Tax question: what categorie are domains?

[Pete]

I intend to deduct all of my registration fees for 2007 on my income tax declaration, as business expenses. Under what kind of designation do most of you file those? Any issues with that?

[Rubber Duck]

I intend to deduct all of my registration fees for 2007 on my income tax declaration, as business expenses. Under what kind of designation do most of you file those? Any issues with that?

Yes, we offset they against tax. Part of the point of going Ltd Company.

[clipper]

Consult an accountant, and a good one. I think it was someone on this forum (or maybe DP) that told me a good accountant will charge you hundreds for an hour and you'll walk away feeling that you got a great deal.

Also, read this:
http://www.avivadirectory.com/domain-law/

The real issue is how you classify your domains for tax purposes. They could be intellectual property, inventory, business assets, government licenses, a form of real estate, or a host of other things. The truth is, nobody really knows yet how they should be treated, so together accountants and domainers are taking their best guess and hoping they don’t get audited. At this point that’s about all you have to go on, so the best thing you can do is be aware of your options.

But, to answer your question, I'll be deducting annual registration fees and amortizing purchases.

[Pete]

Thanx for both your answers.
As far as being Ltd, I don't think it changes anything for me (at least in Canada).
You are only required to register or incorporate if you are not dealing under your own name. I'll likely incorporate next year though.
I had read that article a while ago.

I've phoned the Canadian income tax body and... the didn't know you could buy and sell domains as a business!

So Clipper, you just file fresh regs as "Registration Fees"?
Laws vary a lot by countries too; anyone in Canada?

[bwhhisc]

You need to set it up like a business and keep accurate accounting records if you want to take tax deductions etc. There are advantages to incorporating the business if it becomes more than a hobby.

[Pete]

I've had businesses and been incorporated in the past, so that won't be a problem. As far as it being a business, it would be hard to argue that spending 15 000$/year on xn-- urls is a hobby ;)

[zenmarketing]

Registration fees are expenses, that's fairly simple. They offset income.

Purchases above a certain threshold (this threshold is an ambiguous / grey area) should be on your balance sheet as intangible assets. These are not expenses. They should be depreciated over some period of time (the length of time is also a grey area -- I've seen 5, 10, or 15 years).

[dave_5]

Thanx for both your answers.
As far as being Ltd, I don't think it changes anything for me (at least in Canada).
You are only required to register or incorporate if you are not dealing under your own name. I'll likely incorporate next year though.
I had read that article a while ago.

I've phoned the Canadian income tax body and... the didn't know you could buy and sell domains as a business!

So Clipper, you just file fresh regs as "Registration Fees"?
Laws vary a lot by countries too; anyone in Canada?

Hi,

Montreal here.

I’m not incorporated, working under my name. I deduct all my domain registration fees as “Licensing fees”. Yes, they don’t know about it at Revenue Canada/Quebec.

I declare all profit as capital gain, and it falls under “Goodwill” sale.

[zenmarketing]

Dave,

As far as I know, profit can only be a capital gain if the item (capital) was booked as inventory or as an asset on your balance sheet.

If you do a brand new reg, and expense the $7, and then turn around and sell it the next day (or next year) for $100... you're booking that as $93 in capital gains?

Have you talked to an accountant about that? I'm not sure that is proper.

Makes a big difference in the U.S.: 15% capital gains tax vs. ~40% income tax.

BTW, I haven't read this, but for those of you who haven't seen it:

http://domaintaxguide.com/

[clipper]

Dave,

As far as I know, profit can only be a capital gain if the item (capital) was booked as inventory or as an asset on your balance sheet.

If you do a brand new reg, and expense the $7, and then turn around and sell it the next day (or next year) for $100... you're booking that as $93 in capital gains?

Have you talked to an accountant about that? I'm not sure that is proper.

Makes a big difference in the U.S.: 15% capital gains tax vs. ~40% income tax.

BTW, I haven't read this, but for those of you who haven't seen it:

http://domaintaxguide.com/

Long term capital gains = 15%; short-term capital gains (I think) are taxed as ordinary income. The LT rate is only through 2008, I think, and with the shaky economy and Democrats in charge, that may go up in 2009.

As it was explained to me, if you purchased a domain in order to sell it, then it's inventory, which is taxed as ordinary income (profit); if it was purchased as a business asset, then it's a capital investment, and sales proceeds should be considered capital gains. Of course, it must be held for over one year to realized the long-term benefit.

Again, consult a professional. "I read it on a mesage board" isn't going to satisfy the authorities. It's really worth it, especially if you're spending $15k on domains. (loonies, nonetheless, that's like US$15,300!)

[dave_5]

.

Dave,

As far as I know, profit can only be a capital gain if the item (capital) was booked as inventory or as an asset on your balance sheet.

If you do a brand new reg, and expense the $7, and then turn around and sell it the next day (or next year) for $100... you're booking that as $93 in capital gains?

Have you talked to an accountant about that? I'm not sure that is proper.

Makes a big difference in the U.S.: 15% capital gains tax vs. ~40% income tax.

BTW, I haven't read this, but for those of you who haven't seen it:

http://domaintaxguide.com/

Domain names are considered Goodwill (not a tangible asset). Any profit is considered capital gain and is taxable 30% here in Canada.
So yes I’m declaring $93 as capital gain ($93 -30% = $65.1)

[burnsinternet]

Don't quote me, but I was told by my tax atty that, in the US, the business cannot take more than two years consecutive losses or it is considered a hobby. I didn't deduct domain expenses until last year, so I can claim another loss this year. After that, I claim 0 or these IDNs start making some money.

[IDNCowboy]

but I was told by my tax atty that, in the US, the business cannot take more than two years consecutive losses or it is considered a hobby.
This is correct

[clipper]

Don't quote me, but I was told by my tax atty that, in the US, the business cannot take more than two years consecutive losses or it is considered a hobby. I didn't deduct domain expenses until last year, so I can claim another loss this year. After that, I claim 0 or these IDNs start making some money.

It's two years out of five, consecutive or not.

IRS: Business or Hobby? (http://www.irs.gov/newsroom/article/0,,id=169490,00.html)

[burnsinternet]

Yes. I suppose I was unclear. Thanks, Clipper.

I assumed that my IDNs would be profitable by next year, but that may be optimistic? So, I am taking the deductions now. Perhaps I should have waited another year or stopped fresh regging so much this year!

[mdw]

As stated earlier the length of time for depreciation is to be determined by you and your accountant based on your strategy. As we all know in IDN land, despite some very loud people who continually predict a boom just around every corner, these investments will take a few years to reach reasonable valuations.

Therefore treating them like inventory to be expensed right away is not usually going to be the path you should take. If your strategy is like mine, these investments are assets you're going to control for a several years before selling and realizing a profit or loss. At that time it will have been fully depreciated and you'll pay the appropriate capital gains.

I'm depreciating mine over five years. Three years would be too agressive for IDN and seven years is not realistic for any domain names IMO. Yes this is only my opinion and it's the basis for my strategy. Your strategy will vary depending on everything, so have a nice discussion with your accountant and figure it out. The time to start is the year you acquire them - don't change tactics from year to year!
Domain names are considered Goodwill (not a tangible asset)....
Here in the states it's not so clear - they have never been mentioned in the tax code. Precedent has not been established, therefore agressive strategies are less attractive as someone always must serve as the "example" that establishes that precedent.

[burnsinternet]

My expenses were not high enough pre-2006 to have a need to claim a deduction. I was one of those domainers who hated parking sites. I used to think that domains should be bought and developed, not parked. Of course, with only a few hundred domains, that was not a problem. When I entered IDN land in 2005, it took a while to get comfortable with being a 'domainer' and I didn't even park anything until January 2006. What a blow to my ego back then. Parking & type-in possibilities became real to me, though, when I entered xn dash dash land. Anyway, I am not depreciating them, just claiming the reg fee as expenses in accordance with legal advice.

I do agree, though. Pick a path and move along. There are few 'bad' choices if you follow the rules. Just decide to do it and get on with life! :)
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[Drewbert]

If you buy a building in New York, can you depreciate it over 5 years?

I think anyone spending large sums on domains and then depreciating them over 5 years is in for a nasty surprise when the audit hits town.

The annual fee payable for a domain is a lease charge for your right to operate that domain for a year. Any amount paid over and above that to acquire a name would be a lease acquisition expense paid to the current owner of the lease. Like paying someone to vacate their store in a mall and allowing you to take over the lease.

Items are usually depreciated because they wear out, or become obsolete.

I've been on the Internet some 15 odd years and have yet to see a domain name wear out or be obsoleted (apart from .su that is).

[touchring]

For simplicity, just charge it as an expense, and if you sell, charge it as pure profit. Money out -> expense. Money in -> profit.

[mdw]

Great perspective Drew, but there is really no right or wrong. There are very specific guidelines for real estate, but those do not apply to domain names. Any rational and consistent strategy is "OK" until and unless the time comes when domain names are dealt with explicitly in the tax code.

As for your one-time acquisition cost philosophy it makes perfect sense. But in my case, and in the case of many others this is just not the best way to look at it. These are not inventory that I acquire and then sell, but rather assets that I invest in for years, and develop to increase the value of. I have substantial ongoing costs to "improve" these domains by building and maintaining functioning websites. It therefore not only makes sense to depreciate, but to revise the depreciation schedules if the value of the domain is substantially increased by building a website.

[burnsinternet]

For simplicity, just charge it as an expense, and if you sell, charge it as pure profit. Money out -> expense. Money in -> profit.

Agreed. Easy to track. No headaches.

[burnsinternet]

Great perspective Drew, but there is really no right or wrong. There are very specific guidelines for real estate, but those do not apply to domain names. Any rational and consistent strategy is "OK" until and unless the time comes when domain names are dealt with explicitly in the tax code.

As for your one-time acquisition cost philosophy it makes perfect sense. But in my case, and in the case of many others this is just not the best way to look at it. I have substantial ongoing costs to "develop" and "improve" these domains by building and maintaining functioning websites. It therefore not only makes sense to depreciate, but to revise the depreciation schedules if the value of the domain is substantially increased by building a website.

As long as it is legal, go for it. Too complicated for me. I am lazy. :p

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[Rubber Duck]

Bottom line is profits are going to be so massive, you are not going to have much to offset. It might seem like a lot now but it won't then.

What is important is the rate at which taxed and your ability to defer taxation. That will almost always be better dealt with within a limited company.

[burnsinternet]

Bottom line is profits are going to be so massive, you are not going to have much to offset. It might seem like a lot now but it won't then.

What is important is the rate at which taxed and your ability to defer taxation. That will almost always be better dealt with within a limited company.

When that time comes, we will definitely need a Legal or Tax Advice section of the forum. Members only?

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[Rubber Duck]

When that time comes, we will definitely need a Legal or Tax Advice section of the forum. Members only?

.

May be but not on here.

[Drewbert]

When the time comes, you get that info from a professional tax accountant/advisor, not from a bunch of tossers on a forum.

[bwhhisc]

When the time comes, you get that info from a professional, not from a bunch of tossers on a forum.
Does that apply to world economic predictions as well? :p

[scotty]

“The annual fee payable for a domain is a lease charge for your right to operate that domain for a year. Any amount paid over and above that to acquire a name would be a lease acquisition expense paid to the current owner of the lease. Like paying someone to vacate their store in a mall and allowing you to take over the lease.

Items are usually depreciated because they wear out, or become obsolete.”

This is more conjecture than fact but here goes anyway:

I think Drew's right in his analysis of a domain reg fee or purchase price being equivalent to a lease payment or acquisition cost.

However, I disagree that a lease acquisition cost is an expense to be offset against income in year 1. Only if you held the lease for less than a year would it be a year 1 expense. If you held the lease over 5 years, I would argue that the useful life the lease is 5 years so you should depreciate the cost over 5 years.

Items are usually depreciated not because they wear out or become obsolete but because their useful life is more than a year and so their cost should be spread out over their life.

Typically, tax law says if something you pay for has a useful life of a year or less, it’s a first year expense, and if more than a year, it’s a capital asset. You offset the full price of the former in the first year as an expense and depreciate the latter over the useful life of the asset. In effect, you're always correlating expenses for tax purposes with the amount the business theoretically paid out for item in the current tax year.

Then we move on to the sale of those items. If you're in the business of buying and selling the item in question, then you bought it as inventory and when you sell it the sales price is income. If you're not in the business of buying and selling the item in question then the proceeds of the sale over and above its (depreciated) cost is a capital gain (or loss if the sale amount is lower than the cost).

So for most domainers, I think annual reg fees are expenses but purchases from another registrant should be depreciated over the period you will hold the domain (or 5 or 10 years since you probably don't know how long you'll hold it).

Sales income and parking income is business income since and regular costs such as hosting are year 1 expenses. Expenses on websites that you develop are probably year 1 expenses too since you'll probably do a signigicantly new site in a not very long period of time anyway.

[Drewbert]

Does that apply to world economic predictions as well? :p

Well, I could show you a long list of "professional" financial advisors who have appeared on TV and in print over the last year who have got it completely wrong, and still continue to peddle lies.

Same with those Iraq War fans who predicted rose petals, freedom and victory in 6 days, 6 weeks, 6 months - they still get column inches and air time too.

The ones who get anything as wrong as those guys have should be made to STFU and sit it out, especially since they won't apologise for their costly errors. The ones who DID get it right are still treated like lepers. It's a crazy mixed up world.

Good post Scotty.

[bwhhisc]

It's a crazy mixed up world.
Thats a true statement, and no fix on the horizon.
Regarding Scotty's post, the only difference is that the domain names have a real value, hopefully quite a bit
more than the reg fee. So while your are "renting" them, they have some liquidity and cash value at the same time.