First of Its Kind: Indiana Law Exempts Patent Income for Indiana Small Businesses

Starting in 2008, Indiana Public Law 223-2007 will exempt a portion of patent income from state and local income tax for Indiana individuals and Indiana small businesses for up to ten years.  This law provides a great tax benefit to cultivate and encourage highly profitable, knowledge-based, and innovative businesses to invest in Indiana.  Indiana has become the first state in the nation to have such a patent income exemption.

To qualify, an Indiana taxpayer must be either (1) an individual or corporation whose number of employees and affiliates does not exceed 500 persons or (2) a nonprofit organization or corporation; and domiciled in Indiana.  The status of the taxpayer is determined as of the effective filing date of a qualified patent.

A qualified patent includes utility and plant patents resulting from Indiana development processes, but does not include design patents.  The qualified patent must issue after 2007; however, there is no prohibition against filing a patent application prior to 2008.  Patent income includes (1) licensing fees or other income received for the use of a qualified patent, (2) infringement royalties, (3) receipts from the sale of a qualified patent, or (4) profit from the sale of a product covered by the qualified patent subject to valuation considerations.

The total amount of the exemption may not exceed $5 million annually.  A qualified taxpayer may exempt up to 50% of patent income each of the first five years in which the exemption is claimed.  The percentage drops to 40% for the sixth claimed year, 30% for the seventh claimed year, 20% for the eighth claimed year, and 10% for the ninth and tenth claimed years, completely phasing out after the tenth claimed year.

P.L. 223-2007 offers great promise to retain, expand, and recruit small businesses to Indiana.  This law highlights efforts to attract and cultivate high-tech, biotech, and other technologically advanced businesses.