Valuing domains for tax reasons.

[Leading Names]

My accountant has asked me to do this but I’m getting somewhat confused, Obviously ‘domains’ and ‘value’ are massively subjective. What principle to you use?

Value all of your domains as one?
Value domains individually?
Value at reseller or end user prices? What you paid? or based on monthly PPC revenue times 12/24/36 months?

Thanks
- Rob

 

[Steen]

What I paid for them.

 

[Leading Names]

What I paid for them.

And if you hand reg'd a name @ $6.95 you would value it at $6.95?

Cheers
- Rob

 

[GT Web]

yup

 

[Steen]

And if you hand reg'd a name @ $6.95 you would value it at $6.95?

Cheers
- Rob

Yes.

*If* they were making good income at Sedo, I would imagine your accountant might give you a formula.

 

[chatcher]

I do not consider my domain names to have any value at all for inventory purposes. The fees I pay for registration services are expenses, and money I receive for advertising, ppc, and assignments (sales) is income. The domain names themselves are merely service contracts, and they cease to exist upon expiration. They may be worth something, but then again, they may not be.

 

[OnSpec]

My accountant has asked me to do this but I’m getting somewhat confused, Obviously ‘domains’ and ‘value’ are massively subjective. What principle to you use?

Value all of your domains as one?
Value domains individually?
Value at reseller or end user prices? What you paid? or based on monthly PPC revenue times 12/24/36 months?

Thanks
- Rob

Reg. fee

 

[actnow]

Chuck, the way you structured it is the best way to do it in the U.S.

But, I am not sure how the tax structure works in the UK.

 

[Leading Names]

I do not consider my domain names to have any value at all for inventory purposes. The fees I pay for registration services are expenses, and money I receive for advertising, ppc, and assignments (sales) is income. The domain names themselves are merely service contracts, and they cease to exist upon expiration. They may be worth something, but then again, they may not be.

I like this method, appreciate the in-depth response k: .

Thanks also to Seen, Dan and Richard.

- Rob

Chuck, the way you structured it is the best way to do it in the U.S.

But, I am not sure how the tax structure works in the UK.

Thanks Richard

Any UK’ers care to comment?

- Rob

 

[Chaiki]

I agree. There are a dozen structures you can easily conjure but if you are US based Chuck's seems to hold water. Some day there will be a ruling somewhere in some country about this. But not as of today from what i have seen.

 

[Corwin]

but if you paid $100 for a domain you do not consider it value 6,95 do you?

 

[chatcher]

but if you paid $100 for a domain you do not consider it value 6,95 do you?

No, I consider its value to be zero, which is what it will be worth if I do nothing more (allow it to expire). The disadvantage of this method is that if I sell it next year for $150, the whole $150 is income. If I had treated it as a normal asset, only the amount in excess of my basis (what I paid), or $50, would be a taxable gain.

One way to look at domain names is that they are virtual billboards for lease. Some are in better locations than others. You don't own them, but you can put your content on them if you lease them (from the registry through a registrar). Whoever currently leases the billboard has the right to continue the lease, or to let it expire.

I doubt seriously I will be allowed to continue accounting this way if there ever is a specific IRS ruling about domain names, but for now it makes sense for me (basically money coming in - money going out = taxable income). If I did my accounting on an accrual basis, and had to compute the months remaining for each domain name registration, I'd probably just quit the business.

 

[actnow]

Basically, Chuck is saying that he is treating each domain purchase as an expense.

Which, is subtracted from revenues.

I am sure the U.S. IRS will eventually make a ruling.

But, lets not look for it.

 

[Dale Hubbard]

IMHO it's quite simple. If your accountant does it properly, he will ask you separately for the capital value of the property (domains) which is actually not an asset, but actually an ongoing expense.

You don't OWN the property - you are renting it and thus it's a business expense and not a capital asset. Thus the capital value for the assets and liabilities part of your accounts is essentially zero.

The revenue would be treated differently under income and expenditure, as paying renewal fees on this asset that you don't own is an expense, and the income derived is -- income.

If you paid big money for the domains then I would suggest again that that is an expense and does not make the domain(s) an asset. Again, you are always renting it no matter what the Inland Revenue say and thus it's not yours to capitalise.

I'd argue that with HMIT. I'm not an accountant so this is just an opinion.

Argue it out with your acountant, taking into account the above, and between you, work it out so it's tax efficient. He should be 'creative' enough to do this - I've been there myself with all this.

Make sense?

 

[Leading Names]

Yes, it makes sense however some of my domains have cost several thousand each so using this method would not be good for some of my domains.

Thing is, lets say I paid $5,000 for a domain and later sell for $10,000, that’s $10,000 I’ve got to pay tax on, not $5000 which takes a large chunk of the profits.

Question:

Do any members claim domains as a capital expense, therefore enabling them to claim their £7k capital gains allowance, effectively making the first £7k of domain profits per year tax-free?

- Rob

IMHO it's quite simple. If your accountant does it properly, he will ask you separately for the capital value of the property (domains) which is actually not an asset, but actually an ongoing expense.

You don't OWN the property - you are renting it and thus it's a business expense and not a capital asset. Thus the capital value for the assets and liabilities part of your accounts is essentially zero.

The revenue would be treated differently under income and expenditure, as paying renewal fees on this asset that you don't own is an expense, and the income derived is -- income.

If you paid big money for the domains then I would suggest again that that is an expense and does not make the domain(s) an asset. Again, you are always renting it no matter what the Inland Revenue say and thus it's not yours to capitalise.

I'd argue that with HMIT. I'm not an accountant so this is just an opinion.

Argue it out with your acountant, taking into account the above, and between you, work it out so it's tax efficient. He should be 'creative' enough to do this - I've been there myself with all this.

Make sense?

 

[Dale Hubbard]

Yes, it makes sense however some of my domains have cost several thousand each so using this method would not be good for some of my domains.

Thing is, lets say I paid $5,000 for a domain and later sell for $10,000, that’s $10,000 I’ve got to pay tax on, not $5000 which takes a large chunk of the profits.

Question:

Do any members claim domains as a capital expense, therefore enabling them to claim their £7k capital gains allowance, effectively making the first £7k of domain profits per year tax-free?

- Rob

Rob, selling them on again (or actually selling the RIGHTS to use them on again) is another matter and most certainly you will get clobbered for capital gains. The way I did this before, and this is now hindsight in your case, was to register a company in the BVI and then have that company hold tenure of the domains. Effectively, that company would bill you an amount for their use; probably equivalent to the annual reg. fee, but the rights of tenure (ownership of the domains if you like) stays offshore. For this to work you would need to spend the profit outside of the UK -- as soon as you draw money back here you'll be liable to tax on it and the revenue will tell you it's a company 'tied' to what you're doing here.

So, to get the most benefit out of large profits from selling domains in the UK, you need to get the BVI company with an offshore bank account and transfer ownership. The company will probably cost you about £1400 today. Then you need to look for a house in Malaysia to buy or something

There are nuances to all this so check with your accountant -- the key is to mention the phrase "agency company offshore" to him and see what he/she makes of that.

Good luck!

 

[worldengine]

From a US standpoint, this is what CCH Tax Research states:

CCH-EXP, CCH Federal Tax Service §G:6.363[4], Website Domain Names
Website Domain Names

A domain name serves as the website's address on the internet by providing a coded series of numbers that allows computers to locate the site. While domain names are similar to trademarks and tradenames, they probably do not qualify as an amortizable Code Sec. 197 intangible; domain names consist only of words without any graphic elements, for instance, and a word that is too common to trademark can still be a domain name (see §G:22.41[10] for discussion of amortization of trademarks).

[a] Registering a name.
Original domain names are available from an internet registrar at a nominal fee. Registration fees must be renewed every two years; thus, each fee can probably be capitalized over its two-year useful life.

Purchasing a name.
Many domain names must be purchased from third parties who previously registered them but no longer need them for their own businesses, or who register names and resell them at a profit. These costs probably must be capitalized because the name will have a useful life of more than one year (see §G:3.62[1] for discussion of the one year rule). The costs probably cannot be amortized because of the difficulty of establishing the name's useful life.

So... according to the above, registration or renewal fees should be capitalized (and I assume amortized over registration period or taken as expense if on cash basis). Any cost of purchasing a domain name must be capitalized and cannot be amortized. Upon sale of a domain name, your purchase cost becomes your Cost of Goods Sold.

Taxable income = Sales Price Less Cost of Goods Sold.

Note, however, that there seems to be no definitive ruling on this area as yet and this is simply their interpretation.

 

[chatcher]

From a US standpoint, this is what CCH Tax Research states.....

Sorry, I didn't hear any of that - I had my fingers pushed tightly into my ears :wink:

 

[actnow]

Sorry, I didn't hear any of that - I had my fingers pushed tightly into my ears :wink:

This thread does not exist.

We will deny its' existance.

And, it will self destruct in 10 seconds.

 

[Nameable]

If you're that scared and want to be sure you're paying enough tax (IMHO any tax is too much tax) then why not apply to the IRS for a private letter ruling?

I always have to laugh when I see this topic come up. If you have a corporation (which you should, though not necessarily a US corporation) the cost of a domain, whether it was 6.95 or $10k is an ordinary business expense and should be treated the way Chuck recommends, though it may vary depending on your locality.