Intangible Personal Property Explained: Definition, How It Works, Types, and Examples
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Summary:
Intangible personal property, unlike tangible assets, has no physical form but represents significant value. It encompasses various assets, including intellectual property, copyrights, patents, and investments. Individuals and corporations can hold intangible personal property, which is distinct from tangible personal property, such as machinery or jewelry. This article explores the concept of intangible personal property, its significance, and how it differs from tangible assets. It also delves into the tax implications of intangible assets and provides examples of what falls under this category.
What is intangible personal property?
The term intangible personal property refers to an item of value that cannot be touched or physically held. These assets can be held by both individuals and corporations. Intangible personal property can be anything that has image, social, and reputational capital, along with digital, copyrights, patents, and investments. Intangible personal property or intangible assets are the opposite of tangible personal property, which can be physically touched and come with a degree of value, such as machinery, jewelry, and electronics.
Understanding intangible personal property
Personal property can be divided into a few different categories—notably tangible and intangible personal property. Tangible personal property is anything that can be held and has definitive value while intangible personal property is anything that doesn’t have any obvious value and can’t be touched.
The value in intangible personal property
lies in the associated benefits and value recognition. Intellectual property is one of the most common forms of this type of property. Other types of intangible personal property include life insurance contracts, securities investments, royalty agreements, and partnership interests. The most common forms of intangible property for companies include goodwill, research and development (R&D), and patents.
Assigning value to intangible personal property
Some forms of these intangible items are known as capital assets and appear on a company’s financial statements while others are not included. For example, a company would list a trademark or patent as an asset on its balance sheet.
The company may need to do in-depth research to determine a realistic market price for intangible objects. Once a value is assigned to this property, the company may write off some of the cost of creating the object. An example may be the cost associated with compiling a customer or client mailing list or hiring a lawyer to file a patent application.
Intangible personal property as incorporeal property
Intangible personal property may often be referred to as incorporeal property.
Special considerations
The Internal revenue service (IRS) does impose capital gains taxes on any tangible property that individuals and corporations sell. But it can be cloudy when it comes to intangible assets. Since there is no actual physical shape to this type of property, it doesn’t have an assigned or hard value, which makes it hard to account for and evaluate. As such, not all forms of intangible personal property are taxable.
Some types of intangible assets are, though, making them eligible for capital gains or losses. Capital gains are realized when they’re sold at a higher price while capital losses result from a lower price than the original purchase price. The value is determined by any intellectual or non-physical attributes. For instance, a musical composition may be taxed when it is sold to someone else at a different price than when it was originally purchased.
While tangible assets may be depreciated, the IRS requires that property owners amortize “over 15 years the capitalized costs” any intangibles that were purchased before August 1993. That’s because they are commonly given a 15-year life. These refer to any assets held for the purpose of trade or business.
Certain intangible assets may be taxed as ordinary income, though, thanks to the Tax Cuts and Jobs Act of 2017. This may include things like intellectual property, digital assets, or patents. Make sure you consult a tax professional about how to handle your intangibles.
Intangible personal property vs. Tangible personal property
As noted above, intangible personal property is anything without obvious value that can’t be physically manipulated. Tangible personal property, on the other hand, is anything that can be held and anything with discernable value. As such, it can be moved around.
Tangible assets can be used in the day-to-day operations of a business or by individuals in their daily lives. Examples include machinery, vehicles, jewelry, art, electronics, and furniture. Things like smartphones and collectibles also fall in this category.
This kind of personal property is subject to depreciation, either on an accelerated basis or using the five- or seven-year periods. Taxation occurs on an ad valorem basis, which requires the use of an appraiser to assess the value. It can also be taxed on the actual value—the difference between the sale and the purchase price. Real estate is not considered personal property because it cannot be moved, which is a determining factor in identifying personal property.
Examples of intangible personal property
Let’s say Firm XYZ invented a liquid, that when rubbed on a tattoo, causes it to blend into the surrounding skin rendering it invisible. There is also a solvent used to remove the tattoo obstructing solution. Firm XYZ issues a patent for both formulas. The patent, which keeps others from copying the formulas, gives the company sole ownership rights over this invention for the duration of the patent.
The firm enjoys the financial benefits of being the sole seller of this breakthrough tattoo obstructing concoction. Those financial benefits can be represented by the patent, which does not have any inherent value itself but is valuable because of these future benefits. The company will include the patents as a capital asset and may write off some of the expenses required to list the patent.
What types of assets are considered intangible personal property?
Intangible personal property is anything with no obvious and assigned value and can’t be physically held. Examples include copyrights, patents, intellectual property, investments, digital assets, along with anything that has image, social, or reputational capital.
What’s the difference between intangible and tangible personal property?
Intangible personal property is any type of asset that has value but isn’t physical in nature. Examples of intangible personal property are copyrights, patents, intellectual property, and investments. Assets that can be represented with social or reputational capital also qualify as intangible personal property. Tangible personal property, on the other hand, refers to assets that can be touched and have an assigned value, such as jewelry, art, machinery, and electronics.
Is intangible property taxable?
Intangible personal property has no physical shape and, as such, has no assigned value. This makes it hard to account for and properly evaluate them. But there are certain forms of intangible personal property that are subject to capital gains taxes. This happens when they are sold at a higher price than when they were purchased. An asset’s value and, therefore, any capital gains that result from its sale are based on its physical attributes and intellectual content. Things like music compositions are assets that have great value and may result in capital gains when/if they are sold. Some assets may be taxed as ordinary income, such as patents or other forms of intellectual property.
Frequently asked questions
What is the difference between tangible and intangible personal property?
The primary difference is that tangible personal property has a physical form and assigned value, while intangible personal property lacks physical attributes and assigned values. Tangible property can be touched, such as jewelry or machinery, while intangible property includes assets like intellectual property or copyrights.
Are all forms of intangible personal property subject to taxation?
No, not all forms of intangible personal property are taxable. The taxation of intangible assets can be complex, and some may be subject to capital gains taxes when sold at a higher price than their purchase cost. However, assets like patents and intellectual property may be taxed as ordinary income. It’s essential to consult a tax professional for guidance on specific intangible property taxation.
How can companies benefit from intangible personal property?
Companies can benefit from intangible personal property by including it on their balance sheets, potentially improving their financial standing. Assets like patents, intellectual property, and copyrights can provide companies with a competitive edge, potential income, and protection against intellectual property theft. These assets can represent significant value and enhance a company’s overall worth.
What are some common examples of intellectual property as intangible personal property?
Common examples of intellectual property as intangible personal property include patents, trademarks, copyrights, and trade secrets. These assets are valuable because they protect unique ideas, creations, and innovations from unauthorized use or reproduction.
How do you determine the value of intangible personal property for tax purposes?
Determining the value of intangible personal property for tax purposes can be complex. It often involves considering factors like market demand, income potential, and the cost of creating or acquiring the asset. Some intangible assets may require professional appraisals to establish their value accurately.
Can individuals hold intangible personal property, or is it mainly for businesses?
Intangible personal property can be held by both individuals and businesses. While businesses commonly have intangible assets like patents and trademarks, individuals may possess intangible personal property such as copyrights for their creative works, intellectual property, or investments in intangible assets like stocks or bonds.
Are there specific legal protections in place for intangible personal property?
Yes, there are legal protections in place for intangible personal property. Intellectual property, such as patents and copyrights, is protected by intellectual property laws that prevent others from using, reproducing, or profiting from these assets without permission. Additionally, contracts and agreements often safeguard intangible assets, including partnership interests and royalty agreements.
Key Takeaways
- Intangible personal property encompasses assets without a physical form, including intellectual property, copyrights, and patents.
- Valuing intangible personal property can be challenging, and its worth may vary based on intellectual content.
- Not all intangible personal property is subject to taxation, making it important to understand the tax implications of specific assets.
- Companies can benefit from intangible assets by including them on their balance sheets, potentially enhancing their financial standing and competitiveness.
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