Amortization issue with new product

[Greenbriar]

Client has a patent pending on a product he will sell to fishermen and other sports enthusiasts. Over the course of the first year he has spent about 20,000 in designing the product, e.g. designing the product, various mock-ups of the products until it is in its final version. I'm thinking this is a S.197 intangible amortized over 15 years. Would appreciate any comments. He and his wife formed an LLC for this purpose. Thanks.

[Roland Slugg]

When a taxpayer purchases a patent, either outright from its owner or as an allocated portion of the cost of an entire business, the cost (or allocated basis) of the patent is a §197 intangible, amortizable over 15 years. For a created product, however, for which a patent is obtained from the government, the taxpayer has a choice: He can elect to expense currently all the research, experimentation and development costs (Code §174(a)(1)), or he can elect (using F-4562) to deduct the expenditures ratably over 60 months or longer, beginning with the month the taxpayer first realized benefits from the expenditures. (Code §174(b)(1) and Regs §1.174-4(b)(1)) If the taxpayer adopts the current expense treatment, he must use it for all similar expenditures that year and in all subsequent years unless he receives IRS permission to switch. (Code §174(a)(3))

Regardless of the method adopted for current R&E costs, the costs directly associated with obtaining a patent from the government ... i.e. drawings, attorneys' and governmental fees, etc ... do become the basis of the patent itself, and that basis is, indeed, a §197 intangible.

[Greenbriar]

Patent costs small - R&D hefty

Turns out patent costs are about 2,000 but the cost to develop the product is closer to 30,000 which I understand are considered R&D costs. The extended due date for the 1065 passed on 9/15 so I don't think he can amortize the 30,000 over 5 or 10 years. My research indicates that the election to amortize must be made in the first year of a timely filed tax return. I assume then that he would have to deduct the 30,000 in the first year and pass thru on the k-1. Any thoughts on that? Thanks.