Tax accounting and audits

[fonzie_007]

Has anyone had experience with the IRS regarding tax treatment for their domain business? Anyone ever been audited?

I've stumped several CPAs and IRS reps over the last few years on my tax accounting questions with domain names.

Specifically, I'm curious how others are accounting for their domain names as either inventory, expenses, or capital assets subject to amortization.

 

[Domagon]

Be consistent!

The IRS knows they'd be opening a can of worms, so they seemingly avoid making any determination as to exactly how domain aftermarket resale (not talking new domains) should be treated.

Whichever method you use, be consistent and be able to justify why that method was chosen. Do that and you'll likely do fine in an audit situation.

Many domainers treat domains as assets. Some amortize, some don't. That depends - some simply keep the value the same and add the cost of renewals to the domain's cost basis.

Treating domains as inventory may be more suitable for domainers who rapidly buy and sell in a short period of time, often earning relatively small amounts each time. A situation in which treating them as inventory and expensing may be more advantageous in reducing one's tax liability.

Some domainers use multiple accounting methods, but for most domainers, it's often best to choose just one method. Regardless, to reiterate, it's important to be consistent with the method(s) one chooses to use.

Ron

 

[fonzie_007]

Ron,

I agree with everything you said. The difficulty for me is figuring out how to account for 1000+ domains with an amortization schedule. It is proving time consuming and difficult. Do you use any software to assist you in your accounting?

Thanks,

Fonz

 

[Domagon]

No need to amortize, if one doesn't want to...

Domain names can be viewed more akin to land in regards to lifetime ... domains potentially can be considered as having an indefinite lifetime.

Or another way, from an accounting standpoint, is to think of domains more akin to stocks.

Being you have 1000+ domains, amortizing may make sense depending on how long you plan to hold them and / or if you feel they have a finite lifetime in respect to your domain business.

There's no straight answer on the "right" way, because it depends on one's particular situation.

As far as software, Quickbooks Pro works well for my needs, but I don't track all my domains in there individually. Instead I use a separate spreadsheet to track most all of them. I don't amortize any of them, but rather record a cost basis and then, over time, add yearly renewal costs to the basis of them.

However, to properly amortize in QB you would need to create a sub-acct for each; for 1000+ domains that could be cumbersome to say the least. There are various custom add-ons for QB that address its various shortcomings and may be worth looking into. Or possibly (a big maybe, since it depends a lot on your situation) use a separate program, such as a spreadsheet, etc to track individually and then plug the aggregate numbers into QB or other similar accounting software.

Sorry this isn't clearer, but that's the nature of accounting and taxes. Anyways, hope this helps.

Ron

 

[DubDubDubDot]

Domain names can be viewed more akin to land in regards to lifetime ... domains potentially can be considered as having an indefinite lifetime.

You own land, but nobody owns their domain. You just pay a yearly fee to use it.

Domain ownership is more akin to leasing a company vehicle rather than buying the vehicle.

 

[bmugford]

You might "own" land, but you still need to pay yearly property taxes on it which is very similar to domains and yearly renewal fees.

Brad

You own land, but nobody owns their domain. You just pay a yearly fee to use it.

Domain ownership is more akin to leasing a company vehicle rather than buying the vehicle.

 

[Dean]

I believe if you are parking the domain and making revenue off it then you cant really consider it inventory. It would be an asset and renewals are an expense related to maintaining the asset. Registration/purchase price would be the cost/value of the asset, this would then only become an expense when you drop or sell the domain.

Thats just my opinion anyway, and as someone above said, most important is to be consistent and be able to justify your decision, there is more then 1 way to deal with a lot of things in accounting.

 

[paxton]

Ron,

I agree with everything you said. The difficulty for me is figuring out how to account for 1000+ domains with an amortization schedule. It is proving time consuming and difficult. Do you use any software to assist you in your accounting?

Thanks,

Fonz

Fonz, I also agree with everything Ron said. Tax accounting for domains really is a gray area, so the key is to be consistent and prepared to explain your process.

For what it is worth, my accountant has been in communication with other professionals and they all even consulted the e-Book I provided them (purchased a few years ago from domaintaxguide.com).

In the end, we chose to to amortize, primarily based on the level of my sales, income, and reseller commission earnings. Each domainer's business will be different, so the decision on how to account for tax purposes should be subjective.

Last year, the IRS followed up because they could not reconcile all of the 1099s they received with my actual tax reporting. Some purchasers sent me 1099s based on domains I had sold them and some parking companies and affiliate sponsors were inconsistent in their reporting methods. A simple letter to IRS from my accountant was sufficient to put an end to their inquiry. So that's the closest I have come to an audit, and was relieved that is all that it was.

There really isn't software out there that fits my needs (or my accountant's) so I, too, record everything manually in a spreadsheet. The main categories for record keeping are:

Domain Registrations & Renewals
Itemized Fees & Expenses
Itemized Commissions & Income
Itemized Domain Sales/Expirations
Itemized Domain Purchases
Business Purchases/Expenses

Overall, it's not a difficult process as long as I update my spreadsheet as I go. Although with all of the different companies involved (registrars, paypal, PPC, affiliates, etc.) it does take some time to stay organized and accurate.