Works of art, designs for new technology, computer software, even snappy advertising slogans are all ideas. They also have economic value and are known as intellectual property (IP). Just like tangible assets, they have the potential to generate income for their creators or owners—so much, in fact, that some of today’s most valuable companies (Apple, Microsoft, and Alphabet) derive most of their profit from IP.
What is intellectual property?
Intellectual property refers to intangible creations of the mind, such as literary and artistic works, designs, schematics, brand names, and formulas. IP assets fall into a number of subclasses, including copyrights, patents, trademarks, and trade secrets.
Intellectual property lawprovides protection to encourage innovation, while letting creators benefit exclusively from the commercial exploitation of their own work for a period of time, without fear of being undercut by copycats.
How to handle IP in accounting
Although many IP assets do not appear on a business’s balance sheet, they usually fall under a category known as non-current assets. This category represents a company’s long-term income-producing investments in the business. For example, if a company holds the publishing rights to a song, it can collect license fees from third parties who wish to use the song in television commercials. The same goes for a software company licensing a computer program to third-party users.
Because some types of IP such as patents have expiration dates, they lose value as they age and are amortized over time. Amortization is an accounting method that reflects an asset’s declining value, much like a computer or truck wearing out with use. By amortizing a patent’s value over the lifespan of its exclusivity period (the time before it becomes available to the public domain), a patent owner can lower taxable income by deducting a percentage of a patent’s falling value.
For example, a company may only hold the exclusive right to a patent for 20 years. Under a straight-line depreciation model, the total value of the patent would be divided by 20. For each passing year of exclusivity, the company would deduct 1/20th of the total value from its income for tax purposes. In other instances, usually for a tax advantage, some of the depreciation might be front-loaded at the beginning of the patent’s term. For IP that has no shelf life, like trademarks for slogans, logos, and brand names, there’s no way for a company to amortize value, since it doesn’t expire.
Types of IP
IP falls into a number of different categories. Four of the most common forms of IP include:
Copyright law grants the creator of an original work exclusive rights to its use and distribution, usually for a limited time (generally 70 years after the creator’s death), so the creator and their estate can receive compensation for their intellectual investment. This protection applies to a wide range of creative, intellectual, or artistic forms or works. Works can include:
- Literary: Books, articles, poems, plays, and other written content
- Artistic: Paintings, drawings, sculptures, photographs, etc.
- Music: Compositions, songs, musical scores, and performances
- Audiovisual: Films, TV shows, and commercials
- Architectural: Building designs and architectural plans
- Software: Software programs and computer code
Patents give inventors the exclusive right to their inventions for a set period of time. The purpose is to encourage innovation by granting this temporary monopoly on use, development, and commercial exploitation. This allows inventors to recoup the costs of research and development and to potentially profit from them.Patent law typically covers new and useful inventions, processes, machines, or compositions of matter, such as drugs or chemicals.
In some cases, patents can also cover new developments for existing products. Patents typically last for 20 years from the filing date. However, it’s worth noting that the US Patent and Trademark Office often has a backlog of applications, meaning it could take a few years for a patent to be approved. This means formal protection might actually amount to 17 or 18 years.
Trademarks are distinctive symbols, names, phrases, logos, or other identifiers used to distinguish the source of goods or services from others. They play a crucial role in protecting a company’s brand identity and helping consumers recognize and choose products or services they trust and prefer.
Trademarks are a form of IP that grants exclusive IP rights to use a mark in connection with specific goods or services. For example, the multinational food manufacturing company Kellanova owns the trademarks to recognizable brands like Eggo, Pringles, Pop-Tarts, and Kellogg’s Frosted Flakes.
While the use of a mark can provide some level of intellectual property protection, registering a trademark with a government authority, such as the United States Patent and Trademark Office, offers additional legal benefits and protections. Registration typically involves a thorough examination process to ensure the mark meets the required special considerations, spelled out in the federal Lanham Act—the law establishing the US’s trademark registration system and defining what constitutes trademark violation.
Under trademark law, legal rights can potentially last indefinitely if a company continues to use the mark and maintains the registration.
A trade secret refers to confidential and proprietary information providing a business with a competitive advantage. Trade secrets can include a wide range of technical information, such as formulas, processes, workflows, customer lists, and other business information that derives its value from being kept secret. There are no official registries or offices where a company can register trade secrets, as they might with copyright, a patent, or a trademark. Instead, well-written business contracts, enforced through civil litigation, protect trade secrets.
How to defend your IP
Protecting IP from unauthorized use—also known as intellectual property infringement—is crucial for businesses and individuals to safeguard their creative and innovative efforts. Here are some common strategies to defend different types of IP from would-be infringers:
Federal law permits you to register your IP with the relevant authority, depending on the type of IP at hand. You can register trademarks and patents with the US Patent and Trademark Office (USPTO). It’s essential you register your trademark or patent to enforce your intellectual property rights.
Registration isn’t always necessary with copyrights, however—copyright usually takes effect the moment a work is published or otherwise made public. But registering your copyright-protected work with the US Copyright Office can create a useful record. It can also be used as an enforcement mechanism if you ever need to settle an IP infringement case in federal court, which handles almost all IP disputes.
Foreign countries and organizations like the European Union have their own IP systems with respective registration benefits.
Keeping your IP confidential is another way to avoid IP infringement. This is especially useful when it comes to trade secrets, which you can’t register ahead of time. Ownership of trade secrets is usually only ever determined in court, after someone has already filed a lawsuit. A much cheaper way to defend them is to limit knowledge of your IP to trusted employees, who can be bound to secrecy through non-disclosure agreements. You can also keep patent details confidential or closely guard early drafts of works you later intend to copyright.
Regularly monitor relevant marketplaces for unauthorized use of your copyrighted works, patents, trademarks, or trade secrets. Take prompt action against infringers: Typically, litigation isn’t necessary. A sternly worded cease-and-desist letter from an IP lawyer or a Digital Millennium Copyright Act (DMCA) takedown notice will often do the trick.
Maintain detailed records of the creation, development, and use of your IP. This documentation can be crucial in legal proceedings, if or when it comes to that.
Intellectual property FAQ
What is IP in simple terms?
IP, or intellectual property, is a category of intangible property or asset that is the product of human intellect, such as creative works, industrial designs, software, logos, and more.
What are the four types of IP?
The four types of IP are copyright, patents, trademark, and trade secrets.
What is an example of IP?
Some examples of IP are the Harry Potter books, movies, and theme park attractions (copyright); the patent for the Apple iPhone; the Starbucks mermaid trademark; and the secret formula for Coca-Cola (a trade secret).