The Characterization Of Payments For Computer Software In United States

The United States Internal Revenue Service (IRS) has issued regulations under Internal Revenue Code Section 861, which provide guidance in determining the proper characterization of income from transfers of computer software. According to these regulations, the revenues from software transfers will be characterized as royalty income, income from the sale of goods, and rental income. The characterization of income from the transfer of computer software is based on the type of rights received by the transferee and whether those rights are sufficient to constitute ownership of the software property.

The following questions have been addressed in this article:

What are the important distinctions made between transfers of a copyright right and a copyrighted article under IRS regulations?
How is the transaction treated if the transferee does not receive any one of the four protected rights under copyright law?
When is the transaction characterized as a sale and as a lease?

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