There are two ways to handle these deductions. If you like, you can simply deduct the entirety of the expenses from that year’s taxes as a business expense. This will give you a large, single year benefit. However, all the revenue generated by the patent will be taxed as ordinary income. Depending on how much money you make, the marginal tax rate that you pay is probably between 40% and 50% in California.
However, there’s an attractive alternative to a simple deduction. You can instead choose to capitalize the costs associated with the patent by amortizing them. Amortization is similar to depreciation—both involve taking the upfront expense of an asset and spreading that cost across its useful lifespan. In the case of a patent, instead of taking a single deduction, you can essentially amortize this cost—and thus, the corresponding tax deduction—over a period of 15 years.
