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(This tax law assessment is geared for U.S. business operations and will more than likely be different in other countries. The below should not be construed as legal advice and is meant simply as an informational article to help get you started in your research. We advise that you do all you own research and consult with a licensed Tax attorney for up to date and accurate process information.)
USA Tax Laws generally take a few years to be updated and applied to new business models. Domaining and Website Development have been two of those areas where the tax code laws continues to try and expand for coverage. For the small internet business owner or finance manager in charge of accounting and payroll, it can be a little confusing when it comes time to file taxes.
Valid U.S. IRS Expenses
A domain names cost becomes a viable tax deductible expense depending on how the expense occurred. All deductible expenses need to be identified. Deductible domain business expenses can arrive in a multiple amount of ways; Such as but not limited to: domain registrations, purchase of aftermarket domains, domain development, domain branding / logo / trademarking, hosting, maintenance, security, and routine revision / update work. Deductible U.S. tax laws vary depending on which category an expense falls into.
As a domainer / developer / website owner, the first thing you need to confirm is what type of tax treatment applies to your model. Is your model a Business or a Hobby?
Hobby Tax Treatment
Domain Hobbyists have a special tax treatment with the U.S. IRS since the agency understands that some hobbies can be a little profitable even though they aren't a full-fledged business. A tax payer notifies the IRS of a hobby's existence when filing their personal income taxes at the end of the year. The IRS tax rules normally allow expenses declared as a hobby to be excluded from the total income. Keep in mind that such expenses, whether they are domain / development / Internet-related or any other kind of expense, are not allowed to be more than the total profit declared for the year. Basically, this means that the domainer can't declare hobby income if it results in a loss. The lowest the hobby income can be is net zero as a dollar amount for the tax year. So domaining / development costs can be included if domain buying / collecting is the tax payers hobby, however the expenses cannot exceed the total income earned from the activity.
Business Tax Treatment
The U.S. IRS looks at domaining business costs in two ways: 1.) capital costs and 2.) ongoing, recurring business expenses. Hosting, General registration, Yearly renewal fees, added domain name protection / security, and recurring maintenance costs for domains are all considered regular business expenses. These are deductible from income a business may earn in the same tax year.
Also note that when a domainer makes a purchase on a domain that already exists (aftermarket), or invests heavily to develop that domain name as a brand and trademark, the U.S. IRS looks at the related expense as a solid and permanent business benefit. These expenses are considered capital costs that need to be depreciated as time goes on, just like a company vehicle purchase would be reported and incur a value depreciation. Doing this reduces the deductible benefits of a domains expense against a single year's income.
Document Everything
For both; a business or hobby that involves a domain investment cost, documenting everything provides the best results for defending one's case to the U.S. IRS. Receipts, invoices, emails involving payments, and bank statements provide valid, legal proof of expenses with sufficient detail to identify the domain cost and the sources of charges. Verbal or 3rd party hearsay normally fails any practical level of proof for U.S. tax agencies
Domain Audits
If you find your domain hobby / business being audited, try to avoid stressing out or assuming the worst. U.S. IRS reviews, (E.G. audits) occur regularly, so it's normal. A U.S. IRS Audit can be triggered by an automatic screening process, red flag areas of your tax document, randomly selected or 3rd party report provided to the IRS. You'll need to rely on your detailed documentation and explain your actions clearly. You can then work with the auditor to close / dismiss the case in a timely fashion. NEVER delay in responding or ignore an audit; this can result in some serious penalties.
U.S. IRS Law References
General Business Tax Information
Online Auction sellers
Self-Employment Taxes
Internet Sales Tax Laws by U.S. State
Below is important for U.S. Domainers using payment processors.
USA Tax Laws generally take a few years to be updated and applied to new business models. Domaining and Website Development have been two of those areas where the tax code laws continues to try and expand for coverage. For the small internet business owner or finance manager in charge of accounting and payroll, it can be a little confusing when it comes time to file taxes.
Valid U.S. IRS Expenses
A domain names cost becomes a viable tax deductible expense depending on how the expense occurred. All deductible expenses need to be identified. Deductible domain business expenses can arrive in a multiple amount of ways; Such as but not limited to: domain registrations, purchase of aftermarket domains, domain development, domain branding / logo / trademarking, hosting, maintenance, security, and routine revision / update work. Deductible U.S. tax laws vary depending on which category an expense falls into.
As a domainer / developer / website owner, the first thing you need to confirm is what type of tax treatment applies to your model. Is your model a Business or a Hobby?
Hobby Tax Treatment
Domain Hobbyists have a special tax treatment with the U.S. IRS since the agency understands that some hobbies can be a little profitable even though they aren't a full-fledged business. A tax payer notifies the IRS of a hobby's existence when filing their personal income taxes at the end of the year. The IRS tax rules normally allow expenses declared as a hobby to be excluded from the total income. Keep in mind that such expenses, whether they are domain / development / Internet-related or any other kind of expense, are not allowed to be more than the total profit declared for the year. Basically, this means that the domainer can't declare hobby income if it results in a loss. The lowest the hobby income can be is net zero as a dollar amount for the tax year. So domaining / development costs can be included if domain buying / collecting is the tax payers hobby, however the expenses cannot exceed the total income earned from the activity.
Business Tax Treatment
The U.S. IRS looks at domaining business costs in two ways: 1.) capital costs and 2.) ongoing, recurring business expenses. Hosting, General registration, Yearly renewal fees, added domain name protection / security, and recurring maintenance costs for domains are all considered regular business expenses. These are deductible from income a business may earn in the same tax year.
Also note that when a domainer makes a purchase on a domain that already exists (aftermarket), or invests heavily to develop that domain name as a brand and trademark, the U.S. IRS looks at the related expense as a solid and permanent business benefit. These expenses are considered capital costs that need to be depreciated as time goes on, just like a company vehicle purchase would be reported and incur a value depreciation. Doing this reduces the deductible benefits of a domains expense against a single year's income.
Document Everything
For both; a business or hobby that involves a domain investment cost, documenting everything provides the best results for defending one's case to the U.S. IRS. Receipts, invoices, emails involving payments, and bank statements provide valid, legal proof of expenses with sufficient detail to identify the domain cost and the sources of charges. Verbal or 3rd party hearsay normally fails any practical level of proof for U.S. tax agencies
Domain Audits
If you find your domain hobby / business being audited, try to avoid stressing out or assuming the worst. U.S. IRS reviews, (E.G. audits) occur regularly, so it's normal. A U.S. IRS Audit can be triggered by an automatic screening process, red flag areas of your tax document, randomly selected or 3rd party report provided to the IRS. You'll need to rely on your detailed documentation and explain your actions clearly. You can then work with the auditor to close / dismiss the case in a timely fashion. NEVER delay in responding or ignore an audit; this can result in some serious penalties.
U.S. IRS Law References
General Business Tax Information
Online Auction sellers
Self-Employment Taxes
Internet Sales Tax Laws by U.S. State
Below is important for U.S. Domainers using payment processors.
Source: Payment Processor 1099 Tax ReportingUnder the new legislation, payment processors will be required to report to the IRS the total payment volume received by their customers in the US who:
- Receive more than $20,000 in gross payment volume in a single year, AND
- Receive 200 or more payments in a single year.
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