It Does Not Compute: Copyright Restriction on Tax Deduction for Developer’s Donation of Software

Abstract

Great amounts of wealth can be represented by intellectual property (“IP”), including computer software. Computer software creators, and other inventors, artists and authors, may desire to enthusiastically support their favorite charitable endeavors. The tax consequences for the creative genius donating his or her IP to charity will depend on whether his or her creation is protected by patent, trade secret or trademark on the one hand, or copyright on the other. In general, the donor of a patent, trade secret or trademark enjoys favorable tax treatment – he or she is entitled to claim an income tax deduction for the full fair market value of the IP donated. In contrast, as a result of the Tax Reform Act of 1969, the donor of a copyright is not allowed to claim a full fair market value deduction – instead, he or she may claim a deduction only for his or her cost basis in the copyright (which may be very small, or nothing). The following example demonstrates the different income tax results possible.