Revised IRS royalty rules can result in tax benefits
Abstract: Companies that pay royalties for the right to use trademarks in the products they manufacture find that the way those royalties are treated on their tax returns can make a big difference to the bottom line. Proposed changes to IRS regulations on sales-based royalties, which manufacturers pay based on the number of units of a particular product that they sell, offer a new option for capitalizing royalty expenses that could result in significant tax benefits. This article discusses a court case that led the IRS and the U.S. Treasury Department to issue proposed regulatory changes. A sidebar explains the difference between deducting expenses and capitalizing them.