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For a little over five years (I started in fall of 2008) I've been developing an app for the iPhone/iPad, and it's been for sale in the App Store for all of that time. I'm in a position now where I have an offer to sell the app to another party, including the App Store presence, all source code, and other assets.

I'm tempted to take the offer since I could use the money in the sale right now, instead of the trickle of income the app generates each month (the offer price, minus commissions for the sale, would be a little over 13 months' worth of income from sales, if sales remain at the same pace).

My question is related to what taxes I might incur if I do decide to sell the intellectual property off. I haven't had much luck Googling for advice here, so really I'm just wondering what kind of income this would count as, and how it might be taxed. It is, after all, wholly a work of my own creation, from five years of off-and-on work. How would I value this work? Would income it generated over its lifetime contribute? Would I need to consider the amount of time I invested in development, along with salary ranges for a software engineer?

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3 Answers

up vote 10 down vote accepted

Future income would impact the price you'd negotiate for the sale. And it may turn to profit for the buyer, but it has no impact on you today. You have the sale price, and whatever cost hasn't been written off. The time you put into it doesn't matter either, an hour to write the program or 5 years. Only your out of pocket cost is written off against the sale price.

If the sales are steady, why so low, 13 trailing month's revenue, with potential for growth, is a very low multiple. It's in the store, what is your cost to maintain the product?

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The cost has pretty much been only $99/year to stay in Apple's developer program, and maybe the cost of the two laptops I've gone through in that period. Of course, I didn't say I was going to accept that offer, since it's on the bottom end on what I'd consider. Given that it would incur some hefty taxes, I think I'll just hang onto the app for now, unless a better offer comes around. –  Casey Marshall Dec 11 '13 at 0:52
    
Ok. And thx for 'accepted answer.' The laptops, and probably internet connection are your only expenses, it seems. –  JoeTaxpayer Dec 11 '13 at 1:10
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If significant amounts are involved, that would be a good time to consult a tax professional (EA/CPA licensed in your state).

Generally, sale of a business is an ordinary income and you can only deduct tangible expenses, as Joe said. That would be laptops, bills, expenses per receipt, of course they must all be directly attributable to the business.

You will need to be able to show that the laptops has only been used in business, recapture depreciation, etc. Same with all the rest of the expenses.

If you're incorporated (i.e.: you hold this software under an S-Corp), then you're selling stocks, not business, and the tax treatment may be different, but I'm guessing this is not the case for you.

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I realize this is a dated question, but for anyone interested in this subject please be aware of the availability of IRC § 1235 and capital gain treatment for the sale of patents. When the holder of a patent transfers all substantial rights to an unrelated person, it can qualify for long-term capital gain treatment. That can be a meaningful tax savings relative to ordinary income treatment.

There are a number of specific provisions and requirements to access § 1235. The holder must be the creator or someone unrelated (and not the creator's employer) who purchased the patent from the creator. The holder must transfer all substantial rights to the patent (not a licensing), or sell an undivided portion of all substantial rights (partial sale, again not a license). The benefit of § 1235 is that long-term treatment will apply even for patents with holding periods under 1 year. Other rules and permutations of course also apply. Those who fail § 1235 may still qualify their assets as capital under § 1221 or § 1231. A patent held by its creator will often qualify as a capital asset.

It may not make any sense to sell your business as a whole, particularly if all a purchaser wants is a patent or group of patents. Of course, if the patent was held by its creator in a single-member LLC or other disregarded entity sold to a buyer, then the tax treatment is still treated as the sale of a long-term capital asset.

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