"Legal" Tactics to Reduce IRS TAX Owed from Domain Revenue

[DnPresident]

Nearing the end of the year once again, I currently live in the U.S and have been thinking a lot about IRS tax on domain name revenue and believe it would only be helpful to have a thread on Tax strategies. We could all learn something.

I talked to a supposed very good tax preparer last week and gave him the scoop on what I do domaining. All though he didn't say it, I don't think he's ran across this exact type of business before. I've been thinking about opening my business off-shore for the tax savings but the tax preparer said that many of the people that do that end up in Federal Prison. I can't see why it would be illegal since companies do it every day including many major corporations so I'd like to learn more about it.

I have some write offs like laptops purchased, had the Geek Squad come out, office space, BlackBerry + service for help with marketing, domain purchases, internet service, campaign and ad spending, office supplies and furniture and so on.

Any and all Ideas and tactics invited on this thread.

 

[Bampa]

Another important tax question:

If you sell a name, is it a Capital Gain, or is it listed on Schedule C as part of a business sale?

 

[matt_bodis]

Depends if the domain name was purchase as an investment or for resale.

If you are buying a domain to flip, I believe it would be Capital Gain, once it is sold. If you are buying domains as an investment (PPC parking), it would be a different story.

A good accountant should know how to prepare taxes for domain names whether he/she knows what a domain name is or does not know what a domain name is.

It follows the regular trends of investments and gains.

 

[Bampa]

Hi Matt

That's exactly the way I've been treating the tax questions, but I have seen mixed opinions on flipping a domain, whether or not it is a capital gain. Anyone know for sure?

 

[nielsencl]

Good question on the capital gains, I've just been treating domain income as regular income.

I was told that if I deduct for my home office it can raise some flags, but I also was told that when you sell your home you have to take it into consideration in reverse. Can't remember the details, but we decided that the actual deduction for a home office as a percentage is not that much and more trouble than it would be worth.

Other things to consider for lowering taxes is anything related to the business (With your taxperson's agreement of course) like magazines, books, movies, newspapers, and any thing related to domain name research. Also track your milage when you are going to meetings, tradeshows, or any business-related travel since it can add up.

Having a business off-shore might be one way to go, but if you're not a corporation then you may not want to risk that. Of course, you could also live off-shore and then you might be covered...? I would get a good tax person and not take any chances with this kind of thing. It's not worth it IMO.

 

[fatter]

Hi Matt

That's exactly the way I've been treating the tax questions, but I have seen mixed opinions on flipping a domain, whether or not it is a capital gain. Anyone know for sure?

I spoke with the IRS and according to them right now everything dealing with domains is a gray area, in fact you will get a different answer depending on who you talk too, the problem is there is not much case law (irs taking domainers to court) usually congress writes tax laws but when there is no law IRS must challenge the tax payer in court and win to set a precedence. The answer I got most times was parked earnings should go on a schedule C, and domain sales if thats your primary business can be done as capitol gains, either long or short depending how long you have had them.
If you call the IRs be prepared for getting switched from one person to another because most of them dont even no the answers

 

[DnPresident]

Irs

An older article from Dnj, Doesn't look like much has changed.
http://www.dnjournal.com/columns/tax_tips.htm

 

[PowerUp]

This article should help you decide if your gain is an income gain or capital gain.

http://www.lexisnexis.co.uk/taxtutor/pdf/free_pdf/2a01.pdf

I believe for the majority of us, our gains (from parking and selling domains) are considered income.

 

[snoop]

I've been thinking about opening my business off-shore for the tax savings but the tax preparer said that many of the people that do that end up in Federal Prison. I can't see why it would be illegal since companies do it every day including many major corporations so I'd like to learn more about it.

The difference is that the companies doing in legally have probably invested a lot of of money in structuring it correctly. For the people just buying a shelf company,opening a bank account and still running the whole thing from the USA yes they have a good chance of ending up in jail one day. If you are going to go down this path make sure you have some very experienced advisers and be prepared to spend a lot on that advice.

 

[Cecil_the_turtle]

I think that the earnings off of domain sales could be considered income, unless it is an enourmous amount comparable to gains from real estate sales. I don't think it would be necessary to report capital gains for a few hundred or thousand dollars. However, if I made a profit of over $5000, I would look into getting some professional tax advice.

I'm not a tax professional, but that is my 2¢.

 

[PowerUp]

I think that the earnings off of domain sales could be considered income, unless it is an enourmous amount comparable to gains from real estate sales. I don't think it would be necessary to report capital gains for a few hundred or thousand dollars. However, if I made a profit of over $5000, I would look into getting some professional tax advice.

I'm not a tax professional, but that is my 2¢.

Click on the llink at my post #9 and read the article. It's very informative for determining whether your gain is an income (or trading) gain vs capital gain.

If you buy and sell domains frequently, then any gains from the domain sales will be treated as an income gain because you are viewed as having a "trading" activity. Whether trading 2 times, or 5 times in a year constitute as having a trade or not is up to the IRS / court to decide.

Most importantly, if you read para 1.3, "Profit seeking motive". I believe all domainers fall into this category.

 

[sf2010]

tax minimization = acceptable to IRS

tax avoidance = NOT acceptable to IRS

if you are going through the trouble of setting up an off-shore account, why not setup a sole proprietor LLC and write-off common business expenses (i.e. reg fee, computers, broadband access, etc) against your income?

paying taxes on the remainder will let you sleep better rather than taking some shady shortcuts...

 

[NameCharger]

disclaimer: not to be taken as tax advice, please consult a CPA for your business and taxes

My CPA told me that revenue generated from domain names are investment income which is taxable, but at a much lower rate than earned income.

 

[kokbaw]

Be careful sir.You need to be taxed.

 

[Mike]

if you are going through the trouble of setting up an off-shore account, why not setup a sole proprietor LLC and write-off common business expenses (i.e. reg fee, computers, broadband access, etc) against your income?

Now this i wholeheartedly agree with! Plus, you can compile any kind of cost for office supply, phone, marketing, advertising, etc. There's a ton of possible deductions that your CPA can tell you about - and when one considers that a LLC can be started for below $200 (depending on your states filing fees), it stands to reason that for anyone that's making a taxable amount of domain income/year forming a llc or corp is a smart thing to do. Edit* Almost forgot about it - software and other expenses that directly related and further your business as an internet entrepreneur should also be tax deductible. End of Edit*
I have documents regarding starting a LLC or Corporation that anyone can have to read through and familiarize yourself with. (Of course, they're free) If anyone needs them, let me know and i'll make them available for download.

IB

 

[PowerUp]

Can someone enlighten me?
I'm a non-US citizen and I've never been to US.
I'm earning from Parking domains and flipping some domains.

Am I required to pay taxes to US? or just to my local IRS

 

[BizBot]

PowerUp, if you not a US citizen you do not have to pay US income taxes.

 

[Mike]

Can someone enlighten me?
I'm a non-US citizen and I've never been to US.
I'm earning from Parking domains and flipping some domains.

Am I required to pay taxes to US? or just to my local IRS

Check with your local tax professional. In many countries, if you don't exceed a minimum amount of "supplemental" income, you don't have to declare it as taxable income. This may very well apply in your country as well.
Once you exceed the threshold and need to declare your domain revenue as income, you may have other steps available to you to reduce the tax load.
Again, your local CPA will have all the answers for you.

IB

 

[PowerUp]

PowerUp, if you not a US citizen you do not have to pay US income taxes.

Glad I'm not a US citizen.....

Check with your local tax professional. In many countries, if you don't exceed a minimum amount of "supplemental" income, you don't have to declare it as taxable income. This may very well apply in your country as well.
Once you exceed the threshold and need to declare your domain revenue as income, you may have other steps available to you to reduce the tax load.
Again, your local CPA will have all the answers for you.

IB

..... and last I checked, my tax law states that foreign income is exempted from tax. So I guess it's tax free money for me =)

 

[fatter]

Glad I'm not a US citizen.....



..... and last I checked, my tax law states that foreign income is exempted from tax. So I guess it's tax free money for me =)

Some countries do exempt foreign income but the fine print says you must reside in the country where income was made IE: when my son works overseas he is exempt from that work, but his foreign investments are not exempt

 

[oldsaler]

One more addition, your time. Your time is deductible. I log in and log out when doing research. I spend, like everyone else a lot of time researching names, setting up websites, I park for ppc and also flip names. I diversify for various reasons.
Your time is worth a lot of money. surprise yourself and do a log for 1 week, you'd be surprised at how much time you spend on what you do. Also, time on any forums, or fees paid to join any forums are also deductible and can also be filed under education.
As with any advice, check with your CPA, or tax consultant.

 

[DnPresident]

Absolute minimum of 12-15 hours per day monday-friday and probably another 8 hours on the weekend.. Very time consuming but learning all the way. Implementing everything that needs to be done just seems impossible without at least 2 or 3 more of me :yell: I sometimes wonder if there's an end and realize the real answer for me is "how could there be" :?

Now I'm wondering how deductible is my time according to the IRS?

One more addition, your time. Your time is deductible. I log in and log out when doing research. I spend, like everyone else a lot of time researching names, setting up websites, I park for ppc and also flip names. I diversify for various reasons.
Your time is worth a lot of money. .

 

[fatter]

One more addition, your time. Your time is deductible. I log in and log out when doing research. I spend, like everyone else a lot of time researching names, setting up websites, I park for ppc and also flip names. I diversify for various reasons.
Your time is worth a lot of money. surprise yourself and do a log for 1 week, you'd be surprised at how much time you spend on what you do. Also, time on any forums, or fees paid to join any forums are also deductible and can also be filed under education.
As with any advice, check with your CPA, or tax consultant.

Unless I missed something reading my schedule C book, time isnt deductable Unless you pay yourself a salary and then it is taxed as income. The IRS doesnt even allow for time donated to charities, unless you are a contactor and dontae a complete Job like a roofing contractor replacing a roof on a church for free.

 

[NameCharger]

AFAIK, in the US, you must be a Corporation to pay yourself a salary.

 

[panterrasbox]

Unless I missed something reading my schedule C book, time isnt deductable Unless you pay yourself a salary and then it is taxed as income. The IRS doesnt even allow for time donated to charities, unless you are a contactor and dontae a complete Job like a roofing contractor replacing a roof on a church for free.

Correct. If you did not spend money [and have the paperwork to prove it], it is not a thing that can be deducted.

Also, as an individual, you can deduct pretty much anything you can deduct as a corporation. Incorporating as an S Corp, C Corp, or LLC can have advantages in regards to limiting liability and personal exposure from your business (as well as allocating ownership), but they also have their overhead in forms, recording meeting minutes, queries from state, county, and local taxing authorities, submitting quarterly 941s to the IRS even if you are not issuing payroll. Lots of overhead (been there, done that a few times). So, if you don't see a clear advantage in incorporating, then you might want to think real carefully. By the way, incorporating in no way lessens your tax and fiscal responsibility - ask the guys from Enron, WorldCom, and Anderson Consulting - when they get out of jail.

Yes, domaining is still an evolving area as it pertains to the IRS and taxes. Every year you will see more and more accomodating of domaining. As far as parking, it seems to be best properly classified as advertising income. Domain registrations appear to be licensing or state administration fees (I don't remember exactly without digging up last year's return).

And, professional accounting advice is always a good idea.