Domain Names and Tax Accounting
If you have a good number of domain names you’ve most likely thought about the question of how to account for them at tax time? And, by the way, I’m speaking from a U.S. point of view, where we have very complex (and nonproductive) tax rules.
There are significant decisions to make regarding both the structure of your business (mine is an California LLC for legal protection, and for its simplicity), and of how you treat your names — are they inventory? Are they expenses? Are purchases (above and beyond reg fee) capital expenditures? Amortization? Cap gains or ordinary income?
Crap. It’s enough to make you want to quit the business, if the sheer insanity of the seemingly 24-hour a day name hunting is not for any normal person anyway.
Anyway, it’s likely that your general CPA may not know anything about domain name accounting, so to save a few hundred dollars on him searching for information, I’m going to point you to something that after you read it, you can pass along to your accountant to give them at least a basis of understanding from someone who specializes in this.
Monte Cahn, president of registrar Moniker.com, has a radio program (can’t say I’ve heard it yet, but I’m going to start listening). My CPA found the transcript of one show where he interviewed Evan Brody from Brody & Associates. Evan is Moniker’s corporate tax guy.
I can’t tell you that this interview will answer every question for you on the subject. Hell, when it comes to taxes, I don’t know if one can ever get complete answers. Sometimes, it’s so subjective anyway. But there is a lot of good information. It’s at least enough to get you scared into thinking about how to do it right, I hope.
One of the most interesting things I got out of it is this shocking statistic: “when you’re unincorporated on what they call a Schedule C or Sole Proprietorship, the audit ratio which is really something that is a variable that you really don’t take into consideration for tax planning, but just some statistical information, those entities get audited 11 times more than if you were a corporation.”
Now that’s frightening. I’m assuming since I’m neither a Schedule C or Sole Proprietorship, or a corporation, my LLC falls into or close to the corporation audit rate. I think it just signals to the IRS that the filer is simply more willing ($800 a year in California) to take steps to be serious about their taxes. By the way, I can also tell you that I’ve heard that having your taxes done by a CPA greatly reduces the risk of an audit. I guess individuals are more likely to either lie or make mistakes, than would be a CPA.
So, for your reading enjoyment, here is the Monte Kahn Domains and Taxes transcript.
I would appreciate it if readers would post into the comments any other links to domain business tax discussions they know of! And, please post your own knowledge, or how you do your accounting.
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I heard about this book on webmaster radio - have not read it myself.
http://www.domaintaxguide.com/
anyone heard of/know of a domainer that’s been audited before ?
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[…] unknown wrote an interesting post today onHere’s a quick excerptIf you have a good number of domain names you’ve most likely thought about the question of how to account for them at tax time? And, by the way, I’m speaking from a US point of view, where we have very complex (and nonproductive) tax … […]
Thanks Geoff.
Great topic, I’ve been running into some of the exact same concerns for a while as well. To also point out another tax aspect you might overlook (I did), is that the purchase price of any domain you acquire (SnapNames/Pool) can’t entirely be used as a deduction… it can only be depreciated over a 4 or 5 year period (well, at least in my accountants eyes)..
Domains Gaztte,
I have to extend my taxes this year due to some other investments that have late k-1’s, so I’ll be working on this over the next few months. But, I dread the idea of tracking 4500 domain names for accounting. Do you do some sort of general summing and averaging, or are you completely exact, domain-per-domain, penny-per-penny? And are renewal fees accounted for differently than “purchases” (buying a domain from another party)? Just looking for some shortcuts, which still produce proper results.
I’ve added the
The Domain Name Tax Guide 2007 Edition to the Resources page. Looks like a good one. To support this blog, it would be great if you purchased from that link (or this one), so I can convince myself that it’s worth the time to leep blogging. Thanks. I know…shameless plug.
I pretty much sum up all revenue generated per domain, the throw in investment required to purchase each domain. I do, though, track earnings per domain, just so I have an understanding of which domain performs, and which don’t. Did that answer your question?
[…] Domain Names and Tax Accounting: Even domains aren’t safe from the tax man, so learn what you’ll be responsible for paying on your domain holdings. […]
Some domainers do pay taxes while most dont as they think domain are not an entity measured in books of accountancy
Who created accounting principles? Who sets and revises accounting standards? What if you don’t follow all the rules, do you go to jail? Is there an accounting police force that investigates and arrests violators? It would seem that there must be some regulatory force to make sure that providers of financial statements conform to the rules.