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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Customer Question

Hi, I have an S corp that has spent $50k in legal fees in applying for a number of patents. We haven't assigned the IP to the S Corp, yet. We now realize that each patent idea should be it's own corp. So we are going to create 3 NewCos to house each patent idea and assign the patent to each NewCo.


 


Can we simply assign the IP to NewCos? Or do we need to sell the IP from the original S corp (even though the S corp doesn't have any IP assigned to it---it only paid for it)? If a sale is necessary, would the sale trigger a tax event if we sold the IP at book value (note the IP is still pending and hasn't been granted)? Would the IRS claim the FMV was higher? Could the shareholders of NewCo face any taxes from the purchase of a new asset?


 


What do we do about the 50k on the balance sheet of the S corp? (the 50k is recorded as an asset, not an expense). Do we write it down? Or do make a sale (even though the IP is not assigned to the S corp)? Or do we dissolve the corp?


 


Does it matter that one bank account as paid for all this IP and has the name of the original S Corp? Should we open 3 new bank accounts going forward?


 


 


Any help is much appreciated!

Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!
The patent is classified as an intangible asset.
While the patent is not assigned - you need to be clear who will own each patent - you personally of S-corporation .
While you own that S-corporation - your S-corporation is still a separate legal entity and may be treated as an owner.
So you need to decide if you personally of your S-corporation will own these patents.
If legal payments are made by S-corporation - generally S-corporation will be an owner. However - if you want personally to own these patents - payments that S-corporation made should be treated as made for you personally - and on books - these payments should be distributions to your.
When you will create three separate legal entities - you will decide who will own these entities. Generally - these new entities might be owned by you personally, by your existing S-corporation or a combination of both. In this case the patent may be used as a contribution into the new entity. Even the patent is not approved yet - it still be treated as an asset - so legal and other expenses related to creating the patent will be the basis.
If you want you personally to be an owner of these patents - you need personally pay all fees. In this case $50k that were paid by the S-corporation and will be on the balance sheet as distribution to you (or wages depending on circumstances). Then - you will contribute IP to a new corporation - and your cost basis will be your contribution. When patent will be approved - a new business entity will depreciate the patent based on that cost basis.
Please be sure to ask for clarification if needed.
Let me know if you need any help.

Customer :

I personally own the patents, the S corporation - of which I am a 100% shareholder -- does not own the patents. It has just paid for them. So I have effectively been paying for the patents myself.

Customer :

I want an S corporation to eventually be "assigned" the patents, but the current S corporation is not "assigned."

Customer :

So the S corporation is not the owner.

Customer :

I need to know how to transfer the patents, if I even need to, since I am the owner already.

Customer :

And I need to know how to change the balance sheet of my tax return.

Customer :

Again my questions are:

Customer :

Can we simply assign the IP to NewCos? Or do we need to sell the IP from the original S corp (even though the S corp doesn't have any IP assigned to it---it only paid for it)? If a sale is necessary, would the sale trigger a tax event if we sold the IP at book value (note the IP is still pending and hasn't been granted)? Would the IRS claim the FMV was higher? Could the shareholders of NewCo face any taxes from the purchase of a new asset?


 


What do we do about the 50k on the balance sheet of the S corp? (the 50k is recorded as an asset, not an expense). Do we write it down? Or do make a sale (even though the IP is not assigned to the S corp)? Or do we dissolve the corp?


 


Does it matter that one bank account as paid for all this IP and has the name of the original S Corp? Should we open 3 new bank accounts going forward?


 


 

Customer :

Please answer these questions one-by-one. Thanks.

Customer :


Again my questions are:






11:49 PM



Can we simply assign the IP to NewCos? Or do we need to sell the IP from the original S corp (even though the S corp doesn't have any IP assigned to it---it only paid for it)? If a sale is necessary, would the sale trigger a tax event if we sold the IP at book value (note the IP is still pending and hasn't been granted)? Would the IRS claim the FMV was higher? Could the shareholders of NewCo face any taxes from the purchase of a new asset?


 


What do we do about the 50k on the balance sheet of the S corp? (the 50k is recorded as an asset, not an expense). Do we write it down? Or do make a sale (even though the IP is not assigned to the S corp)? Or do we dissolve the corp?


 


Does it matter that one bank account as paid for all this IP and has the name of the original S Corp? Should we open 3 new bank accounts going forward?


 



LEV :

Can we simply assign the IP to NewCos?
NewCos- will be an owner if the asset is contributed. If you are a shareholder of NewCon - and you own IP. - you will contribute it to NewCos.
Or do we need to sell the IP from the original S corp (even though the S corp doesn't have any IP assigned to it---it only paid for it)?
There is no "selling" - but if IP is owned by S-corporation - that will be a change of the ownership.
If a sale is necessary, would the sale trigger a tax event if we sold the IP at book value (note the IP is still pending and hasn't been granted)? Would the IRS claim the FMV was higher?
I do not see why you are talking about the sale? There is no selling transaction. However - IP is an asset and you need to be clear who owns it - you personally or your S-corporation.
Could the shareholders of NewCo face any taxes from the purchase of a new asset?
If the asset is distributed from s-corporation to shareholders - that might be a taxable event.

LEV :

I need to know how to transfer the patents, if I even need to, since I am the owner already.
If you the owner - you may do with the asset that you own whatever you want - in particular - you may contribute it into a new corporation in exchange of shares - that will not be taxable event.
What do we do about the 50k on the balance sheet of the S corp? (the 50k is recorded as an asset, not an expense).
If S-corporation paid for the asset that is owned by you - not S-corporation - that is a payment for you - and should be recorded as a distribution to you. If it is recorded differently - books should be corrected.
Do we write it down?
Yes - it should be corrected.
Or do make a sale (even though the IP is not assigned to the S corp)?
S-corporation may not sell the asset that it doesn't own - so there is no "sale" transaction.
Or do we dissolve the corp?
That is a different issue not related to your IP - you may keep S-corporation if you need it - or dissolve if you do not need it anymore.

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