Tax Savings Tip for Domainers
November 25, 2008 by Rick Latona
The time to start your tax planning for 2008 is now, not in April of 2009.
While many people have blogged about domains and the tax implications, I’d like to discuss a new theory. First, some background.
I’m not a tax expert and I don’t play one on T.V. These are my thoughts and opinions. Consult your own accountant before making any decisions.
If you buy and sell domains for a living like I do, domains need to be declared as regular inventory. They are not an expense. So, if I pay $30,000 for a name, that’s a transfer of capital. It’s no different than having cash in the bank. The only expense part of the transaction is the 8 dollars or so in transfer fees.
If you buy domains as long-term holds and you aren’t in the business of selling names but do occasionally sell names, you would most likely be taxed at capital gains which is 15% here in the States as of this time. If you are in the business of selling names, you’ll be taxed at full income which between State and Federal you could be paying north of 40% in taxes.
Now here is something you can do now to limit your burden. Start hand registering names like a mad man. I, for one, am going to try and pick up 50,000 names by the end of the year. Everyone of those renewal fees are expenses. For every $10,000 you spend on registration and renewal fees you’ll save $1500-$4000 in real money. I’ve sold so many names this year that I’m looking at fresh registrations as if they come with a 40% discount.
Don’t believe the hype that all of the good names are taken. If you think outside-the-box, you can easilly come up with enough names to fit your budget.
The end result is an even more powerful portfolio, bought at a discount and less money to Uncle Sam, or whomever your uncle may be where you live.
“So, if I pay $30,000 for a name, that’s a transfer of capital. It’s no different than having cash in the bank. ”
Except your cash doesn’t expire at the end of a year.
Thanks for sharing that Rick. Going to run that by my accountant and see if that’s how it works here in Canada as well… Might have to reg me some new names
Great insight Rick,
Thanks for sharing this information - How does the broker side work for you if you dont own the name and get paid a commission do you decalare that as earnings and pay 40%?
Regards,
Robbie
This is one of the subjects I hate the most, but thank you for sharing the insight on Uncle Sam’s cut. I had not considered the expenses you mentioned, I think its time to fire my accountant and get a new one.
Dan
not sure treating reg fees as expense is the right way to go - marchex does not expense as incurred (from its 10-K):
The Company capitalizes costs incurred to acquire domain names or URLs, which include the initial registration fees, and amortizes the costs over the expected useful life of the domain names on a straight-line basis. The expected useful lives range from 12 to 84 months. In order to maintain the rights to each domain name acquired, the Company pays periodic registration fees, which generally cover a minimum period of 12 months. The Company records registration renewal fees of domain name intangible assets as a prepaid expense and amortizes the cost over the renewal period.
Michael, if it amortizes the expense over 12 months, isn’t that the same thing? It’s an anual fee so it wouldn’t make sense to amortize it any longer than that.
@ rick - i don’t think so - if you buy $1200 worth of domains on dec 1, 2008 then you would expense $100 in 2008 and $1100 in 2009 - you would still expense the entire $1200, it’s just a timing issue (2008 or 2009). i interpreted your post as you would expense the entire $1200 in 2008.
What if you just bought 5-10 domains this year, and only sold two for profit?
Should I even list it on my taxes if I made less than $100?
Michael, ICANN has always been very clear that you never own a domain name. What you own is the rights to the name. The name itself is leased. Lease payments can be deducted immediately, to my knowledge. I don’t spread out my lease payments for my computer equipment and I fail to see the difference.
Joe, I would.
fair point rick but you don’t file taxes w/ icann - this issue is obviously open to interpretation - i guess the point is that the tax filer has to document and substantiate his/her argument - whether that position is correct is ultimately decided by irs.
Silly advice, making an investment decision mainly because of a tax deducation sounds like a bad idea to me. If if the names wouldn’t be worth registering without the deducation then something is wrong.
So if I’ve spent $3000 in ‘08 all on hand reg’ed names is that $3000 a business expense that can be written off? I haven’t put any of my domains for up for sale thus for so I haven’t sold any. I’m currently focusing on buying and holding till the world economy turns around.
Thanks in advance.
-Lee