Businesses that earn patent royalties are responsible for reporting this financial information on their tax return. It is important to understand that the life of a patent is twenty years, and during this time the business is responsible for reporting all money made under their patent. Business-related patent costs are usually tax-deductible, although there are special deduction rules that often apply to special circumstances.

To figure out whether or not the patent is income taxable, a business has to decide how their royalty earnings are categorized.  Are the royalty earnings considered business or non-business? Once this information is determined, it can be decided how to file the patent earnings.

Earnings which come from patents might be considered business and occupation tax, also known as B&O tax. Business and occupation tax apply if the inventor earns patent earnings for the right to use a patented process, to manufacture a patent process, or the income is from the sale of a patent by the inventor than B&O tax applies. The earnings must also be considered recurrent and a continuous part of daily business activities.

There are instances when patent royalties are exempt from income taxes such as; if the person invented the patent is the recipient of the royalty, and if the patent income is non-business income. Non-financial businesses need to know who owns the rights to a patent. It is also imperative to know whether or not the patent is being used for investment purposes. If the patent is being used for investment purposes, then it will not be considered business and occupation tax. There are many rules and guidelines when it comes to patent and taxes; it is important to educate yourself with the information before filing taxes.