Intangible assets include intellectual property -- patents, copyrights, trade secrets and trademarks. Just like tangible things like equipment and computers, intangible assets can get worn out or used up over time as you use them in your inventing business. You are allowed to deduct the cost of intangible assets that get used up over the useful life of the asset. This process is called amortization. You deduct an equal amount of the cost of the asset each year over its useful life.
If you buy an intangible asset from someone else, the cost (tax basis in tax parlance) is the amount you paid for it. You deduct this amount over the asset’s useful life. Amortization is also used to deduct those costs of creating an intangible asset that haven’t been currently deducted.
Except for trademarks which are amortized over 15 years, the IRS has not established any set time periods for the useful lives of intangible assets. It’s up to the taxpayer to determine the useful life; but this determination is subject to review by the IRS. The useful life of an invention for tax purposes can be complex to determine: It could be the legal duration of a patented invention (up to 20 years) or a shorter time if it can be shown the invention will become valueless or obsolete in less than 20 years.
Inventions which are not patented, but protected as trade secrets, may not have a fixable useful life for tax purposes, since trade secrets have no fixed term of existence. In this event, no deduction for the cost of purchasing the invention would be permitted. Instead, the amount of the creation costs would be added to the invention’s tax basis (cost for tax purposes). If the trade secret is sold, the tax basis is subtracted from the sale price to determine the taxable profit. You are also entitled to a deduction if the trade secret becomes worthless.
This same rule would apply to any costs of creating a trade secret yourself that you can’t deduct currently or over time. However, one way or another, virtually all the costs of creating a trade secret are ordinarily deductible, so this rule usually doesn’t come into play.
Software that comes with a computer you buy and is included in the price—for example, your operating system—is depreciated as part of the computer, unless you’re billed separately for the software.
If you acquire software by buying another business or its assets, it must be amortized over 15 years using the straight-line method.
If you create software yourself, you can currently deduct the cost as a research and experimentation expense incurred in developing an invention, patent, process, prototype, formula, technique, or similar product.