Small businesses often derive significant value from innovation, which frequently results in the creation of Intellectual Property (IP). However, this vital aspect is often overlooked, particularly since internally generated IP is not recognized on balance sheets for accounting purposes unless acquired from outside.

Since the introduction of the small business restructure rollover on July 1, 2016, small businesses can now recognize IP in one entity (Entity A) and transfer it to another (Entity B) without incurring capital gains tax. Additionally, Entity B can depreciate the transferred IP over its useful life, allowing for tax-deductible depreciation.

This process enables small businesses to:

  1. Recognise Valuable IP: Identify and leverage valuable IP to create separate income streams distinct from operating income, which can be strategically managed and distributed.
  2. Enhance Saleability: Improve the commercial viability of the business structure by allowing the operating entity to pay a fair market price for essential knowledge and processes that confer a competitive advantage.
  3. Create Sustainable Revenue: Establish a separate licensing entity that generates ongoing licensing fees.

To facilitate this restructuring, we offer a range of services:

  1. IP Specialist Introduction: Connect businesses with IP experts familiar with their industry to help identify internally
    generated IP and clarify ownership, ensuring a smooth transfer process.
  2. Legal Documentation: Collaborate with legal professionals to develop a comprehensive suite of documents that
    facilitate the effective transfer of IP, granting the licensor full rights and creating a structured approach for recognizing
    new IP.
  3. IP Valuation: Partner with experienced IP valuers to conduct independent and sustainable valuations, providing
    credible evidence for transactions on an arm’s length basis for tax purposes.

By eliminating capital gains tax costs and enabling tax-deductible depreciation, this restructuring can yield both commercial and tax benefits for small businesses.

Dymond, Foulds & Vaughan has assisted several businesses to identify and value IP for the benefit of the business both operationally and as to tax efficiency and would be please to review your business situation.