Economy and Environment and Government and Life Science & Biotech and Manufacturing & Technology and Technology and Small Business

VOICES FROM THE INDUSTRY: New tax break makes Indiana more attractive than ever

March 17, 2008

Rapid growth in the high-tech fields of biotechnology and life science has made Indiana a shining example of how promoting emerging industries can transform an agricultural and manufacturingbased economy into a national leader in innovation. It has done so by creating an environment in which knowledge-based businesses can thrive.

Building on this success, Indiana continues to position itself as a leader in emerging technologies. A new tax law that took effect this year will present another major step toward this goal.

Indiana Code Section 6-3-2-21.7 aims to encourage innovation by giving entrepreneurs and small businesses a break on the income taxes they pay from using or selling patented products and ideas.

The law will make Indiana the first state in the nation to offer such incentives. Strengthening the state's existing focus on biotech and pharmaceutical companies, the law is intended to encourage new patents from existing companies and make the state more attractive to new companies looking for a profitable marketplace.

The details of the law are quite straightforward. Small businesses with fewer than 500 employees and affiliates that receive patents after 2007 may exempt up to half of the income they receive from using the patents for the first five years. After that, the exemption tapers off each year, eventually expiring after 10 years.

The exemption won't create a significant fiscal loss for the state because, at most, only half of the patent income may be exempted. The key to the law's future success is to ensure new business formation and current business expansion into new products and new sources of income. If that happens, the influx of high-tech businesses and the high-paying jobs they bring with them will boost tax revenue.

Indiana is 19th in the nation in patents per capita. We want to lead the pack, and providing economic incentives for innovation is a solid way to do so.

Business springs in Ireland

To see how great an impact a patent income tax exemption can have on an economy, one only need look at Ireland, where a focus on growing high-tech industries has earned the country the nickname "Celtic Tiger."

By offering tax breaks on patent income, Ireland has become one of the most powerful economies in the world. Several leading U.S. companies, including Indiana's own Eli Lilly and Co., and Cook Group, have established intellectual property units there to save on taxes.

Dell, Intel and Pfizer have also rushed to take advantage of the pro-business environment in Ireland. In turn, these companies become some of Ireland's top employers and contribute a massive share of the government's revenue-generating jobs and revenue that could be growing in the United States.

In today's economy, intellectual capital is one of our country's greatest assets. This makes it especially discouraging to think companies will continue to export this resource. Indiana Code Section 6-3-2-21.7 is designed to keep our best and brightest here.

Patent law can be an intimidating topic for many small business owners and entrepreneurs, and the Indiana exemption contains a few restrictions they should know about.

The exemption covers utility and plant patents, but does not include design patents. The exemption may only be claimed by the owner or seller of the patent, meaning buyers or licensees may not claim an income exemption as well. Also, the amount of the exemption may not exceed $5 million in a given year.

Indiana has already proven it has a vision for the future in establishing itself as a leader in life sciences, and growing businesses should be eager to take advantage of the unique incentives available here.

Our legislators should get ample credit for their foresight. They knew this law is what the state needs to compete in a world where intellectual products like computer programs and new drug formulas now carry the weight farming and factory labor once did.



D'Hue is an associate with Indianapolis-based law firm Baker & Daniels LLP. He focuses his practice in intellectual property law. Views expressed here are the writer's.
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