Where do Patents go on the Balance Sheet?

Small businesses and large companies alike with intellectual property like patents often wonder: where do patents go on the balance sheet? They are intangible assets and are complex to value properly.

How patents show up on a balance sheet is important when creating your financial statements. There are many aspects of asset valuation and balance sheets that are most effectively handled by your CPA or tax attorney, but there are also numerous intellectual property law considerations.

Patents as Intangible Assets on Balance Sheets

Patents fall under “intangible assets” on a balance sheet. These are non-physical assets with value tied to future potential. This is similar to other types of intellectual property like trademarks or copyrights, although different types of intellectual property are handled differently on balance sheets. Unlike cash or inventory, you can’t touch a patent. Its worth comes from its ability to protect innovation and drive revenue.

The value listed on your balance sheet depends on how your patent is currently being appraised. Just like a house, patents can be depreciated over time. For example, utility patents last 20 years. As time passes, you can depreciate their value annually with help from your accountant.

But here’s the catch: depreciation doesn’t always reflect market value. A patent might gain value later in its life if market conditions change. Imagine a product suddenly becoming a hit in year 15. This can make the patent’s real-world worth increase even as its depreciated value decreases on paper.

Valuing Your Patent

To assess your patent’s value, think about how much someone else, like a competitor, might pay for it. Consider whether the patent is tied to a product that’s dominating the market, and if it blocks competitors from entering the market. These factors play a big role in determining its worth.

Accountants often look at market share and revenue impact to calculate value. If your product earns significantly more than competitors, your patent likely has strong market value. Reviewing this annually ensures your balance sheet reflects reality.

Depreciation and Amortization

Aside from depreciation, patents can also be amortized. This helps spread income or tax obligations over time, avoiding sudden financial spikes. For instance, if your patent hits its stride in year 15, amortization prevents a massive tax bill from showing up all at once.

Assigning Patents

Another strategy involves assigning patents to a business entity. By doing this, you may lower your personal taxable income and let the company handle related tax obligations. Some businesses even create separate entities to hold intellectual property. This keeps the main business’s finances cleaner and can reduce tax burdens.

FAQs

What Category Are Patents in Accounting?

In accounting, patents are an intangible asset. They offer potential long-term financial value for your business, but do not physically exist. The patent is assessed as a fixed intangible asset that needs to be valued based on market value, market share, revenue, and other specifics. It’s important that you work with the right professionals to categorize and value your patent portfolio.

Are Patent Costs Capitalized or Expensed?

Patent costs can be capitalized or expensed, but there are important considerations. The costs of researching and developing an invention are a business expense. The cost of actually applying for the patent could be either. Writing off the costs of getting a patent as an expense may have immediate financial benefits, including reducing your taxable income. However, it also shows a major cost. Capitalizing and amortizing the patent costs can improve profit and loss statements.

Is a Patent a Current Asset?

A patent itself is an intangible asset, not a current asset. Current assets are physical or liquid assets. There are specific cases where a patent might become a current asset, such as when the patent is sold or when it is used or licensed quickly. In these cases, the patent is a short-term financial asset with immediate monetary value, rather than a long-term asset.

When Should You Hire a Patent Lawyer?

You should hire a patent lawyer when you are developing a patentable invention or beginning the process of creating an application. Your patent attorney can help you assess the patentability of an invention or help you plan a strategic patent portfolio. They can also determine the scope of patent protection to request in an application and advocate for your interests with the USPTO. If your patent rights are being infringed on, a patent attorney can take steps to protect them.

Experienced Patent Attorneys at Bold Patents

At Bold Patents, our lead attorney, JD Houvener, has worked with thousands of inventors, helping secure more than 300 patents. He and the rest of the attorneys at the firm know the importance and value of intellectual property and can help you secure the protection you need to gain a market edge.

Filing for a patent is a big step for your business. The U.S. Patent and Trademark Office currently has an inventory of nearly 1.3 million patent applications and takes an average of 33.7 months to reach a final decision. You want a strong application when navigating this process, and our team can help. Our team’s help can also make the process go more smoothly, potentially securing your patent rights sooner.

While patents are valuable assets, managing their financial impact requires collaboration with a CPA or tax attorney. Our firm recommends reaching out to these experts to make the most of your patent’s potential.

If you’re an inventor and want to learn more, download JD Houvener’s free Inventor Kit. It’s packed with helpful tips and details about our process, including the Patent Success Matrix. Start your journey today and get in touch with our firm for experienced legal representation in your patent journey.