When you start a business, you want to find as many ways to save money as possible. However, you have to incur certain costs to ensure that your business is properly formed. Fortunately, the U.S. tax code permits businesses to deduct ordinary and necessary expenses from their income. This lowers what the business has to pay in taxes. However, the tax code requires certain expenditures to be deducted from income in specific ways. The tax code groups expenditures into different classes. One of those classes is “organizational costs.” Given the different ways business expenses are deducted from income, it’s important to properly classify expenses such as trademarks. Trademarks generally are not considered organizational expenses under tax law.
A trademark is a work, phrase, symbol or design that is used to distinguish a company’s goods and services from the rest. While you do not need to apply for a federally or state recognized trademark for your business, obtaining one provides your business with certain legal protections that prevent competitors from using your logo. To apply for a trademark, you must already be using the item in connection with products that are already being sold or you must intend to use it. If you do file for federal or state protection, the business will generally need to pay a series of fees to obtain the trademark. Trademarks can be important tools to protect your business’s profitability. Whether to obtain a formal trademark is the type of decision that businesses ordinarily face in the course of managing their operations.
An organizational cost is an expense that is directly related to creating the business. These are costs associated with creating the actual legal entity. Costs of incorporation or negotiating the partnership agreement would be organizational costs. Any expenses associated with transferring assets to the entity or making contracts related to the operations of the business are not included in organizational costs. Generally, organizational expenses are grouped with startup costs, which are expenses incurred while investigating and creating an active business. To qualify as a startup cost, the expense must be incurred prior to when the business initiates operations and it must be something that would have been deductible if the business had incurred after it had started operations.
Trademark As Organizational Cost
A trademark is not an organizational cost, because a trademark is not related to forming a business entity like a corporation. It is also unlikely that a trademark is a startup cost. If the business obtains the trademark on the basis that the trademark is already being used in conjunction with its products, the related fees are not startup costs because it was not incurred before business operations. If a business seeks to obtain a trademark under “intent to use,” it must establish that using the mark is “more than an idea.” This generally involves taking significant affirmative steps to use the trademark, such as producing prototypes and initiating business activities. This generally means the business has already started operations, disqualifying the trademark fee as a startup cost.
Trademark expenses are still deductible. A trademark is a section 197 intangible. This means that the cost of acquiring the trademark is deducted from the business’s income, but not all in one year. Instead, the cost of the trademark is used to offset the business’s income over a period of 180 months. So if you spent $18,000 on obtaining a trademark in June and you had a December 31st year end, you would deduct $600 from your business income due to the trademark. The next year you would deduct $1,200.
If a business owner undertakes the expenses of developing the trademark on his own, he can donate that trademark to the business. Since the trademark is an asset, the transfer would be considered a capital contribution. In exchange for the trademark, he would generally receive an increased share of the business. The owner could also sell the trademark to the business if he preferred cash or assets to a greater stake in the business.