Many people of wealth have positive attitudes regarding new or early-stage companies. These companies, which can also include for-profit businesses in which the prospective royalty investor has all or some ownership, need funding, which the investor may provide through purchasing a royalty issued by the company.
Companies selling revenue royalties, an agreed percentage of defined revenues, for an agreed period of time, are able to deduct their royalty payments from their federal income taxes.
The royalty investors receiving royalty payments from companies that sold the royalty are not required to pay any federal income tax on the royalty payments received until the cost of the royalty has been recaptured. Thereafter, royalty payments received from the royalty issuing company are considered to be ordinary income.
A contribution of the royalty to any qualified non-profit entity by the royalty investor, beyond the point of the investor’s cost recapture, would result in a tax deduction for the investor for the amount of the then value of the royalty. The non- profit recipient would benefit thereafter from the royalties paid until the end of the royalty payment period.
The royalty investor, having financed the company, in which the royalty investor may also be an owner, might possibly lose some of the amount paid for the royalty, less the amount of royalty payments received. However, the royalties received, if any, would be non-taxable up to the recapture of the amount paid for the royalty. The investor or his estate would receive a tax-deduction for the outstanding value of the royalty at the time of donation. The value of the donated royalty could be substantial based on the current amount of royalties being paid by the company and the remaining royalty payment period.
So, if the company honors the terms of the royalty, a business has been assisted and a non-profit entity will benefit from the generosity of the investor. If the company is not successful, the royalty investor would suffer a tax-deducible loss of all or a part of the amount invested in the royalty.
Those considering investments involving royalties issued by privately owned companies should always consult their professional legal, tax and accounting advisors.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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