Tax Questions

[profecy]

I have a few quick questions about taxes (in california):
1: If I earn revenue from a website (like with adsense or clickbank) I can declare that as just being self employed without having a business, right? And also, can I deduct any expenses of doing business, like hosting, a new MacBook Pro (used only for business, of course ;-), etc... just for my personal taxes, without a business?
2: if I sold sites or domains, would that be considered income or capital gains?
3:Could I deduct the cost of new acquisitions, like if I earn 4k from a sale and buy another site for 3k, could I deduct the 3k?

thanks!

 

[furca]

also wonder this.

 

[DNQuest.com]

This has been debated many different ways, I am in business of domains and I am incorporated in the state of Maryland, here is how I handle my domain names...

Registrations, renewals, drops catches are expenses, they come under domain licenses (WE DO NOT OWN DOMAINS, the central registry does).

Anytime I sell a domain, that is revenue which is placed under the catagory of domain sales.

There are no capital gains since we do not actually own the domains, additionally, we must renew our license to keep the domain.

This is very simple and legal. If you run a business of domains, you can deduct all you expenses of hosting, internet and anything else associated with your "business". Keep in mind that you must have a profit eventually to keep being considered a "company". After 3 years of losses, the IRS will deem that you are using a "business" to deduct expenses, then they will audit you and go back to day one.

Now this is only for the domainer business, there are instances where a domain can be an asset (ebay.com) and thus does have value jsut by reputation alone, but that is a different story. Most of us just carry inventory (buy/sell domains) which is very simple.

 

[profecy]

Ok, that explains alot, I never thought of it as we're just "renting" them basically. What about developed websites though? Would that be considered capital gains? And if I purchase domains could that be considered a business expense? Technically, It's "renting" an "expense." But then if it was purchased aftermarket, how would you deal with that. Could I deduct 3k on a 3k domain acquisition?
thanks

 

[DNQuest.com]

yes, purchasing domain is an expense. If you purchase in the aftermarket, that is an expense (so if you caught a drop for $1000, that is an expense). Developed websites, well, if you developed them yourself, all the expenses you incurred developing the site (internet, WYSIWYG programs, the domain name, you people you hire) are expenses, then you have the revenue from the sale.

But remember, to be in business, you will need to make a profit eventually, you governemtnet will not let you keep losing money and writing it off on taxes.

 

[profecy]

Ah, ok. I think I get it know, I'll definitely talk to a cpa before filing anything though.
thanks!

 

[Domagon]

This issue is not fully settled, but many consider domains, unless they're being sold as inventory (ie. new registrations, high-volume sales, etc) and/or have been treated as expenses in the past, as intangible assets of sorts ... and thus such sales would be taxable as capital gains (loss).

Ron

...Registrations, renewals, drops catches are expenses, they come under domain licenses (WE DO NOT OWN DOMAINS, the central registry does)...

Key is to be consistent, which it appears you are in your tax accounting ... the bad thing for you is that potentially paints you into a corner in that you may not be able to utilize the capital gains (loss) part of the tax code even though you may have been / would be able to otherwise.

There are no capital gains since we do not actually own the domains, additionally, we must renew our license to keep the domain.

One could make the exact same argument for land ... the government "owns" all the land (ignoring for a moment indian reservations, which are an enigma) and thus can take it away at any time ... you do recall the recent U.S. Supreme Court ruling regarding eminent domain.

In addition, most everywhere in the U.S., if one doesn't pay property taxes ... guess what ... they lose their property. Umm, what does that sound like ... yep, domain name renewal fees.

This is very simple and legal...

Few things are ever legally simple; the tax code is very complicated - even the IRS doesn't fully understand it, since the tax code is based on legislation enacted by lawmakers.

Ron

 

[profecy]

You may not be able to utilize the capital gains (loss) part of the tax code even though you may have been / would be able to otherwise.

I thought capital gains were more heavily taxed than just income or revenue from selling your inventory. Would it be better to have them classified as capital gains?
thanks

 

[fatter]

capitol gains is a fixed percentage, for me less than profit from selling inventory because profit from selling inventory is subject to federal, state and 15 percent ss/medicare tax.
according to irs if a person like above creates a brand around the website and not just a domain it could be considered same as a sale of a trademark which can mean significantly less taxes depending on their situation

 

[DNQuest.com]

With treating sales as revenue, it can be offset by any expenses for the company. All expenses subtracted from all revenue

With Capital gains, you a limited in what you can offset against the sale.

 

[DomainEngineer]

I think we can have it both ways legally as follows:

1. Treat ppc income as income (1099 etc).

and

2. Treat sales as capital gains


Now, where would the registration/renewal/other-related expeneses would fall?


Q1: Should these expenses be then deducted against "ppc income" or "domain sales capital gains/loss"?


Do you think this approach can be more beneficial and flexible going forward?


Q2: Can you offset other capital losses (such as stocks losses etc) against domain sales capital gains?


Please advise.

Thanks.

 

[jdk]

If you are treating sales as capital gains then registration/renewal/other-related expenses should be deducted against capital gains.

 

[DNQuest.com]

If you are treating sales as capital gains then registration/renewal/other-related expenses should be deducted against capital gains.

Yes, you can deducted those against the capital gains as long as they were instrumental in the domain you sold.

Just as an example, in my busness I have the following:

Revenue:
35000 programming
77000 commissions
58000 domain sales
a Total of 150000 revenue

Expenses:
100000 wages
7650 taxes wages (7.65 FICA, employer portion)
1000 taxes other
8000 travel
8500 Domains licensing (incluse registrations, renewals, enom funding, drop catches, backorder etc)
1000 offices expenses
8000 equipment
4000 software
750 internet expense
250 subscriptions (sedo, DNF, other)
5000 legal

a total of 146000 expenses

My company shows a profit of 4000 for the year. I gather all my revenue and subtract all my expenses. Now for capital gains, you are only able to deduct the expenses you had towards the domains you sold. And you would have to itemize for each one. Of the 8500 of domains fees, mayb only 4000 is applied to your sales because the remaining 4500 is still in your inventory. Plus if you had domains in the prior year, you are able to deduct those costs too. But in this example, You deduct the 4000 of domain costs, and the costs of your subscriptions and internet expense and maybe a portion of your legal expenses. So your total expenses may be 6000 towards the domains you sold. Subtract that from your sales of 58000, then you have a capital gain of 52000 which you have to pay taxes on and using this method, you would not issue yourself a wage. So your total profits would be 114000 which you will be paying taxes on.

So the way I do my accounting, I am able to utilize all of expenses against all of my revenue and lower my bottom line profit. Yes I pay taxes with the wage I pay myself, but overall, I would be saving on appr 14000 in taxable income.

I believe this would be my understanding if you took capital gains on domain names. If I am off here and a accountant can correct me, please do. But this was how it was explained to me in relation to domains as inventory (this does not include domains with goodwill which is handled differently)

 

[Domagon]

If you are treating sales as capital gains then registration/renewal/other-related expenses should be deducted against capital gains.

Yes, that's a possible strategy some use ... however, the key is be consistent.

Ron

 

[Varchar]

Hello,

Well, 2005 is the first year I start selling domain, problem is, I need to know how to report my sales to IRS for 2005. I have been buying domain since 1997, however, I didn't make a sale until last year. My accountant before told me that I cannot expense anything I spent in domain name since it's not related to my job. I guess last year will be a different story because I have couple $x,xxx sales.

Do I claim each sale as income like a stock trade? What about domain renewal fees? Can those claim as operation expense? What about PPC incomes? What about names that I let it drop before 2005, can I even claim them as lost? Also, I have purchase a number of expensive domain, how do I report them?

I don't have a company, all names are register under my personal account. My accountant adviced me to open a corporation for this year, is there much advantage for doing so?

Thanks.

Kindly Regard,

Kawing

 

[DNQuest.com]

Umm, did you read above????

Yes, opening a Sub-S is a good idea, then read what I wrote above about how to handle the domains. As far as 2005, I would think you need to report your revenue and expenses under Section C. You claim all your revenue and then all your expenses like you were operating as a company. You ahve more flexibilty to write off expenses that way. But I would be careful what you claim and keep it simple for 2005 since you not not a company.

 

[Varchar]

Thanks. I read the above. My questions were moved by the mod to this thread. I guess my only question now is that if I can expense renewal fees that I have paid out prior before 2005?

 

[DNQuest.com]

I do not believe you can if you use simple or cash accounting.

 

[Varchar]

Hi,

I know DNQuest has mentioned this. Can drop catches & backorder be consider as expenses? Every accountant I spoke to don't think so. Also, what about offers to buy the domain name for reselling? Say that I purchase ????.com for $10,000 from Person A and didn't sell the name during the tax year. Will that $10k consider as purchasing price or expense? If it is purchasing price, I will not be able to deduct it as expense until the day I sell the name. Every accountants I spoke to tell me that the drop catches and backorder fees are purchasing price of the domain name. Only think I can deduct is the registration and renewal fees.

This is another scenorio: Jan 2005, I have puchased 5 names from drop catches, costing me $100 ($60 fees and $40 auction winning price) each while I puchased 5 more names from domain resellers which also cost for $100 each. So I spent total of $1000. Now during 2005, someone approach me and purchased one of the name I won from drop catches for $1000. What will be my capital gain and expenses in this case? Is it $900 capital gain and $1000 expense resulting a net loss of $100? Or if it is a capital gain of $900 and expense of $100 which comes from registration of 10 domain names for $10 each?

Thanks.

 

[jdk]

What do the accountants you spoke to classify the purchases as?

You can compare them to advertising for your site. You pay an expense to obtain the domain name just like you pay to advertise (expense) a website to obtain more visitors.