Accounting question: my new LLC buying my patent.
izoo
Member Posts: 6
I started my LLC this year. My patent and trademark were purchased awhile ago. I suppose I should have my LLC buy those two assets this year. Would I simply create two "asset" categories in wave for the cost of the patent and trademarks, and label it owner investment? I want to make sure the LLC would pay me back for the patent and trademark costs before I started paying taxes on profit for sales of the thing I patented and the name I trademarked. (hiring a lawyer and accountant is not going to happen...so fire away with ideas...in my experience, getting a new idea made and sold needs to be done on a shoestring.)
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@izoo,
Since you are contributing an asset to the LLC you would debit the asset and credit either Owner Equity or Loan from Owner. You should use cost and not fair market value. You will able to amortize the trademark over a 15 year period which does not necessarily equate to your statement "I want to make sure the LLC would pay me back for the patent and trademark costs before I started paying taxes on profit for sales.." Meaning, your amortization deduction may not offset any profit from sales.
My LLC could not make nor sell my product without the patent. Perhaps it is better to say that I loaned the LLC $8,000, the cost of the patent? It seems to me that the LLC needs to pay me that loan back before claiming it has profits.
@izoo,
I understand. However, either way, whether it is treated as a loan or an equity contribution, payments back to you are not a deduction. The deduction comes from amortization of the trademark. So if you paid 8k in costs and contribute to the LLC, you would debit Trademarks and credit either loan or equity. To deduct amortization, you would divide 8000/15 which is 533 of annual amortization. Debit Amortization expense and credit accumulated amortization. The logic the IRS uses is that the trademark has a useful life of greater than 1 year, therefore, to better match revenue with expenses, you must capitalize the asset and write off over the useful life.
So, the money I paid for a patent cannot be repaid to me by my own company if time has passed.
If I had sold the patent to a different company, it might have found value in the remaining years and paid me what I had paid for the patent. But my own company cannot repay me past amortization schedule monies. It does not matter that I loaned the company money, it only matters for what purpose I had loaned the company money. How do companies ever pay back loans if the money was for this year's expenses?
@izoo,
The LLC is able to pay you back and is not limited by amortization. However, as I've mentioned, loan payments are not a deduction for the LLC. The cost of the trademark is a deduction. But because of IRS regulations, you cannot deduct the cost of the trademark in one year. It has to be spread out over 15 years. It can be confusing but I'll give you a simple example from your last sentence. Let's say I lent 5k to my LLC. The LLC goes out and buys 5K of products for resale. I sell them for 10k. The LLC pays me back the next year for the 5k. So I made 5k - 10k in sales and 5k expenses. That would be what my tax return would show. Now I pay back the 5k. I would not get a deduction because I already took it the year before. If you deducted the loan repayment you would skewing the income earned.