Deduction for patent box profits

(a)

In general

Part VI of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

200.

Patent box profits

(a)

Allowance of deduction

If the taxpayer elects the application of this section, there shall be allowed as a deduction an amount equal to 71 percent of the lesser of— (1)the patent box profit of the taxpayer for the taxable year, or (2)taxable income (determined without regard to this section) for the taxable year. (b)

Patent box profit

For purposes of this section— (1)

In general

Except as provided by paragraph (9), the term patent box profit means, with respect to a taxable year, IP profit multiplied by the ratio— (A)the numerator of which is the 5-year research and development expenditures of the taxpayer with respect to the taxable year, and (B)the denominator of which is the 5-year total costs of the taxpayer with respect to the taxable year. (2)

IP profit

The term IP profit means the excess (if any) of— (A)patent gross receipts, over (B)the sum of— (i)the taxpayer’s cost of goods sold for the taxable year that are properly allocable to patent gross receipts, (ii)other expenses, losses, or deductions (other than the deduction allowed under this section), which are properly allocable to patent gross receipts, plus (iii)routine profit. (3)

Routine profit

The term routine profit means— (A)the taxpayer’s cost of goods sold for the taxable year properly allocable to patent gross receipts reduced by the portion of cost of goods sold related to the sum of cost of raw materials, cost of items purchased for resale, and amounts incurred for intangible property rights (including royalties and amortization), multiplied by (B)15 percent. (4)

Allocation method

The Secretary shall prescribe rules for the proper allocation of items described in this paragraph for purposes of determining patent box profit. Such rules shall provide for the proper allocation of items whether or not such items are directly allocable to patent gross receipts. (5)

Special rules

(A)

Determination of costs

(i)

In general

Cost shall be determined in accordance with the principles of sections 263A and 471, as provided for by the Secretary under regulations or other guidance. (ii)

Items brought into the United States

For purposes of determining cost of goods sold, any item or service brought into the United States shall be treated as acquired by purchase, and its cost shall be treated as not less than its value immediately after it entered the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to patent gross receipts. (iii)

Exports for further manufacture

In the case of any property described in clause (ii) that had been exported by the taxpayer for further manufacture, the increase in cost or adjusted basis under subparagraph (A) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture. (B)

5-year research and development expenditures

The term 5-year research and development expenditures means with respect to a taxable year the research and development expenditures paid or incurred by the taxpayer for the performance of research and development in the United States for which a deduction is allowed under subsection (a) or (b) of section 174 (determined without regard to section 41) for the 5-taxable-year period ending with the taxable year. (C)

5-year total costs

The term 5-year total costs means with respect to a taxable year the excess of— (i)all costs paid or incurred by the taxpayer for the 5-taxable year period ending with such taxable year, over (ii)the sum of— (I)the taxpayer’s cost of goods sold for such 5-taxable year period, (II)interest paid or accrued for such 5-taxable year period, (III)taxes paid or accrued for such 5-taxable year period, and (IV)the net gain or loss for such 5-taxable year period from the sale or exchange of capital assets. (D)

Rules relating to 5-year period

For purposes of this paragraph— (i)

Not in existence for entire 5-year period

If the taxpayer was not in existence for the entire 5-year period referred to in subparagraphs (B) and (C), such subparagraphs shall be applied on the basis of the period during which such taxpayer was in existence. (ii)

Treatment of predecessors

Any reference in this paragraph to a taxpayer shall include a reference to any predecessor of such taxpayer. (6)

Patent gross receipts

(A)

In general

The term patent gross receipts means gross receipts of the taxpayer for the taxable year which are derived from the sale, lease, license, or other disposition of qualified patent property. (B)

Related persons

(i)

In general

The term patent gross receipts shall not include any gross receipts of the taxpayer derived from property leased, licensed, or rented by the taxpayer for use by any related person. (ii)

Related person

For purposes of clause (i), a person shall be treated as related to another person if such persons are treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414, except that determinations under subsections (a) and (b) of section 52 shall be made without regard to section 1563(b). (7)

Qualified patent property

(A)

In general

The term qualified patent property means property which is a product which incorporates a qualified patent or patents— (i)if more than a substantial percentage of the value of the product is derived from the direct or indirect use of one or more qualified patents, and (ii)the gross receipts of the taxpayer from the sale, lease, license, or other disposition of the product are domestic production gross receipts under section 199(c)(4). (B)

Special rule relating to contract manufacturing

For purposes of subparagraph (A)(ii), if the product was produced to the taxpayer’s specifications within the United States under a contract, the taxpayer’s gross receipts from the sale, lease, license or other disposition of the product shall be treated as domestic production gross receipts if the contract manufacturer certifies to the taxpayer that the contract manufacturer’s sale of such product to the taxpayer resulted in domestic production gross receipts of the contract manufacturer. (C)

Domestic production gross receipts

For purposes of this paragraph, the term domestic production gross receipts has the meaning given such term by section 199(c)(4), except that the term United States as defined in subsection (d)(7) of this section shall be substituted for the term United States as used in such section. (8)

Qualified patent

(A)

In general

The term qualified patent means a patent— (i)issued or extended by, or for which an application is pending before, the United States Patent and Trademark Office under title 35, United States Code, (ii)with respect to which— (I)the taxpayer is the patent owner or the holder of an exclusive license to exploit the patent within a specified territory or for a specific purpose, (II)the taxpayer is actively involved in the decision-making connected with exploiting the patent, and (III)either the taxpayer or a member of the affiliated group of which the taxpayer is a member performed substantial activity to develop the patented invention, its application, or a product incorporating the patented invention, and (iii)for any taxable year beginning after the third taxable year beginning after the date of the enactment of this section, more than a substantial percentage of the activity to develop the patented invention or its application occurs in the United States.

Clause (iii) shall not apply to a patent if a member of the taxpayer’s affiliated group performed more than a substantial percentage of the activity to develop the patent outside the United States prior to the end of such third taxable year, and the taxpayer owns the patent in the United States at the end of such third taxable year.

(B)

Special rule for certain foreign patents

If the taxpayer— (i)is the patent owner or the holder of an exclusive license to exploit a patent which meets the requirements of subparagraph (A), (ii)is issued or extended by a foreign country a patent for the same or substantially similar invention or application as the patent described in clause (i), and (iii)is the owner of, or the holder of an exclusive license to exploit, the foreign patent described in clause (ii),

then the foreign patent described in clause (ii) shall be treated as a qualified patent for purposes of this section.

(C)

Special rules relating to licensing

(i)

Licensee Taxpayer

In the case of a license of a patent to the licensee taxpayer, the patent shall not be treated as a qualified patent in the hands of the licensee taxpayer unless the licensee satisfies the requirements of subparagraph (A)(ii) and the licensor— (I)certifies to the licensee (in such form and manner as the Secretary may prescribe) that the patent satisfies the requirements of clauses (i) and (iii) of subparagraph (A), and (II)provides to the licensee such information as the Secretary may require to determine whether the patent is a qualified patent. (ii)

Licensor taxpayer

In the case of a license of a qualified patent by the licensor taxpayer, the amount of royalties, profit shares, and similar amounts received from the license that directly relate to the production of qualified patent property by the licensee taxpayer shall be treated as patent gross receipts if— (I)the licensor meets the requirements of clause (i), (II)the licensor developed or acquired and added substantial value to the qualified patent, but only so long as the licensor is regularly engaged in the development and addition of substantial value to property of such kind, and (III)the licensee certifies to the licensor (in such form and manner as the Secretary may prescribe) that the royalty relates to the production of qualified patent property by the licensee taxpayer. (D)

Special rules relating to patent claims denied or ruled invalid

(i)

Recapture

If— (I)there is a recapture event with respect to any claim contained in a qualified patent, and (II)a deduction was allowed under subsection (a) for any taxable year with respect to such claim,

the tax imposed by this chapter for the taxable year in which such recapture event occurs shall be increased by the recapture amount.

(ii)

Recapture event

For purposes of clause (i), the term recapture event means, with respect to a claim that— (I)the patent does not issue on the basis (in whole or in part) of such claim, or (II)such claim is determined by the United States Patent and Trademark Office or a court of competent jurisdiction not to be valid. (iii)

Recapture amount

For purposes of clause (i), the recapture amount with respect to a claim is the sum of— (I)the excess of the amount by which— (aa)the total tax (determined without regard to subsection (a)) that would be shown on returns of tax of the taxpayer for all taxable years for which a deduction was allowed under subsection (a) with respect to such claim, exceeds (bb)the total tax shown on all returns of tax of the taxpayer for all taxable years for which a deduction was allowed under subsection (a) with respect to such claim, determined with regard to subsection (a), plus (II)in the case of a recapture event described in clause (ii)(I), interest at the underpayment rate established under section 6621 on the amount determined under subclause (I) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. (9)

Alternative determination of patent box profit

(A)

In general

In accordance with regulations or other guidance provided by the Secretary, the taxpayer may elect to determine patent box profit as the amount equal to the net income derived from patent gross receipts related to exploitation of the qualified patent that would be received for the taxable year if all transactions of the taxpayer for the taxable year were conducted at arm’s length under the principles of section 482. (B)

Election

An election under subparagraph (A) for a taxable year shall apply with respect to all qualified patents. Such election, once made, may be revoked only with the consent of the Secretary. (c)

Alternative method for certain taxpayers

In the case of a taxpayer which meets the $5,000,000 gross receipts test of section 448(c) for the taxable year, patent box profit shall be the greater of the amount determined under subsection (b) or 50 percent of IP profit. (d)

Definitions and special rules

For purposes of this section— (1)

Application of section to pass-thru entities

(A)

Partnerships and S corporations

In the case of a partnership or S corporation— (i)the deduction under subsection (a) shall be determined at the partner or shareholder level, (ii)except as provided in clause (i), all determinations relating to receipts, expenses, and whether a patent is a qualified patent shall be made at the entity level, and (iii)each partner or shareholder shall take into account such person’s allocable share of each item described in clause (i) or (ii) of subsection (b)(2)(A) (determined without regard to whether the items described in such clause (i) exceed the items described in such clause (ii)). (B)

Trusts and estates

In the case of a trust or estate— (i)the items referred to in subparagraph (A)(ii) (as determined therein) shall be apportioned between the beneficiaries and the fiduciary (and among the beneficiaries) under regulations prescribed by the Secretary, and (ii)for purposes of paragraph (2), adjusted gross income of the trust or estate shall be determined as provided in section 67(e) with the adjustments described in such paragraph. (C)

Application to individuals

In the case of an individual, subsection (a)(2) shall be applied by substituting adjusted gross income for taxable income. For purposes of the preceding sentence, adjusted gross income shall be determined— (i)after application of sections 86, 135, 137, 199, 219, 221, 222, and 469, and (ii)without regard to this section. (D)

Agricultural and horticultural cooperatives

(i)

Deduction allowed to patrons

Any person who receives a qualified payment from a specified agricultural or horticultural cooperative shall be allowed for the taxable year in which such payment is received a deduction under subsection (a) equal to the portion of the deduction allowed under subsection (a) to such cooperative which is— (I)allowed with respect to the portion of the patent box profit to which such payment is attributable, and (II)identified by such cooperative in a written notice mailed to such person during the payment period described in section 1382(d). (ii)

Cooperative denied deduction for portion of qualified payments

The taxable income of a specified agricultural or horticultural cooperative shall not be reduced under section 1382 by reason of that portion of any qualified payment as does not exceed the deduction allowable under clause (i) with respect to such payment. (iii)

Taxable income of cooperatives determined without regard to certain deductions

For purposes of this section, the taxable income of a specified agricultural or horticultural cooperative shall be computed without regard to any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions). (iv)

Special rule for marketing cooperatives

For purposes of this section, a specified agricultural or horticultural cooperative described in clause (vi)(II) shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any qualifying production property marketed by the organization which its patrons have so manufactured, produced, grown, or extracted. (v)

Qualified payment

For purposes of this paragraph, the term qualified payment means, with respect to any person, any amount which— (I)is described in paragraph (1) or (3) of section 1385(a), (II)is received by such person from a specified agricultural or horticultural cooperative, and (III)is attributable to patent box profits with respect to which a deduction is allowed to such cooperative under subsection (a). (vi)

Specified agricultural or horticultural cooperative

For purposes of this paragraph, the term specified agricultural or horticultural cooperative means an organization to which part I of subchapter T applies which is the owner of, or the holder of an exclusive license to exploit, a qualified patent. (E)

Regulations

The Secretary may prescribe rules requiring or restricting the allocation of items under this paragraph and may prescribe such reporting requirements as the Secretary determines appropriate. (2)

Special rule for affiliated groups

(A)

In general

All members of an expanded affiliated group shall be treated as a single corporation for purposes of this section. (B)

Expanded affiliated group

For purposes of this section, the term expanded affiliated group means an affiliated group as defined in section 1504(a), determined— (i)by substituting more than 50 percent for at least 80 percent each place it appears, and (ii)without regard to paragraphs (2) and (4) of section 1504(b). (C)

Allocation of deduction

Except as provided in regulations, the deduction under subsection (a) shall be allocated among the members of the expanded affiliated group in proportion to each member’s respective amount (if any) of patent box profit. (3)

Coordination with minimum tax

For purposes of determining alternative minimum taxable income under section 55— (A)patent box profit shall be determined without regard to any adjustments under sections 56 through 59, and (B)in the case of a corporation, subsection (a)(2) shall be applied by substituting alternative minimum taxable income for taxable income. (4)

Coordination with domestic production activities deduction

This section shall be applied without regard to the deduction allowed under section 199. (5)

Unrelated business taxable income

For purposes of determining the tax imposed by section 511, subsection (a)(2) shall be applied by substituting unrelated business taxable income for taxable income. (6)

Acquisitions and dispositions

The Secretary shall provide for the application of this subsection in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year. (7)

United States

The term United States includes the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, the Federated States of Micronesia, the Republic of the Marshall Islands, and Palau. (e)

Election

(1)

In general

The taxpayer may make an election to have this section apply for any taxable year. (2)

Pass-thru entities

In the case of a pass-thru entity, the election shall be made at the partner or shareholder level. (3)

Revocation

An election under paragraph (1), once made, may be revoked only with the consent of the Secretary. (f)

Regulations

The Secretary shall prescribe such regulations as may be appropriate to carry out this section, including regulations which prevent the abuse of the purposes of this section.

(b)

Conforming amendments

(1)Section 56(d)(1)(A) of such Code is amended by striking deduction under section 199 both places it appears and inserting deductions under sections 199 and 200. (2)Section 56(g)(4)(C) of such Code is amended by adding at the end the following new clause:

(vii)

Deduction for domestic business income

Clause (i) shall not apply to any amount allowable as a deduction under section 200.

(3)The following provisions of such Code are each amended by inserting 200, after 199,. (A)Section 86(b)(2)(A). (B)Section 135(c)(4)(A). (C)Section 137(b)(3)(A). (D)Section 219(g)(3)(A)(ii). (E)Section 221(b)(2)(C)(i). (F)Section 222 (b)(2)(C)(i). (G)Section 246(b)(1). (H)Section 469(i)(3)(F)(iii). (4)Section 163(j)(6)(A)(i) of such Code is amended by striking and at the end of subclause (III) and by inserting after subclause (IV) the following new subclause:

(V)any deduction allowable under section 200, and

(5)Section 170(b)(2)(C) of such Code is amended by striking and at the end of clause (iv), by striking the period at the end of clause (v) and inserting , and, and by inserting after clause (v) the following new clause:

(vi)section 200.

(6)Section 172(d) of such Code is amended by adding at the end the following new paragraph:

(8)

Domestic business income

The deduction under section 200 shall not be allowed.

(7)Section 199(c) of such Code is amended by adding at the end the following new paragraph:

(8)

Coordination with patent box profits deduction

Qualified production activities income, taxable income, and domestic production gross receipts shall be determined without regard to section 200.

(8)Section 199(d)(2)(B) of such Code is amended by striking this section and inserting this section and section 200. (9)Section 613(a) of such Code is amended by striking deduction under section 199 and inserting deductions under sections 199 and 200. (10)Section 613A(d)(1) of such Code is amended by redesignating subparagraphs (C), (D), and (E) as subparagraphs (D), (E), and (F), respectively, and by inserting after subparagraph (B) the following new subparagraph:

(C)any deduction allowable under section 200,

(11)Section 1402(a) of such Code is amended by striking and at the end of paragraph (16), by redesignating paragraph (17) as paragraph (18), and by inserting after paragraph (16) the following new paragraph:

(17)the deduction provided by section 200 shall not be allowed; and

(c)

Clerical amendment

The table of sections for part VI of subchapter B of chapter 1 of such Code is amended by adding at the end the following new item:

Sec. 200. Patent box profits.

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.