R & D Partnerships . . .

refer to research and development limited partnerships, which are used to obtain financing for a specific company project. In this type of arrangement, the company usually sells its rights to its product to a limited partnership of which it is the general or managing partner. One or more third parties provide funding for the partnership. The funding is used to complete development of the product. The investors expense the portion of the funding used to complete product development and use that expense to reduce their taxable income. The company retains a right to license or repurchase the product or the technology when the development work is successful.

Unfortunately, the usefulness of R & D partnerships as a device to transfer tax benefits is limited by the "passive loss" rules of the Internal Revenue Code. These rules restrict the types of income against which investors can apply their losses and restrict the usefulness of any credits generated to investors. Generally speaking, investors can only use R & D partnership losses to offset income from other passive investments.

Obtaining tax benefits from an R & D partnership requires careful attention to a variety of complex and interrelated tax laws. Failure to structure the partnership correctly will lose the advantages of the R & D partnership. A qualified tax professional should be consulted before structuring any R & D partnership investment. See: K.I.S.S., Lawyers, Limited Partnerships, Off Balance Sheet Financing, S Corporations, Structure.