H.F. 2416 Section 1. Section 422.7, Code Supplement 2011, is amended 1 by adding the following new subsection: 2 NEW SUBSECTION . 57. a. Subtract, to the extent included, 3 the income derived from a registered Iowa patent and earned 4 by an Iowa resident who holds a valid, unexpired Iowa patent 5 certificate or a qualified Iowa business that holds a valid, 6 unexpired Iowa patent certificate. 7 b. The exemption in this subsection applies to income 8 derived from a registered Iowa patent on or after the date 9 the department issues an Iowa patent certificate for that 10 registered Iowa patent. The department shall issue Iowa patent 11 certificates beginning on or after July 1, 2012, for registered 12 Iowa patents. An Iowa patent certificate shall be valid for 13 five years from the date of issuance and shall be transferrable 14 to any other qualified Iowa business or resident according to 15 the rules prescribed by the department. A registered Iowa 16 patent for which an Iowa patent certificate has been issued 17 shall not be eligible for another Iowa patent certificate under 18 this subsection. 19 c. An individual may claim the exemption allowed a qualified 20 Iowa business that is a partnership, subchapter S corporation, 21 or estate or trust electing to have the income taxed directly 22 to the individual. The amount claimed by the individual shall 23 be based upon the pro rata share of the individual’s earnings 24 of the partnership, subchapter S corporation, or estate or 25 trust. 26 d. The department shall adopt rules pursuant to chapter 17A 27 to administer this subsection. 28 e. For purposes of this subsection: 29 (1) “Income derived from a registered Iowa patent” means 30 either of the following: 31 (a) Royalties, licensing fees, or other income earned from 32 the licensing of a registered Iowa patent for use by another 33 qualified Iowa business or resident. 34 (b) Income earned from the use of a registered Iowa patent 35 -1- LSB 5345YH (3) 84 mm/sc 1/ 5

H.F. 2416 by the qualified Iowa business or resident. However, the 1 exemption for this type of income shall not exceed the fair 2 market value of the royalties, licensing fees, or other income 3 that would have been earned by allowing use of the registered 4 Iowa patent by someone other than the qualified Iowa business 5 or resident. The fair market value must be determined in each 6 taxable year in which the qualified Iowa business or resident 7 claims an exemption under this subsection. 8 (2) “Qualified Iowa business” means a business whose 9 commercial domicile, as defined in section 422.32, is 10 in this state, and includes a sole proprietorship, joint 11 venture, partnership, limited liability company, corporation, 12 association, or any other business entity operated for profit. 13 (3) “Registered Iowa patent” means a patent issued under 35 14 U.S.C. § 101 or 35 U.S.C. § 161 that meets all the following 15 requirements: 16 (a) The patented process, machine, manufacture, or 17 composition of matter, or new and useful improvement thereof, 18 or plant, was invented or discovered by a qualified Iowa 19 business or resident. 20 (b) The patent was originally issued on or after July 1, 21 2012. 22 (c) The patent is registered with the department in 23 accordance with the forms and procedures prescribed by the 24 department. 25 Sec. 2. Section 422.35, Code Supplement 2011, is amended by 26 adding the following new subsection: 27 NEW SUBSECTION . 26. a. Subtract, to the extent included, 28 the income derived from a registered Iowa patent and earned 29 by an Iowa resident who holds a valid, unexpired Iowa patent 30 certificate or a qualified Iowa business that holds a valid, 31 unexpired Iowa patent certificate. 32 b. The exemption in this subsection applies to income 33 derived from a registered Iowa patent on or after the date 34 the department issues an Iowa patent certificate for that 35 -2- LSB 5345YH (3) 84 mm/sc 2/ 5

H.F. 2416 registered Iowa patent. The department shall issue Iowa patent 1 certificates beginning on or after July 1, 2012, for registered 2 Iowa patents. An Iowa patent certificate shall be valid for 3 five years from the date of issuance and shall be transferrable 4 to any other qualified Iowa business or resident according to 5 the rules prescribed by the department. A registered Iowa 6 patent for which an Iowa patent certificate has been issued 7 shall not be eligible for another Iowa patent certificate under 8 this subsection. 9 c. The department shall adopt rules pursuant to chapter 17A 10 to administer this subsection. 11 d. For purposes of this subsection: 12 (1) “Income derived from a registered Iowa patent” means 13 either of the following: 14 (a) Royalties, licensing fees, or other income earned from 15 the licensing of a registered Iowa patent for use by another 16 qualified Iowa business or resident. 17 (b) Income earned from the use of a registered Iowa patent 18 by a qualified Iowa business or resident. However, the 19 exemption for this type of income shall not exceed the fair 20 market value of the royalties, licensing fees, or other income 21 that would have been earned by allowing use of the registered 22 Iowa patent by someone other than the qualified Iowa business 23 or resident. The fair market value must be determined in each 24 taxable year in which the qualified Iowa business or resident 25 claims an exemption under this subsection. 26 (2) “Qualified Iowa business” means a business whose 27 commercial domicile, as defined in section 422.32, is 28 in this state, and includes a sole proprietorship, joint 29 venture, partnership, limited liability company, corporation, 30 association, or any other business entity operated for profit. 31 (3) “Registered Iowa patent” means a patent issued under 35 32 U.S.C. § 101 or 35 U.S.C. § 161 that meets all the following 33 requirements: 34 (a) The patented process, machine, manufacture, or 35 -3- LSB 5345YH (3) 84 mm/sc 3/ 5

H.F. 2416 composition of matter, or new and useful improvement thereof, 1 or plant, was invented or discovered by a qualified Iowa 2 business or resident. 3 (b) The patent was originally issued on or after July 1, 4 2012. 5 (c) The patent is registered with the department in 6 accordance with the forms and procedures prescribed by the 7 department. 8 (4) “Resident” means the same as defined in section 422.4. 9 EXPLANATION 10 This bill provides an individual and corporate income 11 tax and franchise tax exemption for income derived from a 12 registered Iowa patent and earned by a qualified Iowa business 13 or resident. “Registered Iowa patent” is defined as a patent 14 which is issued under 35 U.S.C. § 101, which is commonly 15 referred to as a utility patent, or 35 U.S.C. § 161, which 16 is commonly referred to as a plant patent, and which is 17 originally issued on or after July 1, 2012, registered with 18 the department of revenue, and invented or discovered by a 19 qualified Iowa business or resident. “Qualified Iowa business” 20 means any business whose commercial domicile is in this state. 21 “Commercial domicile” is defined in Code section 422.32 as 22 the principal place from which the trade or business of the 23 taxpayer is directed or managed. 24 Income eligible for the exemption includes royalties, 25 licensing fees, or other income earned from the licensing of 26 a registered Iowa patent for use by another qualified Iowa 27 business or resident. It also includes income earned from the 28 taxpayer’s own use of the patent, but the exemption is limited 29 to the fair market value of the royalties, licensing fees, or 30 other income that would have been earned by allowing use of the 31 registered Iowa patent by someone other than the qualified Iowa 32 business or resident. 33 The bill provides that a qualified Iowa business or resident 34 must hold a valid, unexpired Iowa patent certificate in order 35 -4- LSB 5345YH (3) 84 mm/sc 4/ 5

H.F. 2416 to claim the exemption provided in the bill. Iowa patent 1 certificates shall be issued by the department of revenue 2 for registered Iowa patents. The certificates shall be 3 transferrable to another qualified Iowa business or resident to 4 allow the buyer, assignee, or transferee of a registered Iowa 5 patent to take advantage of the income tax exclusion provided 6 in the bill, provided the other requirements for exemption are 7 met. 8 Each certificate shall be valid for five years and shall 9 be issued once per registered Iowa patent. As a result, each 10 registered Iowa patent will be eligible for a maximum of five 11 years of tax exemption under the bill. 12 -5- LSB 5345YH (3) 84 mm/sc 5/ 5