Tag Archives: Tax

501(c)(3) v. 501(c)(6) Nonprofits

26 Tuesday Feb 2019

Posted by in Intellectual Property, Legislation, Nonprofit

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Many people are familiar with the “501(c)(3)” nonprofit designation. But what many don’t realize is that Section 501(c)(3) of the Internal Revenue Code is just one of many tax law provisions granting exemption from the federal income tax to nonprofit organizations. Another common designation is the 501(c)(6) nonprofit. For each type of exemption classification, varying rules and requirements may apply. The following information will help nonprofits and donors understand the distinction between these two types of nonprofit organizations, 501(c)(3) and 501(c)(6), including important tax deduction consequences.

501(c)(3)

501(c)(3) exemptions apply to entities organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (e.g. NCAA).

Donors who make charitable contributions to most types of 501(c)(3) organizations generally are afforded a charitable deduction under section 170 of the Internal Revenue Code. Regulations specify the applicable requirements for donors to claim such deductions (e.g., receipts for donations over $250).

501(c)(6)

A 501(c)(6) is specifically reserved to business leagues. A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. To be exempt, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons. 501(c)(6) organizations are exempt from most federal income taxes. However, donations to a 501(c)(6) are not tax deductible as charitable contributions, as is the case with a 501(c)(3). Donations to 501(c)(6) organizations are not required to be disclosed.

Here’s a side-by-side comparison of key characteristics of 501(c)(3) and 501(c)(6) nonprofit designations:

Note: this blog post contains general advice. Please consult your own attorney or accountant with specific legal and tax issues.

 

Indiana Patent Income Tax Exemption – IC 6-2-3-21.7

04 Wednesday Nov 2009

Posted by in Indiana, Intellectual Property, Legislation, Patent, Tech Developments

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Inventors, patent owners, and their lawyers and accountants should be aware of the Indiana Patent Income Exemption, Indiana Code 6-3-2-21.7.

The exemption aims to encourage innovation by giving entrepreneurs and small businesses a break on Indiana state income taxes. Indiana was the first state to offer this type of incentive.  In an effort to strengthen the state’s existing focus on biotech, pharmaceutical, medical device and equipment companies, the law strives to encourage new patents from Indiana companies and to make the state more attractive to new companies looking for a profitable marketplace.

The law grants a tax exemption on patent income, which includes licensing fees, royalties, patent sale or patent-covered- product sales. Note that the exemption is available only to businesses with less than 500 employees and only covers utility and plant patents, since design patents focus on ornamental features and exclude functional innovations.

IC 6-3-2-21.7
Exemption for certain income derived from patents
Sec. 21.7. (a) This section applies to a qualified patent issued to a taxpayer after December 31, 2007.
(b) As used in this section, “invention” has the meaning set forth in 35 U.S.C. 100(a).
(c) As used in this section, “qualified patent” means:
(1) a utility patent issued under 35 U.S.C. 101; or
(2) a plant patent issued under 35 U.S.C. 161;
after December 31, 2007, for an invention resulting from a development process conducted in Indiana. The term does not include a design patent issued under 35 U.S.C. 171.
(d) As used in this section, “qualified taxpayer” means a taxpayer that on the effective filing date of the claimed invention:
(1) is either:
(A) an individual or corporation, if the number of employees of the individual or corporation, including affiliates as specified in 13 CFR 121.103, does not exceed five hundred (500) persons; or
(B) a nonprofit organization or nonprofit corporation as

specified in:
(i) 37 CFR 1.27(a)(3)(ii)(A) or 37 CFR 1.27(a)(3)(ii)(B); or
(ii) IC 23-17; and
(2) is domiciled in Indiana.
(e) Subject to subsections (g) and (h), in determining adjusted gross income or taxable income under IC 6-3-1-3.5 or IC 6-5.5-1-2, a qualified taxpayer is entitled to an exemption from taxation under IC 6-3-1 through IC 6-3-7 for the following:
(1) Licensing fees or other income received for the use of a qualified patent.
(2) Royalties received for the infringement of a qualified patent.
(3) Receipts from the sale of a qualified patent.
(4) Subject to subsection (f), income from the taxpayer’s own use of the taxpayer’s qualified patent to produce the claimed invention.
(f) The exemption provided by subsection (e)(4) may not exceed the fair market value of the licensing fees or other income that would be received by allowing use of the qualified taxpayer’s qualified patent by someone other than the taxpayer. The fair market value referred to in this subsection must be determined in each taxable year in which the qualified taxpayer claims an exemption under subsection (e)(4).
(g) The total amount of exemptions claimed under this section by a qualified taxpayer in a taxable year may not exceed five million dollars ($5,000,000).
(h) A taxpayer may not claim an exemption under this section with respect to a particular qualified patent for more than ten (10) taxable years. Subject to the provisions of this section, the following amount of the income, royalties, or receipts described in subsection (e) from a particular qualified patent is exempt:
(1) Fifty percent (50%) for each of the first five (5) taxable years in which the exemption is claimed for the qualified patent.
(2) Forty percent (40%) for the sixth taxable year in which the exemption is claimed for the qualified patent.
(3) Thirty percent (30%) for the seventh taxable year in which the exemption is claimed for the qualified patent.
(4) Twenty percent (20%) for the eighth taxable year in which the exemption is claimed for the qualified patent.
(5) Ten percent (10%) each year for the ninth and tenth taxable year in which the exemption is claimed for the qualified patent.
(6) No exemption under this section for the particular qualified patent after the eleventh taxable year in which the exemption is claimed for the qualified patent.
(i) To receive the exemption provided by this section, a qualified taxpayer must claim the exemption on the qualified taxpayer’s annual state tax return or returns in the manner prescribed by the department. The qualified taxpayer shall submit to the department all information that the department determines is necessary for the determination of the exemption provided by this section.

(j) On or before December 1 of each year, the department shall provide an evaluation report to the legislative council, the budget committee, and the Indiana economic development corporation. The evaluation report must contain the following:
(1) The number of taxpayers claiming an exemption under this section.
(2) The sum of all the exemptions claimed under this section.
(3) The North American Industry Classification System code for each taxpayer claiming an exemption under this section.
(4) Any other information the department considers appropriate, including the number of qualified patents for which an exemption was claimed under this section.
The report required under this subsection must be in an electronic format under IC 5-14-6.

For a full breakdown of the law,  see IP Today.

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