From Domain Name Wire - The IRS Cares What Type of Domainer You Are
Guest author Sandy K. Brooks, CPA writes about tax implications for domainers. Advertisement [Editors note: Don’t look at the calendar…tax day in the U.S. is less than two months away. If you’re puzzled about how to treat domains on your tax return, this article by Sandy Brooks, CPA, will help you. Brooks is the author […]
Guest author Sandy K. Brooks, CPA writes about tax implications for domainers.
[Editors note: Don’t look at the calendar…tax day in the U.S. is less than two months away. If you’re puzzled about how to treat domains on your tax return, this article by Sandy Brooks, CPA, will help you. Brooks is the author of Domain Tax Guide, which has been updated for 2008.]
When discussing the tax implications of domaining, the first question that is often asked is, “Are domain names property?” Yes, domains are property. Not only have they continually been proven to be property, they should be considered assets. An asset is anything with economic value. The domain name business would not be the successful, growing industry that it is today if domains had no economic value.
Since there is no question that domain names are assets, the next question is what type of assets are they? There has been much speculation about this, and very little guidance from the tax authorities. I believe the type of asset depends on the nature of your domaining business. Domainers can be broken down into three categories:
The first type of domainer is a Domain Developer. You are a domain developer if you build out your domains into e-commerce businesses. Your domains should be considered intellectual property, similar to trademarks, and subject to amortization over fifteen years.
The second type of domainer is a Domain Dealer. If you buy domains with the intention of quickly flipping them for a profit, then you are a domain dealer. Your domains could be considered inventory and expensed as cost of goods sold.
The third type of domainer is a Domain Monetizer, which probably applies to most who consider themselves in the domain business. This occurs when you build a domain portfolio in order to monetize the traffic. In this case, I would consider your domains business assets. Like equipment, your domain names are tools used in the production of revenue and should be depreciated.
These different classifications of domain names each have their own advantages and disadvantages upon the purchase and sale of the domains. How quickly you can write off an expensive domain purchase can have a huge impact on your taxes. Likewise, whether a large domain sale is considered capital gains or ordinary income results in a great difference on your tax bill. There is relatively no IRS guidance on how to classify, report and expense domain names. Research, advanced planning and documentation will help you minimize taxes and maximize your business’ value.
From Domain Name Wire - www.domainnamewire.com
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