Tax Question

[karter9977]

I have a quick question. I hired a CPA and everything but I wanted to make sure what he is telling me is correct.

Lets say I buy a name in December of 07 for 1k and then I sell the name in Jan. of 08 for 2k. My CPA says I file the 1k as an expense for 07 and the 2k as a sale in 08. Is this correct? I always thought I would have to do some sort of adjustment becuase then wouldnt people just spend all their money on domains on December 31st and then just sell them on Jan 1st, so that they would hardly pay any taxes for 07? I mean eventually you will pay the taxes but I guess its about deferment.

Is he right or do I need to do some type of adjustment?

Thanks

Steve

 

[Theo]

Well, technically the CPA knows best However, it depends on the method used.
I believe what he quotes is the simple inventory method: purchases are expenses and sales are income.

Using another accounting method, all purchases are not accounted for as expenses until the sale occurs. This allows for lower tax rate of 15% ONLY if you hold the domain for 1 full year plus a day. That's when you'd subtract the purchase/acquisition price from the sale price and tag the result as revenue (or loss).

 

[karter9977]

Thanks Acro.

Yea he wants me use the Cash Accounting method like you said.

Steve

 

[Theo]

Hiring a CPA for tax handling should be a top priority of any professional. As an added bonus, it's ...a deductible expense

 

[DNPlan]

It would be interesting to see a Letter Ruling from the IRS on how the acquisition price of a domain should be handled.

Personally, to be conservative, I treat the acquisition cost and the annual license fee separately:

1. I treat the acquisition cost as the price of the intangible asset (this gets deducted at the time of sale against the sale price).

2. I treat the yearly renewal fee as a licensing expense and technically this should be pro-rated i.e. part of it should be deducted as an expense this year, and the part that is for the next year should be deducted as an expense in the following year.

If you describe a domain as intangible property with an annual licensing fee - that is the way most CPA's will treat the two different aspects of your costs.

Now my closest friend is more aggressive, he expenses 100% of everything in the year it is paid <grin> ... and he treats the "asset value" of a domain name as zero on the books ...

There is an old joke about how to tell a good accountant by asking him what the number should be - a good accountant will ask you what number do you want it to be ...

While I don't agree with that joke ... you might ask yourself what you want your personal financial statements to look like ... do you want it to look like you have zero assets? Then expense everything ... do you want it to look like you are asset rich? Then carry the acquisition cost of the domain on your books as an asset ...

I'd rather be conservative and my approach is the most audit proof ... personally, I don't want to try to explain to an auditor why I deducted an "investment" of $10,000 as an "expense" ... they wouldn't let you get away with it "expensing" an investment of $10,000 in IBM stock <grin> ...

Best of luck ...
Greg

 

[2ndWave]

I think you can treat it the same as when your selling a stock and treat it as a capitol gain. That would give you the lowest tax rate.

 

[NameYourself]

I treat the acquisition cost as the price of the intangible asset (this gets deducted at the time of sale against the sale price).

I'd rather be conservative and my approach is the most audit proof ... personally, I don't want to try to explain to an auditor why I deducted an "investment" of $10,000 as an "expense" ... they wouldn't let you get away with it "expensing" an investment of $10,000 in IBM stock <grin> ...

Best of luck ...
Greg

A very safe and good approach, especially if one is investing long term, developing, and selling very rarely. It usually all depends on how your business operates. One who buys and flips names regularly might be advised to use more of an inventory-based method. Best way is to hire a CPA and let them advise you best for your particular case.