Technology Transfer

Tax Treatment for Royalty Distributions

THIS WEBPAGE IS DESIGNED TO PROVIDE UNIVERSITY EMPLOYEES WITH POTENTIALLY HELPFUL INFORMATION REGARDING TAX TREATMENT FOR ROYALTY DISTRIBUTIONS. IT DOES NOT CONSTITUTE TAX ADVICE. PLEASE CONTACT YOUR PERSONAL TAX ADVISOR IF YOU RECEIVE ROYALTY DISTRIBUTIONS FROM THE UNIVERSITY.
 

Tax reporting and treatment for payments made under The University of Toledo's Royalty Sharing Policy is summarized below. The summaries are grouped by the nature and the recipient of the royalty income.

  • Payments to Inventors (Patents and Patent Applications)
  • Payments to Creators/Authors (Copyrighted Material, including software)
  • Payments resulting from non-Patented/non-Copyrighted Material
  • Payments to designated non-Inventors/non-Creators
 
Payments to Inventors (Patents and Patent Applications)
 

Payments to Inventors will be reported on a 1099-MISC form as "Other Income." Inventors may be able to obtain capital gains treatment for this income and the above designation should make that easier. [Section 1235 of the Internal Revenue Service Code permits an inventor of a patent right to obtain capital gains treatment for income derived from the patent right if he/she transferred substantially all rights to the patent to a third party - this is the case when the inventor assigns ownership of the patent to The University of Toledo.]

In the case of inventors who are non-resident aliens, payments will be reported on a 1042-S form as "Royalties." Because most income tax treaties with other countries contain special provisions that limit or eliminate double taxation of royalties, this designation is most appropriate for non-resident aliens.

 
Payments to Creators/Authors (Copyrighted Material, including software)
 

If the copyrighted material is owned by The University of Toledo and it was not created as a "Work Made for Hire," payments to Creators/Authors will be reported on a 1099-MISC form as "Other Income." (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.")

When a work is created by a University employee as a "Work Made for Hire," payments to that individual must be treated as "compensation" (whether the payments are being made while the individual is employed by The University of Toledo or after the individual has left The University of Toledo) and will be subject to deductions for the usual taxes. Capital gains treatment is not available for income resulting from copyrights.

If the material is owned by the creator/author: Payments to these creators/authors who do retain ownership but where The University of Toledo licenses on their behalf, would be reported on a 1099-MISC as "Royalties."

 
Payments resulting from non-Patented/non-Copyrighted Material
 

Payments will be reported on a 1099-MISC form as "Other Income." (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.") Capital gains treatment is not available for income resulting from these types of licenses.

 
Payments to designated non-Inventors/non-Creators
 

Occasionally, university inventors request that non-inventors/creators/authors receive some portion of the "inventors' share" of royalty income. The income received by these non-inventors/creators/authors will be reported on a 1099-MISC form as "Other Income" and will be taxed as ordinary income. (In the case of non-resident aliens, payments will be reported on a 1042-S form as "Royalties.")

 

This webpage is adapted with permission from the Harvard University’s Office of Technology and Trademark Licensing

Last Updated: 3/23/15