What expense category is Trademark Expenses?

Trademarks, such as brand names, logos, and slogans, are valuable intangible assets that distinguish a business's products or services in the marketplace. Incurring costs to acquire, create, or register these trademarks is an important investment. For accountants and Small to Medium-sized Business (SMB) owners, it's crucial to understand that these are generally not immediate expenses but rather costs that are capitalized and amortized over time.

This guide will delve into how trademark-related costs are categorized, the key considerations for their accounting and tax treatment, examples of such expenditures, their tax implications as per IRS guidelines, and how Fyle can assist in tracking these important business investments.

Trademark Expenses Category: Capitalization and Amortization

Unlike routine operating expenses, costs associated with acquiring, creating, or registering a trademark are typically capitalized. This means they are recorded as an intangible asset on the business's balance sheet rather than being expensed immediately on the income statement.

Once capitalized, the cost of the trademark is then systematically written off over a period through a process called amortization. The annual amortization amount is recognized as an "Amortization Expense" on the income statement. The specific accounting categories would be:

• Asset Account (Balance Sheet): "Trademarks" or "Intangible Assets"
• Expense Account (Income Statement): "Amortization Expense"

Some Important Considerations While Classifying Trademark Expenses

Acquired vs. Self-Created Trademarks 

The tax treatment can differ:

• Acquired as Part of a Business Purchase: If a trademark is acquired as part of the purchase of assets that constitute a trade or business, it is generally considered a Section 197 intangible. These are typically amortized over 15 years.
• Self-Created or Separately Acquired (Not in a Business Purchase): Costs incurred to create a new trademark (like design costs, legal fees for registration, filing fees) or to acquire one separately (not as part of a larger business acquisition) are capitalized. These are generally not Section 197 intangibles. Their amortization period may depend on their determinable useful life or other specific regulations (e.g., if part of start-up costs).

Start-up Costs (Section 195)

If trademark registration and related legal fees are incurred before the business actively begins operations, these costs may be treated as start-up expenses. Under Section 195, a business can elect to deduct up to $5,000 of start-up costs in the year the business begins, with the remaining costs amortized over 180 months (15 years).

Costs to Include in the Capitalized Basis 

The basis of a trademark includes all direct costs necessary to acquire or create it. This generally includes:

• Legal fees for trademark searches, advice, and registration.
• Filing fees paid to the U.S. Patent and Trademark Office (USPTO) or other relevant authorities.
• Design costs for creating the logo or mark.
• The purchase price if acquiring an existing trademark.

Costs to Defend a Trademark

Legal fees and other costs incurred to successfully defend your trademark against infringement are generally capitalized and added to the trademark's basis. If the defense is unsuccessful, the costs might be deductible as a loss or business expense.

Renewal Costs

Fees paid to renew a trademark registration are also generally capitalized and amortized over the trademark's remaining useful life or the renewal period.

Recordkeeping

Meticulous recordkeeping is vital for all trademark-related costs. This includes maintaining:

• Invoices from attorneys and design firms.
• Receipts for filing fees.
• Purchase agreements if acquiring a trademark.
• Documentation of the date the trademark is placed in service (when it starts being used in the business).

Examples of Trademark Expenses (Costs to be Capitalized)

The following are common examples of costs that are generally capitalized as part of a trademark:

• Fees paid to an attorney for conducting a trademark availability search.
• Legal fees for preparing and filing a trademark application.
• Application filing fees paid to the USPTO or international registration bodies.
• Costs associated with responding to office actions from the USPTO.
• Graphic design fees for creating a logo that is subsequently trademarked.
• The purchase price of an existing trademark acquired from another party.
• Legal fees for successfully prosecuting or defending a trademark infringement lawsuit that results in upholding or strengthening the trademark.
• Fees for renewing a trademark registration.

Tax Implications of Trademark Expenses

Capitalization Required

Most costs to acquire, create, or significantly enhance a trademark must be capitalized, not expensed immediately.

Amortization Period

• Section 197 Intangibles: Trademarks acquired as part of the purchase of a business are Section 197 intangibles and must be amortized ratably over 15 years, beginning with the later of the month the intangible was acquired or the month the trade or business begins.
• Self-Created or Separately Acquired Trademarks:

If not a Section 197 intangible-

1. If treated as start-up costs under Section 195, the costs (after the initial $5,000 potential deduction) are amortized over 180 months (15 years) from when the business begins.
2. For other created intangibles where a specific useful life cannot be determined and no other Code section dictates the treatment, regulations may provide a safe harbor amortization period (e.g., 15 years under Treas. Reg. §1.167(a)-3(b) for certain created intangibles without a readily ascertainable useful life, though federal trademark registrations have a defined initial legal life of 10 years, renew able).

Reporting Amortization

Amortization deductions are typically calculated and reported on Part VI of IRS Form 4562, Depreciation and Amortization.

Abandonment of a Trademark

If a trademark is formally abandoned or becomes worthless, the unamortized basis may be deductible as a loss in the year of abandonment.

Non-Deductibility of Improperly Expensed Costs

If costs that should be capitalized and amortized are instead expensed immediately, the IRS may disallow the deduction upon audit and require proper capitalization.

How Fyle Can Automate Expense Tracking for Trademark-Related Costs

While the accounting decisions for capitalization and amortization schedules are made by accountants, Fyle plays a crucial role in capturing and organizing the underlying transactions and documentation for trademark-related costs:

Capturing Legal and Filing Fee Invoices

• Email Forwarding: Invoices from law firms for trademark services or from the USPTO received via email (e.g., Gmail or Outlook) can be forwarded directly to Fyle, where data can be automatically extracted.
• Direct Uploads: Users can upload PDF invoices, payment confirmations, and design service bills directly into Fyle via the web or mobile app.

Real-Time Transaction Tracking

If trademark application fees or legal services are paid using a corporate credit card linked to Fyle, these transactions are captured in real-time, providing immediate records.

Centralized Document Storage

Fyle allows for the attachment of relevant documents (legal agreements, filing receipts, design contracts, USPTO correspondence) directly to the expense entries. This creates a centralized, accessible repository for all trademark-related financial documentation.

Categorization for Accountant Review

Payments for trademark-related services can be consistently categorized within Fyle (e.g., "Legal Fees - Trademark," "USPTO Filing Fees," "Trademark Design Costs"). This organized data simplifies the accountant's job of identifying these costs for capitalization and setting up amortization schedules in the main accounting system.

Project or IP Asset Tagging

Businesses can use Fyle’s custom fields or project tracking to associate costs with specific trademark applications or intellectual property development projects.

Seamless Accounting Integration

Fyle integrates with leading accounting software like QuickBooks (Online & Desktop), Xero, NetSuite, and Sage Intacct. This allows for the smooth export of transaction data and supporting documents, facilitating the creation of intangible asset records and subsequent amortization entries by the accounting team.

Spend Visibility

Track expenditures related to intellectual property development and protection, providing insights into these important business investments.

By using Fyle to meticulously capture and organize all costs associated with trademarks, businesses ensure that their accountants have the accurate and complete information needed for proper accounting treatment, tax compliance, and maintaining a precise record of these valuable intangible assets.