I 
113TH CONGRESS 
1ST SESSION H. R. 2605 
To amend the Internal Revenue Code of 1986 to allow a deduction for 
patent box profit from the use of United States patents. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 28, 2013 
Ms. SCHWARTZ introduced the following bill; which was referred to the 
Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to allow a 
deduction for patent box profit from the use of United 
States patents. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Manufacturing Innova-
tion in America Act of 2013’’. 
SEC. 2. DEDUCTION FOR PATENT BOX PROFITS. 
(a) IN GENERAL.—Part VI of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new section: 
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‘‘SEC. 200. PATENT BOX PROFITS. 
‘‘(a) ALLOWANCE OF DEDUCTION.—If the taxpayer 
elects the application of this section, there shall be allowed 
as a deduction an amount equal to 71 percent of the lesser 
of— 
‘‘(1) the patent box profit of the taxpayer for 
the taxable year, or 
‘‘(2) taxable income (determined without regard 
to this section) for the taxable year. 
‘‘(b) PATENT BOX PROFIT.—For purposes of this 
section— 
‘‘(1) IN
GENERAL.—Except as provided by 
paragraph (9), the term ‘patent box profit’ means, 
with respect to a taxable year, IP profit multiplied 
by the ratio— 
‘‘(A) the numerator of which is the 5-year 
research and development expenditures of the 
taxpayer with respect to the taxable year, and 
‘‘(B) the denominator of which is the 5- 
year total costs of the taxpayer with respect to 
the taxable year. 
‘‘(2) IP PROFIT.—The term ‘IP profit’ means 
the excess (if any) of— 
‘‘(A) patent gross receipts, over 
‘‘(B) the sum of— 
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‘‘(i) the taxpayer’s cost of goods sold 
for the taxable year that are properly allo-
cable to patent gross receipts, 
‘‘(ii) other expenses, losses, or deduc-
tions (other than the deduction allowed 
under this section), which are properly al-
locable to patent gross receipts, plus 
‘‘(iii) routine profit. 
‘‘(3) ROUTINE
PROFIT.—The term ‘routine 
profit’ means— 
‘‘(A) the taxpayer’s cost of goods sold for 
the taxable year properly allocable to patent 
gross receipts reduced by the portion of cost of 
goods sold related to the sum of cost of raw 
materials, cost of items purchased for resale, 
and amounts incurred for intangible property 
rights (including royalties and amortization), 
multiplied by 
‘‘(B) 15 percent. 
‘‘(4) ALLOCATION
METHOD.—The Secretary 
shall prescribe rules for the proper allocation of 
items described in this paragraph for purposes of de-
termining patent box profit. Such rules shall provide 
for the proper allocation of items whether or not 
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such items are directly allocable to patent gross re-
ceipts. 
‘‘(5) SPECIAL RULES.— 
‘‘(A) DETERMINATION OF COSTS.— 
‘‘(i) IN GENERAL.—Cost shall be de-
termined in accordance with the principles 
of sections 263A and 471, as provided for 
by the Secretary under regulations or other 
guidance. 
‘‘(ii) ITEMS
BROUGHT
INTO
THE 
UNITED STATES.—For purposes of deter-
mining cost of goods sold, any item or 
service brought into the United States 
shall be treated as acquired by purchase, 
and its cost shall be treated as not less 
than its value immediately after it entered 
the United States. A similar rule shall 
apply in determining the adjusted basis of 
leased or rented property where the lease 
or rental gives rise to patent gross re-
ceipts. 
‘‘(iii) EXPORTS FOR FURTHER MANU-
FACTURE.—In the case of any property de-
scribed in clause (ii) that had been ex-
ported by the taxpayer for further manu-
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facture, the increase in cost or adjusted 
basis under subparagraph (A) shall not ex-
ceed the difference between the value of 
the property when exported and the value 
of the property when brought back into the 
United States after the further manufac-
ture. 
‘‘(B) 5-YEAR
RESEARCH
AND
DEVELOP-
MENT
EXPENDITURES.—The term ‘5-year re-
search and development expenditures’ means 
with respect to a taxable year the research and 
development expenditures paid or incurred by 
the taxpayer for the performance of research 
and development in the United States for which 
a deduction is allowed under subsection (a) or 
(b) of section 174 (determined without regard 
to section 41) for the 5-taxable-year period end-
ing with the taxable year. 
‘‘(C) 5-YEAR TOTAL COSTS.—The term ‘5- 
year total costs’ means with respect to a taxable 
year the excess of— 
‘‘(i) all costs paid or incurred by the 
taxpayer for the 5-taxable year period end-
ing with such taxable year, over 
‘‘(ii) the sum of— 
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‘‘(I) the taxpayer’s cost of goods 
sold for such 5-taxable year period, 
‘‘(II) interest paid or accrued for 
such 5-taxable year period, 
‘‘(III) taxes paid or accrued for 
such 5-taxable year period, and 
‘‘(IV) the net gain or loss for 
such 5-taxable year period from the 
sale or exchange of capital assets. 
‘‘(D) RULES
RELATING
TO
5-YEAR
PE-
RIOD.—For purposes of this paragraph— 
‘‘(i) NOT IN EXISTENCE FOR ENTIRE 
5-YEAR PERIOD.—If the taxpayer was not 
in existence for the entire 5-year period re-
ferred to in subparagraphs (B) and (C), 
such subparagraphs shall be applied on the 
basis of the period during which such tax-
payer was in existence. 
‘‘(ii) 
TREATMENT
OF
PREDE-
CESSORS.—Any reference in this para-
graph to a taxpayer shall include a ref-
erence to any predecessor of such taxpayer. 
‘‘(6) PATENT GROSS RECEIPTS.— 
‘‘(A) IN
GENERAL.—The term ‘patent 
gross receipts’ means gross receipts of the tax-
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payer for the taxable year which are derived 
from the sale, lease, license, or other disposition 
of qualified patent property. 
‘‘(B) RELATED PERSONS.— 
‘‘(i) IN GENERAL.—The term ‘patent 
gross receipts’ shall not include any gross 
receipts of the taxpayer derived from prop-
erty leased, licensed, or rented by the tax-
payer for use by any related person. 
‘‘(ii) RELATED
PERSON.—For pur-
poses of clause (i), a person shall be treat-
ed as related to another person if such per-
sons are treated as a single employer 
under subsection (a) or (b) of section 52 or 
subsection (m) or (o) of section 414, ex-
cept that determinations under subsections 
(a) and (b) of section 52 shall be made 
without regard to section 1563(b). 
‘‘(7) QUALIFIED PATENT PROPERTY.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
patent property’ means property which is a 
product which incorporates a qualified patent or 
patents— 
‘‘(i) if more than a substantial per-
centage of the value of the product is de-
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rived from the direct or indirect use of one 
or more qualified patents, and 
‘‘(ii) the gross receipts of the taxpayer 
from the sale, lease, license, or other dis-
position of the product are domestic pro-
duction 
gross 
receipts 
under 
section 
199(c)(4). 
‘‘(B) SPECIAL RULE RELATING TO CON-
TRACT MANUFACTURING.—For purposes of sub-
paragraph (A)(ii), if the product was produced 
to the taxpayer’s specifications within the 
United States under a contract, the taxpayer’s 
gross receipts from the sale, lease, license or 
other disposition of the product shall be treated 
as domestic production gross receipts if the con-
tract manufacturer certifies to the taxpayer 
that the contract manufacturer’s sale of such 
product to the taxpayer resulted in domestic 
production gross receipts of the contract manu-
facturer. 
‘‘(C) DOMESTIC PRODUCTION GROSS RE-
CEIPTS.—For purposes of this paragraph, the 
term ‘domestic production gross receipts’ has 
the meaning given such term by section 
199(c)(4), except that the term ‘United States’ 
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as defined in subsection (d)(7) of this section 
shall be substituted for the term ‘United States’ 
as used in such section. 
‘‘(8) QUALIFIED PATENT.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
patent’ means a patent— 
‘‘(i) issued or extended by, or for 
which an application is pending before, the 
United States Patent and Trademark Of-
fice under title 35, United States Code, 
‘‘(ii) with respect to which— 
‘‘(I) the taxpayer is the patent 
owner or the holder of an exclusive li-
cense to exploit the patent within a 
specified territory or for a specific 
purpose, 
‘‘(II) the taxpayer is actively in-
volved in the decisionmaking con-
nected with exploiting the patent, and 
‘‘(III) either the taxpayer or a 
member of the affiliated group of 
which the taxpayer is a member per-
formed substantial activity to develop 
the patented invention, its application, 
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or a product incorporating the pat-
ented invention, and 
‘‘(iii) for any taxable year beginning 
after the third taxable year beginning after 
the date of the enactment of this section, 
more than a substantial percentage of the 
activity to develop the patented invention 
or its application occurs in the United 
States. 
Clause (iii) shall not apply to a patent if a 
member of the taxpayer’s affiliated group per-
formed more than a substantial percentage of 
the activity to develop the patent outside the 
United States prior to the end of such third 
taxable year, and the taxpayer owns the patent 
in the United States at the end of such third 
taxable year. 
‘‘(B) SPECIAL
RULE
FOR
CERTAIN
FOR-
EIGN PATENTS.—If the taxpayer— 
‘‘(i) is the patent owner or the holder 
of an exclusive license to exploit a patent 
which meets the requirements of subpara-
graph (A), 
‘‘(ii) is issued or extended by a foreign 
country a patent for the same or substan-
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tially similar invention or application as 
the patent described in clause (i), and 
‘‘(iii) is the owner of, or the holder of 
an exclusive license to exploit, the foreign 
patent described in clause (ii), 
then the foreign patent described in clause (ii) 
shall be treated as a qualified patent for pur-
poses of this section. 
‘‘(C) SPECIAL
RULES
RELATING
TO
LI-
CENSING.— 
‘‘(i) LICENSEE
TAXPAYER.—In the 
case of a license of a patent to the licensee 
taxpayer, the patent shall not be treated as 
a qualified patent in the hands of the li-
censee taxpayer unless the licensee satisfies 
the requirements of subparagraph (A)(ii) 
and the licensor— 
‘‘(I) certifies to the licensee (in 
such form and manner as the Sec-
retary may prescribe) that the patent 
satisfies the requirements of clauses 
(i) and (iii) of subparagraph (A), and 
‘‘(II) provides to the licensee 
such information as the Secretary 
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may require to determine whether the 
patent is a qualified patent. 
‘‘(ii) LICENSOR
TAXPAYER.—In the 
case of a license of a qualified patent by 
the licensor taxpayer, the amount of royal-
ties, profit shares, and similar amounts re-
ceived from the license that directly relate 
to the production of qualified patent prop-
erty by the licensee taxpayer shall be treat-
ed as patent gross receipts if— 
‘‘(I) the licensor meets the re-
quirements of clause (i), 
‘‘(II) the licensor developed or 
acquired and added substantial value 
to the qualified patent, but only so 
long as the licensor is regularly en-
gaged in the development and addi-
tion of substantial value to property 
of such kind, and 
‘‘(III) the licensee certifies to the 
licensor (in such form and manner as 
the Secretary may prescribe) that the 
royalty relates to the production of 
qualified patent property by the li-
censee taxpayer. 
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‘‘(D) SPECIAL RULES RELATING TO PAT-
ENT CLAIMS DENIED OR RULED INVALID.— 
‘‘(i) RECAPTURE.—If— 
‘‘(I) there is a recapture event 
with respect to any claim contained in 
a qualified patent, and 
‘‘(II) a deduction was allowed 
under subsection (a) for any taxable 
year with respect to such claim, 
the tax imposed by this chapter for the 
taxable year in which such recapture event 
occurs shall be increased by the recapture 
amount. 
‘‘(ii) RECAPTURE
EVENT.—For pur-
poses of clause (i), the term ‘recapture 
event’ means, with respect to a claim 
that— 
‘‘(I) the patent does not issue on 
the basis (in whole or in part) of such 
claim, or 
‘‘(II) such claim is determined by 
the United States Patent and Trade-
mark Office or a court of competent 
jurisdiction not to be valid. 
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‘‘(iii) 
RECAPTURE
AMOUNT.—For 
purposes of clause (i), the recapture 
amount with respect to a claim is the sum 
of— 
‘‘(I) the excess of the amount by 
which— 
‘‘(aa) the total tax (deter-
mined without regard to sub-
section (a)) that would be shown 
on returns of tax of the taxpayer 
for all taxable years for which a 
deduction was allowed under sub-
section (a) with respect to such 
claim, exceeds 
‘‘(bb) the total tax shown on 
all returns of tax of the taxpayer 
for all taxable years for which a 
deduction was allowed under sub-
section (a) with respect to such 
claim, determined with regard to 
subsection (a), plus 
‘‘(II) in the case of a recapture 
event described in clause (ii)(I), inter-
est at the underpayment rate estab-
lished under section 6621 on the 
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amount determined under subclause 
(I) for each prior taxable year for the 
period beginning on the due date for 
filing the return for the prior taxable 
year involved. 
‘‘(9) ALTERNATIVE
DETERMINATION
OF
PAT-
ENT BOX PROFIT.— 
‘‘(A) IN
GENERAL.—In accordance with 
regulations or other guidance provided by the 
Secretary, the taxpayer may elect to determine 
patent box profit as the amount equal to the 
net income derived from patent gross receipts 
related to exploitation of the qualified patent 
that would be received for the taxable year if all 
transactions of the taxpayer for the taxable 
year were conducted at arm’s length under the 
principles of section 482. 
‘‘(B) ELECTION.—An election under sub-
paragraph (A) for a taxable year shall apply 
with respect to all qualified patents. Such elec-
tion, once made, may be revoked only with the 
consent of the Secretary. 
‘‘(c) ALTERNATIVE METHOD
FOR CERTAIN TAX-
PAYERS.—In the case of a taxpayer which meets the 
$5,000,000 gross receipts test of section 448(c) for the 
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taxable year, patent box profit shall be the greater of the 
amount determined under subsection (b) or 50 percent of 
IP profit. 
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
‘‘(1) APPLICATION OF SECTION TO PASS-THRU 
ENTITIES.— 
‘‘(A) PARTNERSHIPS
AND
S
CORPORA-
TIONS.—In the case of a partnership or S cor-
poration— 
‘‘(i) the deduction under subsection 
(a) shall be determined at the partner or 
shareholder level, 
‘‘(ii) except as provided in clause (i), 
all determinations relating to receipts, ex-
penses, and whether a patent is a qualified 
patent shall be made at the entity level, 
and 
‘‘(iii) each partner or shareholder 
shall take into account such person’s allo-
cable share of each item described in 
clause (i) or (ii) of subsection (b)(2)(A) 
(determined without regard to whether the 
items described in such clause (i) exceed 
the items described in such clause (ii)). 
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‘‘(B) TRUSTS AND ESTATES.—In the case 
of a trust or estate— 
‘‘(i) the items referred to in subpara-
graph (A)(ii) (as determined therein) shall 
be apportioned between the beneficiaries 
and the fiduciary (and among the bene-
ficiaries) under regulations prescribed by 
the Secretary, and 
‘‘(ii) for purposes of paragraph (2), 
adjusted gross income of the trust or es-
tate shall be determined as provided in sec-
tion 67(e) with the adjustments described 
in such paragraph. 
‘‘(C) APPLICATION
TO
INDIVIDUALS.—In 
the case of an individual, subsection (a)(2) shall 
be applied by substituting ‘adjusted gross in-
come’ for ‘taxable income’. For purposes of the 
preceding sentence, adjusted gross income shall 
be determined— 
‘‘(i) after application of sections 86, 
135, 137, 199, 219, 221, 222, and 469, 
and 
‘‘(ii) without regard to this section. 
‘‘(D) 
AGRICULTURAL
AND
HORTI-
CULTURAL COOPERATIVES.— 
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‘‘(i) DEDUCTION
ALLOWED
TO
PA-
TRONS.—Any person who receives a quali-
fied payment from a specified agricultural 
or horticultural cooperative shall be al-
lowed for the taxable year in which such 
payment is received a deduction under sub-
section (a) equal to the portion of the de-
duction allowed under subsection (a) to 
such cooperative which is— 
‘‘(I) allowed with respect to the 
portion of the patent box profit to 
which such payment is attributable, 
and 
‘‘(II) identified by such coopera-
tive in a written notice mailed to such 
person during the payment period de-
scribed in section 1382(d). 
‘‘(ii) COOPERATIVE
DENIED
DEDUC-
TION
FOR
PORTION
OF
QUALIFIED
PAY-
MENTS.—The taxable income of a specified 
agricultural or horticultural cooperative 
shall not be reduced under section 1382 by 
reason of that portion of any qualified pay-
ment as does not exceed the deduction al-
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lowable under clause (i) with respect to 
such payment. 
‘‘(iii) TAXABLE INCOME OF COOPERA-
TIVES DETERMINED WITHOUT REGARD TO 
CERTAIN
DEDUCTIONS.—For purposes of 
this section, the taxable income of a speci-
fied agricultural or horticultural coopera-
tive shall be computed without regard to 
any deduction allowable under subsection 
(b) or (c) of section 1382 (relating to pa-
tronage dividends, per-unit retain alloca-
tions, and nonpatronage distributions). 
‘‘(iv) SPECIAL RULE FOR MARKETING 
COOPERATIVES.—For purposes of this sec-
tion, a specified agricultural or horti-
cultural cooperative described in clause 
(vi)(II) shall be treated as having manufac-
tured, produced, grown, or extracted in 
whole or significant part any qualifying 
production property marketed by the orga-
nization which its patrons have so manu-
factured, produced, grown, or extracted. 
‘‘(v) QUALIFIED PAYMENT.—For pur-
poses of this paragraph, the term ‘qualified 
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