A Question of Royalties
When one thinks of royalties, the money paid to top recording artists usually comes to mind.
Their spacious mansions, exotic getaways, and fast cars are supplemented by the monies received from music sales.
Authors are paid royalties by a publisher for the right to publish his or her work.
A percentage of the box office receipts during a play's run go to playwrights.
Even you as an entrepreneur or businessperson, you may be entitled to royalties surrounding the use of your intellectual property.
You are granting permission to an entity for use of your creative concept - the fruits of your labor, while allowing them to benefit as well.
How royalties operate is hinged on the contractual agreement between the owner of the intellectual property ("licensor" for the sake of this post) and the one who will be using, manufacturing, or marketing the patented or trademarked product ("licensee").
Within the contract, the terms and conditions of royalty payments are outlined.
Five percent (5%) of net sales is the customary amount; however, certain industries have a standard that exceeds this percentage.
If royalties are set too high within the contract, it won't be profitable for the licensee to do business.
The work-to-profit determinations have to be figured in such a way that the licensee doesn't price itself out of the market.
Included in the contract may be a provision for a lump sum payment to the licensor.
These are really advances on the future royalty payments.
If the intellectual property fails to produce the anticipated future royalties, the loss to the licensee could be taken as a write off or recovered through litigation.
When thinking about royalties, taxes and you as an entrepreneur or business person, keeping yourself up-to-date on the laws and rules is very important to protect your IP and your business.
Did you receive your payment within 30 days of your quarterly or annual payment date? If not, that's not the norm.
You're entitled to audit the accounting ledgers to make sure you're getting your proper entitlement.
If you find that you have been undeservingly misled, you may be entitled to five percent or more of your costs.
When you receive your royalty payments, how does the IRS view them? They are viewed as income.
Do your homework on what is allowable as an independent businessperson, but note that there are some allowable deductions when it comes to royalties: •Duties and sales taxes that were actually incurred and paid by the licensee; •Normal and usual discounts actually granted; •Feeds paid to the licensee associated with packing, shipping and insurance of products sent to individual customers.
Since royalties are personal property, they are transferable to heirs.
Ever see the movie "Giant"? Luz transferred land rights to James Dean's character, Jett.
He drilled on the land and became a millionaire.
This is parallel to the days in which Great Britain's Crown owned all the mineral-rich mines in the country and miners would have to pay the royal family a "royalty" to mine them.
To further illustrate the point, an energy company using a private citizen's land to drill for oil or find minerals would be subject to the same scrutiny.
In exchange for the mineral rights, the landowner receives a royalty payment based upon a percentage of the yield.
If you are new to the receiving end of this income stream, do your homework.
If not, make sure you do your due diligence of hiring an attorney.
Their spacious mansions, exotic getaways, and fast cars are supplemented by the monies received from music sales.
Authors are paid royalties by a publisher for the right to publish his or her work.
A percentage of the box office receipts during a play's run go to playwrights.
Even you as an entrepreneur or businessperson, you may be entitled to royalties surrounding the use of your intellectual property.
You are granting permission to an entity for use of your creative concept - the fruits of your labor, while allowing them to benefit as well.
How royalties operate is hinged on the contractual agreement between the owner of the intellectual property ("licensor" for the sake of this post) and the one who will be using, manufacturing, or marketing the patented or trademarked product ("licensee").
Within the contract, the terms and conditions of royalty payments are outlined.
Five percent (5%) of net sales is the customary amount; however, certain industries have a standard that exceeds this percentage.
If royalties are set too high within the contract, it won't be profitable for the licensee to do business.
The work-to-profit determinations have to be figured in such a way that the licensee doesn't price itself out of the market.
Included in the contract may be a provision for a lump sum payment to the licensor.
These are really advances on the future royalty payments.
If the intellectual property fails to produce the anticipated future royalties, the loss to the licensee could be taken as a write off or recovered through litigation.
When thinking about royalties, taxes and you as an entrepreneur or business person, keeping yourself up-to-date on the laws and rules is very important to protect your IP and your business.
Did you receive your payment within 30 days of your quarterly or annual payment date? If not, that's not the norm.
You're entitled to audit the accounting ledgers to make sure you're getting your proper entitlement.
If you find that you have been undeservingly misled, you may be entitled to five percent or more of your costs.
When you receive your royalty payments, how does the IRS view them? They are viewed as income.
Do your homework on what is allowable as an independent businessperson, but note that there are some allowable deductions when it comes to royalties: •Duties and sales taxes that were actually incurred and paid by the licensee; •Normal and usual discounts actually granted; •Feeds paid to the licensee associated with packing, shipping and insurance of products sent to individual customers.
Since royalties are personal property, they are transferable to heirs.
Ever see the movie "Giant"? Luz transferred land rights to James Dean's character, Jett.
He drilled on the land and became a millionaire.
This is parallel to the days in which Great Britain's Crown owned all the mineral-rich mines in the country and miners would have to pay the royal family a "royalty" to mine them.
To further illustrate the point, an energy company using a private citizen's land to drill for oil or find minerals would be subject to the same scrutiny.
In exchange for the mineral rights, the landowner receives a royalty payment based upon a percentage of the yield.
If you are new to the receiving end of this income stream, do your homework.
If not, make sure you do your due diligence of hiring an attorney.