Tax Questions

[jaremo04]

I have posted this question before, but am still looking for answers that make sense to me.

Here is the hypothetical case: I bought $3,000 worth of domain names in 2008 and sold one name for $100. Tough way to make a living!! How do I treat the names in my inventory? Can I write off the whole $3,000 and declare the $100 in sales? Any thoughts or guidance would be greatly appreciated.

Thanks!

 

[Keral_Patel]

$3000 is your expense - investment which you could - would have written in 2008 year.

If you sold 1 name for $100 then its comes under gains - profits - income.

Now if you purchased that particular name for $20 then your income is 80 for that particular name but then your expense - investment is 2980 as you are counting 20 different from the 3000.

In totals it would be same.

I don't know how it works in your country. But the above scenario says.

3000 - expense
100 - gains
Total - 2900 - expense.

 

[Chappy]

Many people hold their names as inventory. Hence the $3000 in purchases is not expensed. Rather, when you sell the name you simply calculate your gain (sales price less purchase price) and apply your marginal tax rate to that gain.

 

[srisri24]

Your expenses are not just $3000.
You can also include internet expenses.
Investment Expenses If you subscribe to any magazines or journals pertaining to your investments(domain names), or buy a computer program to help you monitor your investments, you can deduct the cost, if it helps push you over the 2% AGI rule.

 

[jaremo04]

Thanks to all respondents. I appreciate your input. Anyone else?

 

[Jeff]

Here is the hypothetical case: I bought $3,000 worth of domain names in 2008 and sold one name for $100. Tough way to make a living!! How do I treat the names in my inventory? Can I write off the whole $3,000 and declare the $100 in sales? Any thoughts or guidance would be greatly appreciated.

What did your ... CPA™ / EA© or professional tax advisor tell you, given your other specific circumstances, and jurisdiction? :gl:

-Jeff

 

[jaremo04]

Hi Jeff,

Thanks for your response.

I don't pay a tax advisor, CPA, or EA for advice. I am a small-time domainer with limited resources and continutng challenges and I try to find my way as I go and look for help from my peers, as I have limited resources and would like to think that I can draw from the vast pool of knowledge in this forum.

 

[Jeff]

I don't pay a tax advisor, CPA, or EA for advice. I am a small-time domainer with limited resources and continutng challenges and I try to find my way as I go and look for help from my peers, as I have limited resources and would like to think that I can draw from the vast pool of knowledge in this forum.

I agree that there is a vast pool of experience and knowledge here at our #1 Namepros™ ... but TAX ADVICE, much like medical advice, is extremely specific to one's location and inter-relation with one's other (organs) income, investments, expenses, familial situation, and so forth IMHO. While very general points may provide some overall general guidance, I would strongly suggest that you speak with a qualified CPA/EA and/or tax advisor in your area regarding your specific and unique circumstances ... as a quick analogy; I wouldn't allow anyone here - no offense - to operate on me if I had stomach cramps! :red:

Just my two sense.
-Jeff

 

[snowbird]

Along with your 1040 tax return, you will need to submit a Schedule C. I would suggest looking it over and dowloading a copy of it for personal reference [ http://www.irs.gov/pub/irs-pdf/f1040sc.pdf ]. That way you will know how to keep better track of your losses and gains throughout the year and can categorize your expenses accordingly for next year as well. It is pretty straight forward.

 

[labrocca]

$3000 is your expense - investment which you could - would have written in 2008 year.

If you sold 1 name for $100 then its comes under gains - profits - income.

Now if you purchased that particular name for $20 then your income is 80 for that particular name but then your expense - investment is 2980 as you are counting 20 different from the 3000.

In totals it would be same.

I don't know how it works in your country. But the above scenario says.

3000 - expense
100 - gains
Total - 2900 - expense.

That's how I would calculate it as well. I been doing my own taxes for a long time and doing the full set of forms too. I don't believe domains are inventory. They are a contract leased item and in general are an expense or liability (renewals and purchase) until sold. But you are selling the contract and nothing more. There is no physical item and you never actually OWN anything. People need to remember that we lease domains from the registry and never at any point own them. They are NOT property nor inventory and to consider them as such is going to have long-term tax repercussions.

Some want domains to be a property for their own legal protection and I understand their position. When you have domains valued in the $xxx,xxx range you want legal protections not currently offered. But for most making domains property is going to create a lot of hassle and financial burden.

That's my opinion.

 

[cpamtm]

I agree

Registration fees are expense given the nature of the industry not to mention the fact that a domain may never be sold and lapse/expire worthless... To capitalize or inventory domains would imply that these could be sold during the normal course of business / operations. If you are fortunate to sell a few during the year, then these amounts (net of fees ie., escrow, brokerage etc) along with ppc income etc. would offset your gross costs/expenses for the year. Unfortunately, the more domains, the tougher it is to turn a net profit... Consult your Accountant in your respective country for additional information.

 

[Acroplex]

What country are you at? The advice you received from the fellow in India, does not apply in the US.

If you bought $3,000 worth of domains, you can expense only the renewal fees you've incurred in 2008. The $100 in sales will count as income, either taxed at ~30% bracket as regular income if you held the domain for less than a year, or, at ~15% tax bracket if you held it for a year plus a day.

To expense the $3,000 you have to first sell the domains.

 

[AdoptableDomains]

Acroplex seems to be the closest to the correct tax handling in my opinion for US taxpayers. However, the type of business (Proprietorship, Partnership, LLC, S-Corp, C-Corp) and accounting method (Cash, Accrual) will also effect taxes. Domains are NOT inventory for tax purposes even if you wish to call them inventory, as they are intangible. Registration and renewal fees should be expensable when paid, sales are income when received if you are on a cash accounting method.

If on an accrual basis (Corporations), you may have to expense over multiple years if you pay for several years ahead for registration or renewals. Income should be reported when posted as a receivable if on accrual method. Large unsold domains may not be able to be costed as inventory, but considered as investments like buying stock where the gain or loss is only realized upon sale.

Short term sales can be considered regular income and taxed as such, and long term holdings can be considered under the capital gains rate which may be lower depending on your tax bracket. Parking, lease-outs, or ad income should be considered regular income.

The above is my understanding. Don't consider this as tax or legal advice. See your accountant, lawyer, or other advisor.

 

[Acroplex]

Correct. For best advise, consult with a CPA that will give you the best answers related to your location and business status.

 

[labrocca]

What country are you at? The advice you received from the fellow in India, does not apply in the US.

If you bought $3,000 worth of domains, you can expense only the renewal fees you've incurred in 2008. The $100 in sales will count as income, either taxed at ~30% bracket as regular income if you held the domain for less than a year, or, at ~15% tax bracket if you held it for a year plus a day.

To expense the $3,000 you have to first sell the domains.

I don't agree. Show me the tax code that pushes that belief.

If I am going to build a website I need a domain, developer, hosting and all are expenses. If I pay $3k for the domain that's part of "web develepment" expenses.

Of course really this depends on how you want to setup your taxes. You can certainly defer the expense at the time of the sale imho without a problem. I prefer the "cash" method and I don't defer.

http://en.wikipedia.org/wiki/Accounting_methods

Read up on Cash vs Accrual.

Cash accounting defers all credit transactions to a later date. It is more conservative for the seller, since it does not record revenue until the cash receipt. In a growing company, that results in a lower income compared to accrual accounting.

 

[Acroplex]

If your sole business is that domain and its associated costs, yes. If you are in the domain reselling business, selling and buying domains, the process is as I described it. I never question my CPA.

 

[AdoptableDomains]

Treatment of a domain depends on why you buy it and how you use it. Here are a couple articles worth reading:

http://domainnamewire.com/2008/02/26/the-irs-cares-what-type-of-domainer-you-are/

http://domainnamewire.com/2009/01/22/12-domainer-expenses-to-remember-on-your-taxes/

 

[labrocca]

If your sole business is that domain and its associated costs, yes. If you are in the domain reselling business, selling and buying domains, the process is as I described it. I never question my CPA.

Oh I understand but realize that accounting is something that's pliable and has a lot of aspects. I just didn't like you saying you can't take off $3k expense when you buy a domain when you most certainly can.

The cash method is very common and in truth a lot less complicated.

Your accountant and you have probably decided that the accrual method works best for you however you might want to make sure of that by consulting another accountant. I been with 4 (All CPAs) in the past 12 years but the past 6-7 years I do everything myself with tax software. Never had an issue.

I myself do not consider my primary income to be sale of domains it's actually a by-product of my web development and services business.

OP and anyone not comfortable with taxes should seek a CPA and not just the local H&R Blocks either. I mean a real business CPA hopefully one with internet experience. Having your taxes CPA signed is very comforting.

 

[domainerx]

IMO, A lot of returns are accepted and nothing done until that 'special project'. So if your returns went thru without problems the last couple of years, it doesn't necessarily mean you were correct when filing those returns.

 

[bmugford]

To actually pay taxes you pretty much need to turn a profit. I don't think this is even a problem 90% of the people on the forum have.

I better question for most is how to write off losses

Brad