Website purchases are assets or expenses?

[daled1]

I've been operating as a sole proprietor.  I usually buy a few websites each year for their income.  I fix them up, improve them, and hopefully increase the income or create income when there was none before.  I typically hold them for more than a year. I've been treating these purchases as expenses and deduct the entire thing in the tax year I bought them.  I just realized I probably should treat them like assets and not expenses, any opinions on that? And if so, should I amend all my previous tax returns or start anew?

[view2 · Accepted solution]

Domain names are generally regarded as intangible personal property. The nominal annual domain name registration fees are generally deductible.

http://www.irs.gov/irm/part4/irm_04-043-001-cont04.html

Intangibles

You must generally amortize over 15 years the capitalized costs of “section 197 intangibles” you acquired after August 10, 1993.

You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Intangibles

However ,  the  domain  name  is  not  a capital asset if held by someone who is in the business of buying and selling domain names (Panavision Int'l v. Toeppen, 141 F.3d 1316 (9th Cir. 1998).).
If you buy domains with the intent to sell them later, they could be treated as inventory and expensed as cost of goods sold. But when you use them for producing income  the character changes.The IRS looks at the related expense as a solid and permanent business benefit. These expenses are considered capital costs that need to be depreciated .

[92krosado]

I bought a web domain for a friends personal beautician business but it is for booking and publicity only. She is the one goint to make a profit from the traffic. I just helped her get started. But I also actively develop it. So I do not know what to categorize this web domain of mine. Is it an itemized deduction? Business expense? etc. help?

[view2]

When you purchases a domain name that already exists, or invests heavily to develop that domain name as a brand and trademark, then the IRS looks at the related expense as a permanent business benefit.Such expenses move toward capital costs that need to be depreciated over time,

[92krosado]

No it didnt already exist. But yes I am trying to develop her website thoroughly so she can gain her own profits. So can guide me as to where to categorize this ? Is there a section for capital costs? how do i show its depreciation?

[view2]

Are you in the business of buying and selling domain names ?

[92krosado]

No i am not. I just bought her domain to help her get her prospective business going. Also she has YET to profit from it. And i am not at all a domain professional in anyway.

[view2]

The U.S. IRS looks at domaining business costs in two ways:( 1.) capital costs and( 2.) ongoing.  Amortize that purchase over 15 years  §§197 and 1060 will likely apply to determine the tax treatment.

[92krosado]

So is it a personal expense or a business one? and since its not related to any of my businesses that i run where do i categorize it? on turbox tax. This my first year making a tax return.

[view2]

You bought it you own it depreciate it.

[Critter1]

I wouldn't amend anything but are they assets? Do you / could you sell them later? Are they more than $100?  If so you could list them as assets and then use the 179 deduction to deduct the cost in one tax year. Effect is the same but it insulates the expense from possible IRS audit.

[daled1]

Thanks for the response!  Yes I can sell them later.  And they are more than $100.  But it looks like 179 only includes "off the shelf" software.  I doubt websites would apply.  So you think its pretty clear they are assets?  But you don't think I have to amend previous year returns?

[Critter1]

It's a very grey area, entering as assets is an anti audit technique. Use the other /7years category and not "software".

[TaxGuyBill]

Unfortunately, I don't think they qualify for Section 179.
<a href="http://www.irs.gov/publications/p946/ch02.html#en_US_2013_publink1000107395" rel="nofollow" target="_blank">http://www.irs.gov/publications/p946/ch02.html#en_US_2013_publink1000107395</a>

I agree, they seem more like assets to me.  Or **possibly** inventory.  I don't think I would amend anything, but I would change how you handle it from now on.

These websites probably cost more than this, but it costs $200 or less, don't depreciate it, just deduct it.  If you have a "policy" at the beginning of the year to deduct (rather than depreciate) items under $500, then you can change that $200 threshold to $500.

[TaxGuyBill]

Section 197, why didn't I think of that?   🙂   View2, you should change your comment to an answer.

View2 is correct.  It needs to amortized (similar to depreciation) over 15 years.

Although it sounds like you are buying the ENTIRE existing website (not just the domain name), unless you are buying something physical ('tangible'), you are buying the existing business ('goodwill' and 'going concern') and it is still amortized over 15 years.

In the event you are buying them for less than the $200 (or $500, see my comment above), you can still just deduct the expense.