What Is a Licensing Fee?
A licensing fee represents an essential cost paid to secure specific rights from another party. This fee might be paid to a government agency by individuals or businesses for the privilege of offering professional services or conducting a certain type of business.
In other instances, licensing fees are paid for the right to use intellectual property, such as patents, trademarks, or copyrights, owned by another person or organization.
Key Takeaways
- Licensing fees can be a mandatory payment to a government entity for the authorization to practice a particular profession or business.
- They may also be fees paid to use another’s intellectual property, such as a creative work, brand, or invention.
- Unlike royalties, licensing fees are often fixed amounts set in advance, rather than usage-based payments.
- Licensing fees are common across a variety of industries and ensure legal use of assets while supporting business and artistic endeavors.
How Professional Licensing Fees Work
Many professions require licenses before individuals can perform work in their specific fields. These licenses are generally awarded after the individual has completed necessary training and passed a certification exam.
For example, licenses are necessary to become a professional in many sectors, including:
- Engineer
- Landscape Architect
- Certified Public Accountant (CPA)
- Surveyor
Once licensed, an individual earns the title of licensee. To maintain their licenses, licensees may need to take additional exams, undergo further training, or pay ongoing fees. Licenses can be revoked if the licensee fails to uphold legal standards or adhere to their profession’s code of ethics.
Licensing fees ensure that professionals have the required skills and follow ethical practices, safeguarding public health and safety.
Pros and Cons of Professional Licensing Fees
Professional licensing ensures that individuals or businesses engaged in particular trades are skilled and knowledgeable. It also boosts public confidence in these professionals and generates revenue for government bodies.
For example, a CPA (Certified Public Accountant) plays a crucial role in auditing and potentially safeguarding against financial crimes. The rigorous standards and ethical practices upheld by CPAs, evidenced in historic cases like Al Capone’s tax evasion, demonstrate the importance of these licensing fees.
However, licensing fees and the associated costs and training requirements can create barriers to entry into licensed professions. For instance, a hairdresser must pay a licensing fee and obtain a cosmetology license to operate legally, which may lead to higher service costs.
While the employment of licensing fees is primarily to ensure quality and professional standards, relaxing these requirements might endanger public safety. Conversely, high barriers could reduce the number of professionals in certain fields, impacting service availability.
Historical events, such as the 1928 collapse of the St. Francis Dam in California, prompted the establishment of licensure requirements for professional engineers to prevent similar tragedies caused by inadequate expertise and ethical violations.
How Other Licensing Fees Work
Licensing fees are also pivotal when one party pays to use the intellectual property of another. This includes copyrighted works such as photographs or logos.
For example, a T-shirt company seeking to print Major League Baseball team logos would need to pay for a licensing agreement from Major League Baseball and potentially the individual team.
Similarly, a television or film company planning to use a particular song in its production needs to secure multiple licenses. The American Society of Composers, Authors and Publishers (ASCAP) notes that obtaining a synchronization license and a master-use license is necessary to lawfully include music within visual projects.
A notable case of costly licensing is from “Mad Men,” where the rights to use the Beatles’ song “Tomorrow Never Knows” cost about $250,000 merely for one scene.
Licensing Fee vs. Royalty
Royalties refer to ongoing, usage-based payments for the right to use an asset. These are usually calculated as a percentage of revenue or profit. Licensing fees, however, are typically fixed amounts agreed upon beforehand.
In some instances, both licensing fees and royalties are applicable. For instance, a franchisee might pay an initial licensing fee for the right to use the franchise’s name and processes, plus regular royalties based on sales—often averaging between 5% to 9% annually, contingent on the franchise.
What Is Intellectual Property?
The World International Property Organization defines intellectual property as “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce.” Intellectual property is legally guarded by trademarks, copyrights, and patents to ensure the owners’ exclusive rights and incentivize innovation and creativity.
Are Professional Licensing Fees Tax Deductible?
Professional licensing fees are generally tax-deductible unless specific circumstances require them to be amortized. If amortized, the cost of obtaining or renewing certain licenses, such as liquor licenses, broadcasting licenses, or taxicab medallions, may be split over 180 months.
Is the Education Required for Licensing Tax Deductible?
Education costs might be tax deductible if already working in that profession and the education enhances or maintains required skills or meets regulatory requirements. However, education expenses meeting the minimum qualifications for a particular position typically aren’t tax deductible.
The Bottom Line
Individuals and businesses often pay licensing fees to governmental bodies or intellectual property owners to practice a profession or utilize a specific asset legally. Such fees are pivotal in ensuring professionals meet established standards, which protect public interests and uphold safety.
However, while licensing fees promote security and quality in professional fields, they might also create barriers, reducing service availability and increasing costs. For intellectual property, they offer legal means to use and safeguard creative works, subsequently affecting business expenses.
Related Terms: royalties, intellectual property, professional license, franchise license.
References
- Alliance for Responsible Professional Licensing. “Fast Facts”.
- National Association of Insurance Commissioners. “State Licensing Handbook”, Page 17 (Page 24 of PDF).
- U.S. Nuclear Regulatory Commission. “License Fees”.
- Federal Communications Commission. “How to Apply for a Radio or Television Broadcast Station”.
- Federal Bureau of Investigation. “Famous Cases and Criminals: Al Capone”.
- Alliance for Responsible Professional Licensing. “What’s at Risk?”
- Alliance for Responsible Professional Licensing. “Fast Facts.”
- Association of State Dam Safety Officials. “St. Francis Dam (California, 1928)”.
- American Society of Composers, Authors and Publishers. “About Us”.
- American Society of Composers, Authors and Publishers. “How to Acquire Music for Films”.
- The Wall Street Journal. “How Much ‘Mad Men’ Paid for the Beatles”.
- FranNet. “Franchise Royalty Fees Explained”.
- World International Property Organization. “What Is Intellectual Property?”
- Internal Revenue Service. “Publication 535 (2022), Business Expenses”.
