How I got a $2m tax refund by understanding the difference between licensing and selling your IP rights
The difference between licensing your IP rights and selling them can make a huge difference when it comes to taxes. When you license your IP, you will typically pay ordinary income tax rates on the royalty income. However, when you sell your IP, it is commonly treated as capital gains…which can have significantly lower tax rates.
For example, if you license your training content to a corporation to use with its employees, you are basically renting the content to them, and you still own it. Just like renting a piano or any other product. However if you sell the corporation your content, they may have the same rights to use the product, but now you don’t have it any longer because you’ve given up the asset.
So you might be asking, what if I license my IP to someone exclusively? I’m still giving up my right to let others use it, so can’t I get the lower tax rates too?
Now, you know, I wouldn’t be a great CPA if I didn’t answer by saying, it depends!
Let me tell you a story. A story of how I got a client a $2m refund from the IRS.
Most CPAs don’t really understand your business and aren’t really a proactive advocate for you. It’s not because they don’t want to, they are usually just too busy (and a little too introvert too).
But here’s what happens when your CPA is also your outsourced CFO.
Several years ago, a new client came on board. He was an inventor whose product hit it big in the construction industry. He had been paying millions in taxes (yes, writing 7-figure checks to the IRS) each year and was looking for a CPA who was more than just a CPA to help him plan better.
Lucky for him he found us! The first thing we did was understand his business model and his licensing contracts to see how we could leverage his product and help him make even more money. But instead of just looking at it from a tax perspective, we wanted to help his business grow. After digging deeper, we realized that his licenses had certain clauses in them that actually could be treated as a sale rather than a license for tax purposes. This was a huge win.
Because the prior CPA treated his income as ordinary income, and we treated it as capital gains income, we were able to go back and amend three years of tax returns for a total refund of $2.1 million dolllars. Pretty good, huh?
I’m not here to be everyone’s hero when it comes to taxes, mostly because I have a boutique practice of clients that I love helping them fast-track their businesses. I do however offer the full suite of tax, accounting, planning and intense business consulting ONLY to those CEO-business owners who are striving to earn a million dollar salary.
But first things first (“wiggle your big toe” as Quentin Tarantino would say).
Take a minute to download this free Million Dollar Dashboard and you’ll have an idea where to start www.MillionDollarCEO.com.