Huge rep for a difficult question

[jacal1]

When/if you file a Scedule C (those of you in the US), where do you list reg fees for all your domains? They are not inventory because you have to pay them each year unlike inventory which is fixed and retains its value. Are they legal fees? Professional fees? Please let me know.

Thanks!

 

[Michael]

I usually put it under 20b for renting other business property. Please be advised that I am not a tax attorney, and do not misconstrue this as tax advice. Always consult with a professional and blah blah blah....

Hope that helps

 

[jacal1]

I didn't think of that, but it makes a ton of sense considering that we are technically renting them. Rep added.

 

[Domagon]

Something to consider ...

Domains are not "rented", but are intangible property in the view of many, including some court opinions.

The annual renewal fee is basically a maintenance fee.

If domains were "rented", the renewal price would vary greatly (ie. like .TV domain registrations) and furthermore, the registrant would not be considered the "owner" (some may debate this aspect since some registrars state otherwise in their terms) ... how else could people "sell" domains, if they don't actually "own" them? One can debate this for sure, but point is that the renewal fee, in the view of many experienced domainers, is NOT rent.

It's important to be consistent ... treating a domain itself (content is a different matter and should often be considered separate) as an expense will likely result in much higher tax liability upon sale ... or worse if one treats it as an expense in some parts and at same time an intangible asset elsewhere in their accounting - regardless of how one defines a domain for accounting purposes, it's important to be consistent.

There is no one simple answer for domain names as of yet ... most taxing authorities have chosen to steer clear of defining exactly how a domain should be accounted for.

So in short, one way to account for the renewal fees would be to add it to the cost basis of each of the domains renewed. That may not help much now, but likely will upon sale, since a higher cost basis will typically reduce the gain incurred.

Do some searching around on the forums - there have been numerous discussions about domain accounting.

Finally, if you are doing more than say $xxx in renewals and/or expect to do $x,xxx or more in sales eventually, consider hiring an accountant (not tax preparer) for professional advice regarding the various accounting methods - there's more than one way to treat a domain name depending on one's exact business ... ie. a domain registrar would likely treat domains little more than a "service" while a domainer would potentially treat them as simple inventory or intangible property, etc.

Ron

 

[jacal1]

Domagon, thanks for the insightful response. I appreciate it. My basic problem is this: let's say in a given year I spend $5000 on reg fees. Then I make 5 sales of $1000 each. If I use the same method I do for stocks or a material good business, as you suggest, I have to claim $5000 profit and only $25 expense for those 5 names' reg fees. Huge tax liability.

I would argue that I spent $5000 on this business and got $5000 out. There should be no tax liability, no? If I owned them outright you could argue that I still own $4575 worth at the end of the year, like with stocks or material goods. However, I am going to have to pay renewals of $4575 - it just doesn't seem like the same thing. It seems like my expense was truly $5000, and it was something like rent or service fees or something because at the end of a year with each domain I own zero unless I re-up. It just doesn;t seem to fit neatly at all.

One way maybe this works is to say that you "bought" the name for free, but have to pay a service fee to have someone do the administrative tasks? Cost basics = zero, but service fees = reg fees.

Did you (or has anyone) asked an accountant about this?

 

[Michael]

The way I understand it is that you are renting the domain from the registrar. When you "sell" it, they are really just buying out your lease or your right to rent the domain.

In terms of accounting, there are two methods, the cash basis and accrual. Smaller companies tend to use the cash basis, which means you expense something out when you incur the expense. Larger companies tend to use the accrual basis, which means you expense something out when it sells. This is usually geared more towards physical inventories rather than intangible property that you are renting.

As domagon said, it really doesn't matter which accounting method you use, as long as you stick with it. When you filed your first tax return for the business you had to state which method of accounting you use, so you need to stick with that or notify them of a change if you decide to do it a different way.

I personally use the cash basis and treat the expense as rent.