The Taxation of Intellectual Capital

50 Pages Posted: 31 Mar 2014 Last revised: 14 Dec 2014

See all articles by Lily Kahng

Lily Kahng

Seattle University School of Law

Date Written: October 1, 2014


Intellectual capital — broadly defined to include nonphysical sources of value such as patents and copyrights, computer software, organizational processes and know-how — has a long history of being undervalued and excluded from measures of economic productivity and wealth. In recent years, however, intellectual capital has finally gained wide recognition as a central driver of economic productivity and growth. Scholars in fields such as knowledge management, financial accounting and national accounting have produced a wealth of research that significantly advances our conceptual understanding of intellectual capital and introduces new methodologies for identifying and measuring its economic value.

This Article is the first to analyze and assess the taxation of intellectual capital within this broader interdisciplinary landscape. Informed by the recent research and reform efforts in knowledge management, financial accounting and national accounting, the Article finds that the tax law, which allows most investments in intellectual capital to be deducted, is fundamentally flawed. This results in the loss of hundreds of billions of dollars in tax revenues, costly misallocations of resources and a grave deviation from the accurate measure of income. The Article argues that, consistent with the prevailing view in other fields, investments in intellectual capital ought to be capitalized under the tax law. Drawing upon the work of reform proponents in other fields as well as their critics, the Article considers whether and to what extent the advances in other disciplines can be adapted to the tax system. Based on this analysis, it proposes the tax law be reformed to require businesses to capitalize and amortize over five years a broad array of intellectual capital investments including research and development, advertising, worker training and strategic planning.  

Keywords: tax, accounting, capitalization, intangibles, intellectual property, intellectual capital

JEL Classification: K34, M40, M41, O30, O31, O32, O47

Suggested Citation

Kahng, Lily, The Taxation of Intellectual Capital (October 1, 2014). Florida Law Review, Vol. 66, p. 2229, 2014; Seattle University School of Law Research Paper No. 14-10. Available at SSRN:

Lily Kahng (Contact Author)

Seattle University School of Law ( email )

901 12th Avenue
Seattle, WA 98122
United States

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