Indiana Creates Patent Income Tax Exemption to Boost Small Business

“This exemption is an excellent incentive for businesses to locate, innovate, and produce in Indiana,” said Matthew Schantz, a patent attorney with Bingham McHale LLP. “It is a well placed magnet for just the kind of economic development I think will be most beneficial for Indiana.”

The Indiana Legislature and Governor Mitch Daniels have given many small, innovative businesses throughout the state of Indiana a boost. One of Indiana’s most recent legislative activities impacting small business encourages innovation and entrepreneurship by offering significant tax exemptions for development of patentable technology in Indiana.

Indiana’s House Enrolled Act (HEA) 1461 provides a 10-year income tax exemption for patent-derived income to Hoosier businesses with fewer than 500 employees. The exemption is 50% in years 1-5 and gradually phases out in years 6-10, with an annual cap per company of $5 million. To qualify, a company must be a small business headquartered in Indiana, conduct its development process here and receive a patent from the U.S. Patent and Trademark Office.

The provisions in HEA 1461 in conjunction with the state’s current research and development tax credit help position Indiana to be more competitive in terms of education, innovation and small business support.

Indiana is at the forefront of states in developing this concept for patent-derived income. Much of the Indiana policy was modeled after Ireland’s successful national patent policy.

Indiana’s Patent Income Tax Credit Details:  

• Exempts from taxation certain income derived by an Indiana taxpayer from qualified utility and plant patents that are issued after 2007.
• Caps the exemption claimed by a taxpayer in any taxable year at $5,000,000.
• Allows an exemption from income tax for a certain percentage of income derived from a particular patent for up to ten taxable years.  The income may be from licensing the patent, selling the patent, collecting royalties for infringement of the patent, and/or practicing the patent (that is, making a product or using a method claimed in the patent, to the extent that the income is attributable to the invention).
• The exemption is for 50% of income derived from a qualified patent for each of the first five taxable years and decreases annually to 10% in the tenth taxable year.

Contact smcgoun@binghameda.com to learn more about Indiana's Patent Income Tax Exemption.