Short answer: It depends on how the income is characterized. Section 512(b)(2) excludes 'all royalties' from unrelated business taxable income, but whether an AI data license payment is a royalty, a payment for services, or something else depends on the deal's facts. Get a tax advisor's view before signing.
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What the code says
In computing unrelated business taxable income, 'there shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income' (26 U.S.C. § 512(b)(2)).
Why characterization matters
A passive license of rights looks more like a royalty than a deal where your staff do substantial work for the buyer. Deal terms such as who exports, cleans and supports the data can matter. We don't know of IRS guidance specific to AI data licenses.
For taxable organizations
For comparison, gross income includes royalties for taxable entities (26 U.S.C. § 61(a)). See our general tax guide.
This is general information, not tax advice. Talk to your own tax advisor.
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Frequently asked questions
Will licensing threaten our exemption?
Ask your tax advisor. Scale, relatedness to mission and how the deal is structured all matter.
Is a one-time payment treated differently?
Possibly. Characterization depends on the facts; get advice.
Sources
- 26 U.S.C. § 512, Unrelated business taxable income (Cornell LII)law.cornell.edu
- 26 U.S.C. § 61, Gross income defined (Cornell LII)law.cornell.edu
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