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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 577
Experience:  10 years experience
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My subchapter S corporation sold some IP in April. While developing

Customer Question

My subchapter S corporation sold some IP in April. While developing this IP in 2011 I did not expect to sell this IP. As a result I did not capitalize the cost of development. I expect to pay capital gains on the full purchase price. My CPA would rather that I go and refile/amend the 2011 tax return and capitalize the cost of development, pay the additional taxes and fines to be safe. I do not think this is necessary as the truth is exactly what happened.
Submitted: 7 months ago.
Category: Tax
Expert:  Mark Taylor replied 7 months ago.
If it is an S-Corporation the extended deadline would be 9/30/2012. With this said, if you timely filed your return the statute of limitations has expired. So amending the return may not be an option.What was the approximate amount of the sale?
Customer: replied 7 months ago.
Mark, you are saying that the deadline for an amended return has expired. My question is: Can I claim the income from the sale as capital gains? Why should the amount matter? The buyer is booking the purchase as an asset purchase - which it is.
Expert:  Mark Taylor replied 7 months ago.
Self created IP would not receive capital gain treatment. You are correct that it would be an asset to the buyer.
Expert:  Mark Taylor replied 7 months ago.
There are exceptions. What was the type of IP property that was sold? Different types of IP are treated differently.
Customer: replied 7 months ago.
Mark: What do you mean by self-created IP. The IP was created by my Team. The IP is a Semiconductor Manufacturing Process. We created the Process and used it for 3 years to produce semiconductors in 3rd party factory. Then the buyer of these semiconductors wanted to purchase the semiconductors directly from the 3rd party factory by purchasing the Semiconductor Manufacturing Process (like a recipe). This was not anticipated when we created the IP. We sold it in April 2016.In the semiconductor industry Process is commonly viewed as IP.
Expert:  Mark Taylor replied 7 months ago.
Thank you. ***** better understand. Yes, it can be treated as a capital gain. The problem is that you have been expensing the cost associated with the development of the process. This would mean that you would get a capital gain and an ordinary deduction. The best of both worlds (but not the correct way). This is why your CPA wants to go back and capitalize costs associated with the process. The reason why I was asking for a ballpark of the cost the sale is that the IRS has different division. Companies with assets greater than 10 million are handled by Large Business and International and smaller entities would be handled by Small Business Self Employed. If you are just over 10 million it may work in your favor as you are a small fish. The problem with treating it as a capital asset is that there is no asset on the books. So on the tax return it looks like there is not basis in the IP. This is another reason to capitalize the amounts in the prior year. Is it possible to capitalize the cost in the year of the sale? This may result in reducing some of your operating costs for the year. But you would avoid the need to amend the prior year returns. With this approach you are still paying taxes on the amount you capitalized but you would potentially avoid interest and penalties associated with amending prior returns. You could use the argument that the administrative burden to amend prior S-Corporation returns, prior shareholder returns was too great. You would wind up with the same answer, and same taxes paid assuming that you are in the same tax bracket. I do not think that there is a great deal of exposure taking this position. Again, no tax would be avoid - just interest and penalties, and the cost to prepare amended returns. Does that make sense?
Expert:  Mark Taylor replied 7 months ago.
By capitalizing everything in the year of the sale you would arrive at the same results as amending the returns - just a simpler approach.
Customer: replied 7 months ago.
Mark;If I capitalize the development costs the same year the sale of the IP I will not be able to claim long term capital gains? The sale was for $2.5 mil.
Expert:  Mark Taylor replied 7 months ago.
You are capitalizing costs from prior years. I am assuming that all of the costs came from prior years. You are still ok to have a long term capital gain. This treatment is to avoid amending the prior returns. End results are the same amount of taxes are paid. Congratulations. The semiconductor industry is a very tough industry especially for US Companies.
Customer: replied 7 months ago.
Yes - the development costs were incurred in 2011. Are you saying that I capitalize the 2011 development costs in 2016 and still get long term capital gains?
Expert:  Mark Taylor replied 7 months ago.
Yes, bear in mind whatever amounts you capitalize you will reduce you operating expenses by the same amount. Let's assume you had 1 million in development costs. You have already expensed these as operating expenses in the prior year. You will reverse these and capitalize them as basis for the IP. This will give you a capital gain of 1.5 million and an increase of ordinary income of 1 million. Does this make sense?
Expert:  Mark Taylor replied 7 months ago.
Please let me know if you have any questions at all....If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit”)…I receive no crediting at all unless you rate in this way....Thank you!
Customer: replied 7 months ago.
Mark, the rating system is not letting me choose the star (good). The submit button works but the star buttons cannot be selected. Puzzled.
Expert:  Mark Taylor replied 7 months ago.
That is not a problem. Hopefully I was able to provide some help to you.