When thinking about royalties, taxes and you as an entrepreneur or business person, keeping yourself up-to-date on the laws and rules is very important to protect your IP and your business. Did you receive your payment within 30 days of your quarterly or annual payment date? If not, that’s not the norm. You’re entitled to audit the accounting ledgers to make sure you’re getting your proper entitlement. If you find that you have been undeservingly misled, you may be entitled to five percent or more of your costs.
When you receive your royalty payments, how does the IRS view them? They are viewed as income. Do your homework on what is allowable as an independent businessperson, but note that there are some allowable deductions when it comes to royalties:
•Duties and sales taxes that were actually incurred and paid by the licensee;
•Normal and usual discounts actually granted;
•Feeds paid to the licensee associated with packing, shipping and insurance of products sent to individual customers.
Since royalties are personal property, they are transferable to heirs. Ever see the movie “Giant”? Luz transferred land rights to James Dean’s character, Jett. He drilled on the land and became a millionaire. This is parallel to the days in which Great Britain’s Crown owned all the mineral-rich mines in the country and miners would have to pay the royal family a “royalty” to mine them. To further illustrate the point, an energy company using a private citizen’s land to drill for oil or find minerals would be subject to the same scrutiny. In exchange for the mineral rights, the landowner receives a royalty payment based upon a percentage of the yield.
If you are new to the receiving end of this income stream, do your homework. If not, make sure you do your due diligence of hiring an attorney.