Can an inventor write the cost of the patent off their taxes as a business expense?

See 2011 IRS notice – http://www.irs.gov/publications/p535/ch07.html#en_US_2010_publink1000208875

Research and Experimental Costs

The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current business expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change.

If you meet certain requirements, you may elect to defer and amortize research and experimental costs. For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8.

Research and experimental costs defined. Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement.      The costs of obtaining a patent, including attorneys’ fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another’s patent are not research and experimental costs.
Product. The term “product” includes any of the following items. 

  • Formula.
  • Invention.
  • Patent.
  • Pilot model.
  • Process.
  • Technique.
  • Property similar to the items listed above.

It also includes products used by you in your trade or business or held for sale, lease, or license.

Costs not included. Research and experimental costs do not include expenses for any of the following activities. 

  • Advertising or promotions.
  • Consumer surveys.
  • Efficiency surveys.
  • Management studies.
  • Quality control testing.
  • Research in connection with literary, historical, or similar projects.
  • The acquisition of another’s patent, model, production, or process.
When and how to elect. You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. 

 

IF you . . . THEN . . .
Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years.
Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. See Research and Experimental Costs in chapter 8.
Research credit. If you pay or incur qualified research expenses, you may be able to take the research credit. For more information about the research credit, see the instructions for Form 6765, Credit for Increasing Research Activities.

Research and Experimental Costs

You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below).

If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from the costs.

For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7.

Optional write-off method. Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code.
Costs you can amortize. You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. 

  • You paid or incurred the costs in your trade or business.
  • You are not deducting the costs currently.
How to make the election. To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Generally, you must file the return by the due date (including extensions). However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return.   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method.

Optional Write-off of Certain Tax Preferences

You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. If you make this election, there is no AMT adjustment. The applicable costs and the optional recovery periods are as follows:

  • Circulation costs — 3 years,
  • Intangible drilling and development costs — 60 months,
  • Mining exploration and development costs — 10 years, and
  • Research and experimental costs — 10 years.

 

How to make the election. To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: 

  • Your name, address, and taxpayer identification number; and
  • The type of cost and the specific amount of the cost for which you are making the election.

Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return.

Revoking the election. You must obtain consent from the IRS to revoke your election. Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective.