What Is a Licensing Fee?
A licensing fee is a sum of money paid to another entity for a certain right. For example, individuals or companies may pay licensing fees to a government agency for the right to perform professional services or engage in a particular line of business. In other instances, individuals or businesses pay licensing fees for the right to use intellectual property that another party owns.
- A licensing fee can refer to a government-imposed fee to work in a certain profession or operate a certain type of business.
- A licensing fee can also refer to money paid to the owner of intellectual property (such as a song, an invention, or a brand name) for the right to use that property.
- License fees are generally a fixed amount, while royalties are usage-based payments for using an asset or a property.
How Professional Licensing Fees Work
Many types of professions require licenses before a person can perform the work of that profession. These licenses are usually issued after the individual has passed a certification exam and/or completed a certain number of mandatory training hours.
Once someone has their license, they are a licensee. They may have to take additional exams and courses and pay additional fees in the future in order to maintain their licenses. Their licenses may also be revoked if they are found to have violated the law or their profession's code of ethics.
Such licenses are often issued by state governments, and individuals who want to do business in more than one state may have to obtain a license from each one. For example, life insurance agents are typically licensed in their home state, or the one where their business is based; they can obtain nonresident licenses to do business in other states through reciprocity arrangements with those states.
In addition to the states, the federal government also charges licensing fees to certain types of businesses. For example, the Nuclear Regulatory Commission charges commercial nuclear power plant operators licensing fees to support its work. The Federal Communications Commission imposes them on radio and television broadcasters. And the list goes on.
Pros and Cons of Professional Licensing Fees
Professional licensing exists largely to ensure that the people or companies practicing a certain trade or selling a particular product know what they're doing, as well as to give the public some assurance of that. It can also be a source of revenue for government agencies.
However, licensing fees, combined with the time and money required to get the training necessary to qualify for them, create barriers to entry in licensed occupations. Hairdressers, for example, must pay a licensing fee and obtain a cosmetology license to operate their business, which also serves to drive up the costs of their services.
How Other Licensing Fees Work
A licensing fee can also refer to a sum paid to use intellectual property of various kinds, such as a copyrighted work, like a photograph or a logo, that is owned by someone else.
For example, a T-shirt company that wants to sell shirts imprinted with a certain Major League Baseball team's logo would need to pay a licensing fee to get Major League Baseball's permission and possibly the permission of the team itself.
A television or movie company wanting to use a particular song in its soundtrack might have to pay for multiple licenses. According to ASCAP, which licenses more than 16 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, it 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 a total of $250,000 to license the Beatles song "Tomorrow Never Knows," so that the character Don Draper could listen to it in one scene.
Licensing Fee vs. Royalty
Royalties 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 or net profit. Licensing fees, by contrast, are usually a fixed amount.
Some businesses pay both licensing fees and royalties. For example, a franchisee might pay the parent franchisor 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 between 5% and 9% annually, depending on the franchise.
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.
Are Professional Licensing Fees Tax-Deductible?
Usually, yes. According to the Internal Revenue Service (IRS), "Licenses and regulatory fees for your trade or business paid annually to state or local governments are generally deductible."
However, it adds, "Some licenses and fees may have to be amortized" over a period of 180 months. "For example," the IRS writes, "you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license.
Is the Education Required for Licensing Tax-Deductible?
In some cases, yes, although you must already be working in that field.
As the IRS explains, "You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law."
However, the IRS adds, "Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, aren't deductible."
The Bottom Line
The term "licensing fee" has several meanings, depending on the context, but broadly speaking it refers to money paid to another entity in return for a certain right. For example, individuals or businesses must often pay licensing fees to a government agency in order to practice a certain profession or engage in a particular line of business. In another context, licensing fees can refer to money paid to the owner of copyrighted, trademarked, or patented intellectual property for the right to use that property.