Discussion:Domain names - how to treat them.
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Discussion Forum Index --> Tax Questions --> Domain names - how to treat them.
Skmarkarian (talk|edits) said: | 2 March 2006 |
| What is the proper way to treat a domain name. The client purchases several domain names some make money right away some for sale in the future. Is it inventory or Sec 197? | |
| 2 March 2006 | |
| If the reason he bought them is to sell them, they are inventory. If they are bought to use you can expense them as advertising expense. | |
| 2 March 2006 | |
| Advertising is good> I use other expenses (subscription services) | |
| 22 March 2007 | |
| What if you buy an existing domain name and the reseller charges you $5,000. Then is it still advertising? | |
Bottom Line (talk|edits) said: | 23 March 2007 |
| WARNING - had a client (now former) that purchased a couple of businesses. Primary asset of the businesses (and the reason he purchased them) was domain names. These names were actually customers and were charged for advertising. Business was an internet advertiser. Purchase price of the two combined was around $3 million - 95% domain names and only 5% tangible assets (computers). Client wanted to depreciate the domain names over three years claiming they were Software. I gave him documentation saying that this was specifically not software (could not be purchased "off the shelf") and that it was an intangible asset similar to a customer list. Client insisted and I refused to do return. Couple of years later, he had a full blown audit. The IRS auditor called me (apparently client told him I did return but didn't sign it). I told the auditor I had not done the return and had told the client that domain names were not software and instead were actually a customer list. I said that I had told the client he could write off the specific names as the particular customer was lost. Auditor said thank you and hung up the phone. A few months later, I got a call from a CPA whose specialty was representing clients with IRS problems. Apparently client was still claiming that I had done the return but wouldn't sign it. I ran through the scenerio again. Apparently the CPA agreed with me but was trying to get the penalty and interest lowered.
Long story short, I wouldn't claim it as an advertising expense. | |
| 26 March 2007 | |
| Fascinating area. I can find almost no resources for dealing with these questions. I'm wondering about the tax treatment of websites bought and sold. I set up an LLC for my 18yr old son who was making enough (thousands) money on the internet to concern me. So this is the first tax return. So, Dan buys a website (domain name + content + knowledge of how to generate the income) for $3,000. in June. In the present market, websites sell for approx 6 months equivalent income. He makes $3000 ($500/mo) in 2006. He incurs $600. expenses for hosting. So is his website a capital asset? Is the useful life 6mos since that's how the market defines it? Can we depreciate it 100%? If he resells it, we deal with that later. How do we treat this? thanks, Jon | |
| 27 March 2007 | |
| My understanding is that if he purchases the domain name then he can amortize that purchase over 15 years. It is a 1231 asset if he is "monetizing" it (apparently funky domainer speak for using it to make money). Selling it would fall under those rules.
Cost of annual registration or renewal fees is a currently deductible expense. | |
Bottom Line (talk|edits) said: | 27 March 2007 |
| Well said Wamark | |
| 27 March 2007 | |
| Well really, the value of the asset isn't in the domain name in this case (if he owned 'money.com' it might have intrinsic value...) The value is in the existing content, which is software (php etc) and data, in the design, and in the traffic it generates (because of links) and consequently the pagerank. So a 15 year writeoff doesn't seem appropriate to its useful life, which the market prices at a year or two. At worst it's software, and at best with all respect to the earlier thread it's buying advertising space (like a billboard next to a busy highway, whose traffic pattern you can influence with still more advertising..., or like buying space on a tshirt than Angelina Jolie wears (gets more attention than the same t-shirt on Rosie O'Donnell). 15 years? naw...you really think so? | |
Bottom Line (talk|edits) said: | 27 March 2007 |
| I agree with your point Jonw. Unfortunately I don't believe the IRS does. If I buy an ad on Yahoo.com, that is an advertising expense. My understanding of this situation is that he has purchased a domain name and then is selling hosting to others. In other words, he purchased a business and the primary asset of that business is intangible. Agreed that the value is in the traffic generates just as the value of a customer list is the money (traffic) it generates. The IRS definately won't call it software since it has been developed/altered by the creation of the domain name. This is one of those situations where the tax code hasn't kept up with real life. Remember when we were having to depreciate computers over seven years because there was not yet a special category for them? | |
| 4 April 2007 | |
| If a client (sole proprietor) buys domain names for the sole purpose of reselling, how do I treat the cost? According to Wamark above, it appears I can amortize the purchase over 15 years. Is that accurate?
Or do I treat it as inventory and only take the expense when it is sold? | |
Bottom Line (talk|edits) said: | 6 April 2007 |
| Agreed - inventory | |
| 6 April 2007 | |
| Flipping Domains: Inventory
Cost of a Domain: Other Business Expense (I tell my clients to either classify it as a IT EXPENSE or MARKETING if they write their web maintenance there as well). Domain as a Acquisition: Usually as part of an asset that costs 1000x more than the cost of the registration fee, Amortize. | |
Victor1530 (talk|edits) said: | 14 January 2008 |
| Ok would like some comments here. Purchasing a domain for a client for use in their business. Asset or Ad expense? Example McDonaldsHamburgers.com is current domain paying $10,000 for McDonalds.com. Not a material amount of money and the name is associated with a 100 year old local business. Will it go up? Probably will they ever sell it ....I doubt it.
No content involved. | |
| 6 June 2008 | |
| Thought I'd bring this discussion back as I have a client inquiring about his tax liability in the sale of a domain name.
I am fairly certain that this client purchased the domain name for use in his business at a cost of $24.95 for three years. The cost of purchasing was deducted as a business exp in the year of purchase. Now, a company wants to buy his web domain name for $19,500. He has costs related to a facilitator of the sale and an escrow company. So, is this just a sale of an intangible and would I report it as a Sec 1231 property? I am unsure with my research on this as everything having to do with domain name sales revolves around those who hold an inventory. Thanks! | |
| 6 June 2008 | |
| Victor1530,
Depending on the nature of the purchase, in my opinion, it would be an advertising expense. E.g., registering a domain via dotster.com for 12.95. Each year you would expense that amount as advertising costs as well as hosting/server fees and maintenance. If you purchase it for 10,000, you would expense the renewal and transfer fee and then amortize it as an section 197 intangible. If you developed non OTC/OTB software for the site, you would classify it as an asset. On going web maintenance fees are should be expensed as they are incurred. For Woodstock, I believe your client would have 0 basis on the sale. The sale 19,500 is taxable. My view is, the domain name itself does not necessarily put itself into an intangible asset. | |
| 7 June 2008 | |
| Isn't a domain name a Sec. 197 trademark, as defined in the 197 regs? If so, 15-years seems just about right.
-- "A trademark includes any word, name, symbol, or device, or any combination of words, names, symbols or devices, adopted and used to identify goods or services and distinguish them from those provided by others....." | |
| June 8, 2008 | |
| You CAN'T purchase a domain outright, it is more like leasing space than anything. The cost of this lease is an EXPENSE, nothing else.
If you "purchase" it at an auction or such, you're paying for the hype of the name, which is an intangible asset that should be amortized. If this "purchase" was made to be resold, consider it inventory. I agree with Pegoo. | |
| 12 September 2008 | |
| So what do you guys think about this scenario- Corporation runs a website for their largest client, they register the domain for them, and the client pays for domain registration. Domain is registered under corporation's name. It is time to renew and corporation finds out that the name was registered under a former officer's name (no longer w/company). Former officer requests a large sum in exchange for changing domain rights to corporation. Corporation pays him the requested amount.
Is this a corporate asset? I don't think it is advertising or inventory (not primary business activity. Suggestions...?? | |
