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Subject Author Date
Rights to software sold. Capital gains or ordinary income? Lee 06-20-2006
Posted by Lee on June 20, 2006, 2:12 am
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 Sorry, I thought that I had already posted this, but my
newsreader was acting a bit off kilter.

I have a software product that I have developed over the
last 6 years or so. While I have been made offers on it
before, a recent offer is attractive to me and before
considering it, I trying to find out what kind of taxes I
would be liable for.

I've spoken with 4 CPA's today as well as the "complex tax
issues" department at the IRS. 2 CPA's think that it would
be taxed as ordinary income. 2 other CPA's as well as the
IRS guy think it should be capital gains claimed on schedule
D.

While the product itself is software, it is not our actual
business to design and sell software. This is a product
that I developed (I personally have rights on it) and
license for use by other companies.

Having to pay 43% between federal and NC taxes makes the
offer less than viable for me. Capital Gains taxes on the
other hand, I could probably swing the deal.

Any thoughts?

Thank you in advance.

--
Lee

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by San Diego CPA on June 21, 2006, 1:31 am
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> Sorry, I thought that I had already posted this, but my
> newsreader was acting a bit off kilter.
>
> I have a software product that I have developed over the
> last 6 years or so. While I have been made offers on it
> before, a recent offer is attractive to me and before
> considering it, I trying to find out what kind of taxes I
> would be liable for.
>
> I've spoken with 4 CPA's today as well as the "complex tax
> issues" department at the IRS. 2 CPA's think that it would
> be taxed as ordinary income. 2 other CPA's as well as the
> IRS guy think it should be capital gains claimed on schedule
> D.
>
> While the product itself is software, it is not our actual
> business to design and sell software. This is a product
> that I developed (I personally have rights on it) and
> license for use by other companies.
>
> Having to pay 43% between federal and NC taxes makes the
> offer less than viable for me. Capital Gains taxes on the
> other hand, I could probably swing the deal.
>
> Any thoughts?

Without more background than you provide above, I can see at
least 2 possible outcomes:

1. you sell the product outright, retaining no ownership or
rights to the product or revenue it generates, then capital
gains appears appropriate. Whether it's long or short term
could still be an issue depending on when the software was
first put into service.

2. if you license the software to others (whether
individuals or companies), you'll have ordinary income.
Whether you were (or believed your were or were not) in the
software business before is irrelevant, you will be once you
begin licensing the software to others.

This is a very simple response based on limited facts
provided. There are special (and potentially complex) rules
for self-constructed assets and domestic production
activities, none of which are discussed here. You clearly
need guidance from a competent professional which is seems
you're searching out.

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Gil Faver on June 21, 2006, 1:51 pm
Please log in for more thread options

>> Sorry, I thought that I had already posted this, but my
>> newsreader was acting a bit off kilter.
>>
>> I have a software product that I have developed over the
>> last 6 years or so. While I have been made offers on it
>> before, a recent offer is attractive to me and before
>> considering it, I trying to find out what kind of taxes I
>> would be liable for.
>>
>> I've spoken with 4 CPA's today as well as the "complex tax
>> issues" department at the IRS. 2 CPA's think that it would
>> be taxed as ordinary income. 2 other CPA's as well as the
>> IRS guy think it should be capital gains claimed on schedule
>> D.
>>
>> While the product itself is software, it is not our actual
>> business to design and sell software. This is a product
>> that I developed (I personally have rights on it) and
>> license for use by other companies.
>>
>> Having to pay 43% between federal and NC taxes makes the
>> offer less than viable for me. Capital Gains taxes on the
>> other hand, I could probably swing the deal.
>>
>> Any thoughts?

> Without more background than you provide above, I can see at
> least 2 possible outcomes:
>
> 1. you sell the product outright, retaining no ownership or
> rights to the product or revenue it generates, then capital
> gains appears appropriate. Whether it's long or short term
> could still be an issue depending on when the software was
> first put into service.
>
> 2. if you license the software to others (whether
> individuals or companies), you'll have ordinary income.
> Whether you were (or believed your were or were not) in the
> software business before is irrelevant, you will be once you
> begin licensing the software to others.

Is this true if it is an EXCLUSIVE License?

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Lee on June 21, 2006, 1:51 pm
Please log in for more thread options
San Diego CPA enlightened me by writing:

> Without more background than you provide above, I can see at
> least 2 possible outcomes:
>
> 1. you sell the product outright, retaining no ownership or
> rights to the product or revenue it generates, then capital
> gains appears appropriate. Whether it's long or short term
> could still be an issue depending on when the software was
> first put into service.
>
> 2. if you license the software to others (whether
> individuals or companies), you'll have ordinary income.
> Whether you were (or believed your were or were not) in the
> software business before is irrelevant, you will be once you
> begin licensing the software to others.
>
> This is a very simple response based on limited facts
> provided. There are special (and potentially complex) rules
> for self-constructed assets and domestic production
> activities, none of which are discussed here. You clearly
> need guidance from a competent professional which is seems
> you're searching out.

First, thank you for your response. I know that is unfair
and unrealistic to ask for actual advise on an open, unpaid
forum. Factual information as you have provided is really
appreciated.

--
Warm Regards,
Lee

"Upon further investigation it appears that your software is
missing just one thing. It definitely needs more cow
bell..."

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Benjamin Yazersky CPA on June 21, 2006, 1:31 am
Please log in for more thread options

> Sorry, I thought that I had already posted this, but my
> newsreader was acting a bit off kilter.
>
> I have a software product that I have developed over the
> last 6 years or so. While I have been made offers on it
> before, a recent offer is attractive to me and before
> considering it, I trying to find out what kind of taxes I
> would be liable for.
>
> I've spoken with 4 CPA's today as well as the "complex tax
> issues" department at the IRS. 2 CPA's think that it would
> be taxed as ordinary income. 2 other CPA's as well as the
> IRS guy think it should be capital gains claimed on schedule
> D.
>
> While the product itself is software, it is not our actual
> business to design and sell software. This is a product
> that I developed (I personally have rights on it) and
> license for use by other companies.
>
> Having to pay 43% between federal and NC taxes makes the
> offer less than viable for me. Capital Gains taxes on the
> other hand, I could probably swing the deal.
>
> Any thoughts?

I've seen this issue go both ways. It depends on facts and
circumstances.
Are you selling software?
Are you licensing someone else to use it?
Are you licensing someone else to sell it?
Are you packaging it with another product or service?

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

"This written advice was not intended or written to be used,
and it cannot be used by any taxpayer, for the purpose of
avoiding penalties that may be imposed on the taxpayer."

(The foregoing legend has been affixed pursuant to U.S.
Treasury Regulations governing tax practice.)

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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