For Richer or Poorer: Intangibles Spawn Deductions

Interesting information that may be of interest to technology, biotech, recent company acquirors, or others with lots of intangible assets on the books. -T. C. Wright

By acquiring the rights to develop and market a product, a struggling company can pick up tax benefits.

April 25, 2011

Embedded in the tax code is the principle that just as companies must pay taxes on their earnings, they also merit tax breaks when they suffer losses. Thus, when a corporation incurs more expenses than revenues, its allowable tax deductions often exceed its taxable income by what’s called a net operating loss (NOL). For the struggling companies that often can report them, NOLs can be a very good thing, since they can be used to recover past tax payments or cut future outlays.

In a letter ruling (201106001) issued February 11, the Internal Revenue Service showed how a company with intangible assets can boost the amount of NOLs it can use following an ownership change. The subject, a company we’ll call PoorSmart, entered into a sub-license agreement with another company we’ll call RichSmart. Under the agreement, RichSmart provided PoorSmart with patents, know-how, and the rights to develop and distribute a certain product worldwide.

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About Tiffany C. Wright - The Resourceful CEO

Tiffany C. Wright is the author of “The Funding Is Out There! Access the Cash You Need to Impact Your Business” and “Solving the Capital Equation: Financing Solutions for Small Businesses.” She is the founder of The Resourceful CEO, which helps owners of small/medium-sized businesses prepare their businesses for sale. Tiffany has an MBA from the Wharton School of Business, sits on non-profit boards and serves as a business mentor with the Cherie Blair Foundation.
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