A recent federal appeals court decision. In Robinson Knife Manufacturing Co., Inc. v. Commissioner (March 19, 2010), the U.S. Court of Appeals for the Second Circuit ruled that royalties paid for the use of licensed trademarks are immediately deductible by the taxpayer as ordinary and necessary business expenses.
The IRS has not announced whether it will follow Robinson Knife or instead continue to maintain the position that royalty payments should be capitalized.
The Court held that the royalty payments at issue were deductible in the year paid and that a taxpayer-licensee may immediately deduct the cost of paid royalties as a matter of law, provided the licensee: calculates royalties as a percentage of sales revenue from inventory; and incurs royalty liability only upon the sale of that inventory.
26 U.S. Code § 263A - Capitalization and inclusion in inventory costs of certain expenses
http://www.law.cornell.edu/uscode/text/26/263A
Although the decision addresses only trademark license royalties, it may also be applicable to royalties paid under copyright and patent licenses.
Other Expenses
Enter all additional ordinary and necessary business expenses not deducted elsewhere on Schedule C. Describe the type and enter the amount of each expense separately in the lines provided.
Although the decision addresses only trademark license royalties, it may also be applicable to royalties paid under copyright and patent licenses.
The Second Circuit itself noted it was the "first court of appeals to address the treatment of intellectual property royalties under the uniform capitalization regulations."
Be consistent in the expense application and be able to prove your reasoning.
