# Understanding Licensing Fees: Definitions, Mechanics, and Royalty Comparisons

![A person hanging a framed diploma on a wall](https://www.investopedia.com/thmb/mrUgLxyMIXM_PMtsZ8FQZ1yCLQY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-535164561-c3936a468a9c490faefce1a1533015bc.jpg)

*Many professionals are required to have a license, such as a CPA. — XiXinXing / Getty Images*

> **Definition**
>
> Licensing fees are fixed payments for the right to use intellectual property or to engage in specific business activities.

## What Is a Licensing Fee? 

Licensing fees grant businesses and individuals specific rights to operate or use [intellectual property](https://www.investopedia.com/terms/i/intellectualproperty.asp), like trademarks and patents, legally. This article explores the workings of licensing fees, their applications in various industries, and how they differ from royalties, using real-world examples.  

### Key Takeaways

*   Professional licensing fees help maintain occupation standards by ensuring qualified practitioners adhere to ethical guidelines.
*   Unlike licensing fees, royalties are usage-based payments made as a percentage of revenue for using an asset or property.
*   Licensing fees can act as barriers to entry for some professions due to costs and required education or training.
*   Licensing fees provide a legal framework for using proprietary content and generate revenue for government entities and copyright holders.  
    

## Understanding Professional Licensing Fees

Many [careers](https://www.investopedia.com/financial-edge/1010/the-best-careers-for-your-skills.aspx) require a professional license before someone can legally work in the field. These licenses are generally issued by state agencies and require passing a certification exam, meeting educational prerequisites, or completing a minimum number of training hours.

For example, licenses are required to become a professional in many fields, including:

*   Engineer
*   Landscape architect
*   [Certified public accountant (CPA)](https://www.investopedia.com/terms/c/cpa.asp)
*   Surveyor

Once licensed, an individual is known as a [licensee](https://www.investopedia.com/terms/l/licensee.asp). To maintain their licenses, they may need to take additional exams, complete further training, or pay ongoing fees. Their license can be revoked if the licensee violates legal standards or the [code of ethics](https://www.investopedia.com/terms/c/code-of-ethics.asp) in their profession.

> **Important**
>
> Licensing fees ensure professionals have the skills and follow ethical guidelines, which protect the public.

State governments often issue these licenses, and individuals looking to do business in multiple states may have to obtain a license from each one. For example, [life insurance agents](https://www.investopedia.com/articles/financial-careers/08/become-insurance-agent.asp) usually hold a license in their home state, or the one where their business is based, but they can also obtain nonresident licenses to do business in other states through reciprocity agreements.

Besides state licenses, the federal government requires some businesses to pay licensing fees. For example, the Nuclear Regulatory Commission charges licensing fees to commercial nuclear power plant operators. The [Federal Communications Commission (FCC)](https://www.investopedia.com/terms/f/fcc.asp) imposes fees on radio and television broadcasters, among other industries that are regulated at the federal level.

## Advantages and Disadvantages of Professional Licensing Fees

Professional licensing aims to guarantee that people or businesses engaged in a certain trade or selling specific products are qualified and knowledgable. It also provides the public with the confidence in these professionals. Finally, licensing fees also serve as a [revenue](https://www.investopedia.com/terms/r/revenue.asp) source for government agencies.

 For example, CPAs can [audit](https://www.investopedia.com/terms/a/audit.asp) governments and help protect the public from financial crimes. A notable example: CPAs at the Federal Bureau of Investigation (FBI) who unraveled complex, illegal financial transactions, such as mobster Al Capone's conviction for tax evasion.

The licensing fee for CPAs is vital as it ensures that these professionals adhere to rigorous standards of expertise and ethics, essential for handling sensitive financial information and protecting public interests in various high-stakes scenarios.

Licensing fees and training costs can create barriers to entering certain jobs. For example, hairdressers must pay a licensing fee and obtain a cosmetology license to legally operate, which in turn can increase the cost of their services.

These requirements for professional licensing are meant to ensure quality and provide the public with confidence in those professions. Some may argue that weakening licensing requirements or reducing fees could put the public at risk. But licensing fees may also inadvertently limit the number of professionals entering certain fields and lead to a shortage in certain services.

> **Fast Fact**
>
> Historical events have influenced professional licensing. The collapse of the St. Francis Dam in California in 1928, which resulted in over 500 fatalities, was pivotal in initiating the licensing of professional engineers in these states. The dam collapse was attributed to poor engineering and human errors and led to licensing requirements.

## Exploring Licensing Fees Beyond Professional Certifications

A licensing fee may also be paid to use intellectual property, like a [copyrighted](https://www.investopedia.com/terms/c/copyright.asp) photograph or logo.

 For example, a T-shirt company must pay a licensing fee to use a Major League Baseball team's logo.

TV or movie companies may pay multiple licenses to use a song in their soundtracks. According to the American Society of Composers, Authors and Publishers (ASCAP), which licenses more than 18 million songs and scores, the producer would need to obtain a synchronization license for “the right to synchronize a song or a piece of music with your visual image. It must be obtained from the copyright owner of the music, which is usually the publisher.”

In addition, the company would need to obtain a master use license for the “right to reproduce a specific recording of a song” from the relevant music label.

In one notably expensive example, the producers of “Mad Men” reportedly paid about $250,000 to license the Beatles song “Tomorrow Never Knows,” so that the character Don Draper could listen to it in one scene.

## Comparing Licensing Fees and Royalties: Key Differences

[Royalties](https://www.investopedia.com/terms/r/royalty.asp) are ongoing, usage-based payments for the right to use an asset or a property. They are generally calculated as a [percentage of gross revenue](https://www.investopedia.com/terms/1/25-percent-rule.asp) or net profit. Licensing fees, by contrast, are usually a fixed amount. 

Some businesses pay both licensing fees and royalties. For example, a [franchisee](https://www.investopedia.com/terms/f/franchisee.asp) might pay the parent franchiser an initial license fee for the right to use the franchise’s name and processes plus regular royalties based on sales. Those royalties often average 5% to 9% annually, depending on the [franchise](https://www.investopedia.com/terms/f/franchise.asp).

## What Is Intellectual Property?

As the World International Property Organization, a United Nations agency, defines it, intellectual property refers to “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.” The legal ownership of intellectual property is protected by trademarks, copyrights, and [patents](https://www.investopedia.com/terms/p/patent.asp).

## Are Professional Licensing Fees Tax Deductible?

Professional licensing fees are usually tax deductible. However, some licensing fees may be [amortized](https://www.investopedia.com/terms/a/amortization.asp) over 180 months. Amortized fees include the cost of acquiring or renewing a liquir license, TV or radio broadcasting license, or taxicab medallion.

## Is the Education Required for Licensing Tax Deductible?

For education costs to be tax deductible, you must already be working in that field and show either that the education maintains or improves required skills for your profession or is required by regulations. Education expenses that are necessary to meet the minimum requirements of your present procession aren't tax deductible.

## The Bottom Line

Licensing fees are crucial payments for accessing rights to operate businesses or use intellectual property. They ensure that professionals uphold legal and ethical standards, as seen with CPAs and media companies that need legal paths for the usage of creative works.

While they maintain industry standards and protect intellectual assets, these fees can pose financial and administrative challenges, especially for small businesses and newcomers in various fields. Yet, licensing fees remain integral to functioning within regulated sectors, contributing to overall industry trust and consumer confidence.  
  

> **Article Sources**
>
> 1.  Alliance for Responsible Professional Licensing. "[Fast Facts](https://www.responsiblelicensing.org/fast-facts/)."
>     
> 2.  National Association of Insurance Commissioners. “[State Licensing Handbook](https://content.naic.org/sites/default/files/inline-files/State%20Licensing%20Handbook%20-%20Complete%20and%20Final.pdf),” Page 17 (Page 24 of PDF).
>     
> 3.  U.S. Nuclear Regulatory Commission. “[License Fees](https://www.nrc.gov/about-nrc/regulatory/licensing/fees.html).”
>     
> 4.  Federal Communications Commission. “[How to Apply for a Radio or Television Broadcast Station](https://www.fcc.gov/media/radio/how-to-apply).”
>     
> 5.  Federal Bureau of Investigation. "[Famous Cases and Criminals: Al Capone](https://www.fbi.gov/history/famous-cases/al-capone)."
>     
> 6.  Alliance for Responsible Professional Licensing. "[What's at Risk?](https://www.responsiblelicensing.org/whats-at-risk/)"
>     
> 7.  Alliance for Responsible Professional Licensing. "[Fast Facts.](https://www.responsiblelicensing.org/fast-facts/)"
>     
> 8.  Association of State Dam Safety Officials. "[St. Francis Dam (California, 1928)](https://damfailures.org/case-study/st-francis-dam-california-1928/)."
>     
> 9.  American Society of Composers, Authors and Publishers. "[About Us](https://www.ascap.com/about-us)."
>     
> 10.  American Society of Composers, Authors and Publishers. “[How to Acquire Music for Films](https://www.ascap.com/help/career-development/How-To-Acquire-Music-For-Films).”
>      
> 11.  The Wall Street Journal. “[How Much ‘Mad Men’ Paid for the Beatles](https://www.wsj.com/articles/BL-SEB-69999).”
>      
> 12.  FranNet. “[Franchise Royalty Fees Explained](https://frannet.com/resources/general/franchise-royalty-fees-explained/).”
>      
> 13.  World International Property Organization. “[What Is Intellectual Property?](https://www.wipo.int/about-ip/en/)”
>      
> 14.  Internal Revenue Service. "[Guide to Business Expense Resources](https://www.irs.gov/forms-pubs/guide-to-business-expense-resources#en_US_2021_publink1000208975)."