BU - Office of Technology Development - Technology Transfer - Invention - Tax Implications of Royalty Distributions

Tax Treatment for Royalty Distributions

This section is adapted with permission from the website of Harvard University’s Office of Technology and Trademark Licensing. THE FOLLOWING SECTION IS INTENDED ONLY TO SUPPLY FACULTY WITH POSSIBLY HELPFUL INFORMATION AND DOES NOT CONSTITUTE TAX ADVICE. RECIPIENTS OF ROYALTY DISTRIBUTIONS SHOULD CONSULT THEIR OWN TAX ADVISORS.

Tax reporting and treatment for payments made under Boston University's Royalty Sharing Policy is summarized below. The summaries are grouped by the nature and the recipient of the royalty income.

Payments to Inventors (Patents and Patent Applications)
Payments to Creators/Authors (Copyrighted Material, including Software)
Payments resulting from non-Patented/non-Copyrighted Material
Payments to designated non-Inventors/non-Creators

Payments resulting from Patents or Patent Applications

Payments to inventors: Except for payments to non-resident aliens, payments to inventors will be reported on a 1099-MISC form as "Other Income." Inventors may be able to obtain capital gains treatment for this income and the above designation should make that easier. [Section 1235 of the Internal Revenue Service Code permits an inventor of a patent right to obtain capital gains treatment for income derived from the patent right if he/she transferred substantially all rights to the patent to a third party – this is the case when the inventor assigns ownership of the patent to Boston University.]

In addition, the IRS issued a Technical Advice Memorandum, TAM 200249002, on this issue in December 2002. A copy of the memorandum may be found here.

In the case of inventors who are non-resident aliens, payments will be reported on a 1042-S form as "Royalties." Because most income tax treaties with other countries contain special provisions that limit or eliminate double taxation of royalties, this designation is most appropriate for non-resident aliens.

Payments resulting from Copyrighted material (including copyrighted software)

If the material is owned by Boston University:

a work is created by a Boston University employee as a "Work Made for Hire," payments to creators/authors will be reported on a 1099-MISC form as "Other Income." (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.") When a work is created by a Boston University employee as a "Work Made for Hire," payments to that individual must be treated as "compensation" (whether the payments are being made while the individual is employed by Boston University or after the individual has left Boston University employment) and will be subject to deductions for the usual taxes. Capital gains treatment is not available for income resulting from copyrights.

If the material is owned by the creator/author:

Payments to Creators/Authors: Payments to these creators/authors who do retain ownership but where Boston University licenses on their behalf, would be reported on a 1099-MISC as "Royalties."

Payments resulting from non-Patented, non-Copyrighted property (such as some Biological Materials)

Payments to inventors or creators: Payments will be reported on a 1099-MISC form as "Other Income." (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.") Capital gains treatment is not available for income resulting from these types of licenses.

Payments to Designated non-Inventors/non-Creators

Occasionally, inventors/creators/authors request that non-inventors/creators/authors receive some portion of the "inventors' share" of royalty income. The income received by these non-inventors/creators/authors will be reported on a 1099-MISC form as "Other Income" and will be taxed as ordinary income. (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.")

This Site