How Biotech and Deeptech Startups Should Capitalise and Amortise Patent Costs

Understanding Patent Capitalisation: When Costs Become Assets

For a deeptech or biotech startup, the largest early-stage invoices often come from patent attorneys. Seeing tens of thousands of dollars or pounds go towards legal fees can be daunting when every bit of runway counts. But these costs are not just expenses disappearing from your bank account. They are investments in your company’s most valuable asset: its intellectual property on the balance sheet.

Understanding how to account for patent costs is not just a compliance exercise; it’s a critical part of presenting an accurate financial story to investors, partners, and auditors. Properly managing your intellectual property on the balance sheet reflects the true value you are building, moving it from an abstract concept into a tangible financial asset.

So, why can't you just expense all these legal fees and move on? The answer lies in the principle of matching costs to the revenue they help generate. A patent provides a competitive advantage over many years, so its cost should be recognized over that same period, not all at once. This is achieved through capitalisation. Capitalisation is the process of recording a cost as a long-term asset on the balance sheet rather than an immediate expense on the income statement.

By capitalising patent costs, you shift the initial cash outlay from your income statement to your balance sheet. This results in a lower reported loss or higher profit in the short term and creates an intangible asset that strengthens your financial position. This process is governed by specific accounting standards for intangible assets, namely GAAP ASC 350 and IFRS IAS 38. Following these rules for your US GAAP compliant financials (see our guide on ASC 350) is mandatory for fundraising and potential acquisition discussions. These rules are not optional.

How to Account for Patent Costs: The Capitalise vs. Expense Decision

This is the most common point of confusion for founders: which of the many legal and filing invoices can actually be put on the balance sheet? The rules create a clear dividing line based on a core principle. Only external costs incurred to successfully acquire, register, or defend a patent can be capitalised.

The key distinction is external versus internal. Internal costs, such as R&D salaries, are expensed as incurred. Even though your lead scientist’s time is invaluable to the invention, their salary is considered an operational expense and cannot be added to the value of the patent asset. The same logic applies to success and failure: legal fees for an unsuccessful patent application or defense must be expensed. This reflects the fact that no long-term asset was successfully created or defended.

Here’s a practical breakdown of the patent accounting treatment:

• Capitalise This (Add to Balance Sheet):
  • Fees paid to patent attorneys for drafting and filing a successful application.
  • Government filing and registration fees (e.g., with USPTO or UK IPO).
  • Legal costs for a successful defense of your patent against a challenge.
  • Costs to acquire a patent from another party.
• Expense This (Record on Income Statement):
  • Salaries for your internal R&D team.
  • Costs related to general R&D activities before a specific patent is identified.
  • Fees for any unsuccessful patent applications.
  • Legal costs for an unsuccessful patent defense.
  • Patent maintenance and renewal fees, which are typically expensed as incurred.

Common Misconceptions

Myth: “My lead engineer spent three months on this invention, so I can capitalise their salary.”
Reality: Under both US GAAP and IFRS, the salaries of internal staff involved in R&D must be expensed. You can only capitalise direct, external costs associated with securing the patent.

Myth: “I paid a lawyer £10,000, so it must be a capitalisable asset.”
Reality: The cost is only capitalisable if it was for a successful registration or defense. If the application is rejected, the entire amount must be expensed in that period.

Patent Amortisation: Writing Down Value Over Its Useful Life

Once a patent is on your balance sheet as an asset, you cannot leave it at its original cost forever. You must account for its value declining over its life through a process called amortisation. Amortisation is the systematic write-down of an intangible asset's value over its useful life, recorded as a non-cash expense on the income statement.

A critical decision is determining the amortisation period. This requires distinguishing between a patent's legal life and its economic useful life. For instance, the legal life of a US utility patent is 20 years from the filing date. However, the technology it protects might be superseded by newer innovations in just 5 or 10 years. For accounting purposes, you must amortise the patent over its economic useful life, which is your best estimate of how long it will generate economic benefits.

For most deeptech and biotech startups, this is often much shorter than the 20-year legal life. The reality for most early-stage businesses is more pragmatic: select a standard, defensible useful life for your patent portfolio, like 10 years, and apply it consistently.

This process becomes more complex when considering the differences between accounting and tax rules, particularly between the US and UK.

For US Companies (US GAAP)

You amortise the patent over its estimated economic useful life for your financial statements (your books). For tax purposes, however, the rules are different. For tax purposes, the US IRS generally requires intangible assets like patents to be amortised over 15 years, as specified in 26 U.S. Code § 197. This creates a book-to-tax difference that your accountant must track and reconcile in your tax filings.

For UK Companies (FRS 102/IFRS)

The system for British companies is more straightforward. The UK tax rules for amortisation are more aligned with accounting treatment, allowing amortisation based on the useful economic life. This means the amortisation expense on your income statement will generally match the deduction you can take for tax purposes, simplifying your compliance.

For example, a US-based biotech startup capitalises $50,000 in costs for a new patent. The team determines its useful economic life is 10 years. For its books, it will record $5,000 of amortisation expense each year ($50,000 / 10). For its tax return, it must deduct only $3,333 per year ($50,000 / 15).

Maintaining Compliant Records for Your Patent Portfolio

Maintaining audit-ready records is crucial, especially as your patent portfolio grows. This does not require expensive enterprise software; a well-structured spreadsheet is perfectly sufficient for most startups up to Series B. This patent schedule becomes your source of truth for audits and investor due diligence.

Your schedule should track the cumulative costs and amortisation for each patent asset. To build this in a spreadsheet, you should include columns for the following information:

• Patent ID
• Description & Country
• Filing Date
• Issue Date
• Capitalised Legal Fees
• Capitalised Filing Fees
• Total Cost
• Useful Life (in years)
• Annual Amortisation Expense
• Cumulative Amortisation
• Net Book Value

Beyond tracking, you must also monitor for impairment. Impairment is a sudden, significant drop in its value. An impairment test is required if a trigger event suggests a patent's value has dropped suddenly. Trigger events could include a competitor launching superior technology, a change in regulation that makes your invention obsolete, or losing a legal challenge that invalidates your patent. If an impairment event occurs, you must formally assess the patent's fair value and write down the asset on your balance sheet to this new lower value, recording the difference as a loss on your income statement.

Actionable Steps for Managing Patent Accounting

For a founder or early-stage finance leader managing this process in QuickBooks or Xero, the goal is to build a simple, scalable system. You do not need to be a patent attorney or an accounting expert, but you do need to be systematic.

1. Segregate Costs at the Source: When you receive an invoice from your patent attorney, ask them to itemise costs for successful applications versus research or unsuccessful attempts. In your accounting software, code the successful external costs to an asset account (e.g., "Patents" or "Intangible Assets"). Code all other legal fees, R&D consultations, and internal staff time to an expense account (e.g., "Legal & Professional Fees" or "R&D Expenses").
2. Maintain Your Patent Schedule: Use the field structure provided above as a starting point for your spreadsheet. Update it every time you incur new capitalisable costs and at the end of each financial period to record amortisation. This document will be invaluable for your accountant and any future due diligence.
3. Establish a Clear Amortisation Policy: Decide on a standard useful economic life for your patents and document the reasoning behind your choice. Consistency is key. Whether you choose 7, 10, or 12 years, applying a consistent and defensible policy simplifies your accounting and makes it easier to justify to auditors.
4. Acknowledge Book-to-Tax Differences: If you are a US company, ensure your tax advisor is aware of your accounting treatment for patents. They will need your patent schedule to make the necessary adjustments for the 15-year tax amortisation rule on your corporate tax returns. Our guide on tax vs book depreciation differences provides practical reconciliation tips.

Properly accounting for your patent portfolio does more than keep you compliant. It translates your scientific and technical achievements into a financial language that investors understand, reflecting the true value of the enterprise you are building. For related guidance, visit the Capex, Depreciation, and Intangibles hub.

Frequently Asked Questions

Q: What happens if a patent is granted in one year but costs were incurred previously?
A: You begin capitalising costs once success is probable, typically upon filing. Pre-filing R&D is always expensed. Costs incurred in prior periods for a now-successful patent are grouped into the asset's value upon grant. Amortisation then begins from the patent's issue date.

Q: Can I capitalise the cost of renewing an existing patent?
A: No, patent maintenance and renewal fees are operational costs to maintain an existing asset, not create or enhance one. Under both US GAAP and IFRS, these recurring fees should be expensed on your income statement as they are incurred.

Q: How do I choose a "useful economic life" for my patent?
A: This is a management judgment based on technology obsolescence, market trends, and your competitive landscape. For a fast-moving sector, 5 to 10 years might be appropriate, even if the legal life is 20. Document your reasoning and apply the policy consistently across your portfolio.

Q: Do R&D tax credits affect how I account for patent costs?
A: R&D tax credits and patent accounting are separate processes. The internal R&D costs you expense may qualify for tax relief, while the separate external legal and filing costs you capitalise become a balance sheet asset. The two do not directly offset but are both critical parts of your financial strategy.