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Ask The Experts: Intellectual Property and Tax Classification

Ask the Experts: Intellectual Property and Tax Classification

Q: I have a product that I am going to manufacture. I will have to contract out the manufacturing, and I’ll also need the manufacturer’s engineers to help me with the final design of the product. How do I prevent the manufacturer from stealing my product idea?

A: I assume you are eventually planning to patent the product but cannot do so when it is still just an “idea.” My first recommendation is to consult with a local attorney specializing in intellectual property. The attorney-client privilege will be your first protection once you have engaged the attorney. The attorney can also advise you about possibly patenting the product.

I anticipate that the lawyer would advise you to enter a non-disclosure agreement in writing with a manufacturer. Preparation of these agreements is a routine function of the lawyer’s practice. Also, you will probably be advised to prepare a detailed journal of how you got the idea and all relevant steps involved to use as evidence if anyone in the future tries to steal your idea. The other benefit will be having a search done to make sure your product does not infringe on any existing patents.

Working with an attorney on these items will help you avoid surprises later after money and energy have been expended. If there is a chance to enter foreign markets, the non-disclosure can be even more crucial. It is a good practice to tell no one about your plans without a signed agreement of non-disclosure.

Michael Beene, NASE Legal Expert

Q: I have a single member LLC, and I elected to file as an S-Corporation 6 years ago. I want to change that election classification and report my business income on my personal tax return. I believe I need to file IRS form 8832 to make this change. Is that correct? What else do I need to do to change the classification for federal and state tax purposes?

Form 8832 is used for certain entities to make a taxing classification. However, it is not the form to use in terminating an S election. Unfortunately, the IRS does not have a prescribed form for terminating an S election, but instead requires that the entity submit a “statement” indicating the termination request. The statement must be signed by each shareholder consenting to the termination and those shareholders must comprise more than 50 percent of the ownership of the entity. In your case, since the entity is owned solely by you, your signature on the statement will meet the required consent.

The statement needs to include the fact that 100 percent of the shares are owned by you and that with your signature, more than 50 percent of the outstanding shares do, in fact, consent to the termination. You must also state the effective date of the termination. In order for a termination to be effective for the year in which it is filed, if must be filed within 2 months and 15 days of the beginning of that tax year. If filed after that, the effective date will be the beginning of the next tax year. You can find more detail related to terminating the election on page 2 of the instructions for IRS form 1120S.

Keith Hall, NASE Tax Expert

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Ask the Experts: Intellectual Property and Tax Classification

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