IRS Audit of my Schedule C (Domain Business)!

[H2FC]

Thanks for the update sitemaker.

Its interesting what you said about the IRS allowing all your expenses. I don't know which schedule you report yours on but the problem I ran into with reporting all expenses on schedule C (which was mainly the registrations and renewals of over a thousand domains yearly) is I have relatively small ppc income to offset those expenses and the IRS doesn't want to see continued yearly losses reported on schedule C. I was told I must show a profit at least 2 or 3 years out of every 5 years or I could expect an audit. I'm pretty sure you have much more income from your domain business than I do so you probably don't have this problem.

Since I make most of my profit from domain sales I decided to deduct the bulk of registration expenses on schedule D along with those sales. I use schedule D because I can offset gains from previous stock market losses I carry over from year to year.

I deduct a smaller part of the registration fees from schedule C where I show my ppc income so that I can show a small profit and hopefully avoid an audit.

As I said in my previous post I'm now wandering if the IRS will frown upon my splitting those expenses on two separate schedules. This is a question I apparently will have to pay a qualified CPA to answer......or depending on what he says I may want to get more than one opinion before I file.

 

[sitemaker]

If the split is arbitrary, changing from year to year, it's likely to be not allowed. But if there's some logically consistent principle behind it, it's probably OK. For example: If you can really consistently categorize any given domain as being primarily held for PPC income or primarily held for investment/resale, then that assignment, if consistently applied, might justify capitalizing some renewal fees (and reporting on Sch.D when the domain is sold) while expensing other renewals on Sch.C.

Then perhaps you could section 179 expense the domains newly aqcuired for PPC, and perhaps you could depreciate over 5years as intellectiual property assets the capitalized values of the domains held for resale. (I wouldn't do either unless your accountant says it's OK.)

In my case, the goal is to expense all the acquisition costs (not just the renewals) of all domains: those held for PPC and/or for resale/investment. This simplifies everything. The grounds for seeking IRS approval of this is that there are thousands of transactions a year, mostly small, and the cost of onerous bookkeeping complexity could render the whole activity unable to produce any taxable income. The IRS is not trying to kill small business, they just want to make sure we pay what the law says is our responsibility to pay. A valid (not inconsistently self-serving) tax-liability approximation that eanables us to function profitably is better than requiring to maintain an exactitude that puts us out of business.

Thanks for the update sitemaker.

Its interesting what you said about the IRS allowing all your expenses. I don't know which schedule you report yours on but the problem I ran into with reporting all expenses on schedule C (which was mainly the registrations and renewals of over a thousand domains yearly) is I have relatively small ppc income to offset those expenses and the IRS doesn't want to see continued yearly losses reported on schedule C. I was told I must show a profit at least 2 or 3 years out of every 5 years or I could expect an audit. I'm pretty sure you have much more income from your domain business than I do so you probably don't have this problem.

Since I make most of my profit from domain sales I decided to deduct the bulk of registration expenses on schedule D along with those sales. I use schedule D because I can offset gains from previous stock market losses I carry over from year to year.

I deduct a smaller part of the registration fees from schedule C where I show my ppc income so that I can show a small profit and hopefully avoid an audit.

As I said in my previous post I'm now wandering if the IRS will frown upon my splitting those expenses on two separate schedules. This is a question I apparently will have to pay a qualified CPA to answer......or depending on what he says I may want to get more than one opinion before I file.