Tax Treatment of Domain Name Costs
In the early days of the Internet, little precedent existed for how domain names were handled from an income tax standpoint. Central to the debate was whether they should be considered assets or expenses, but a 2003 U.S. Appeals Court ruling helped answer that question. Since then, the laws that govern domain names have continued to evolve, and the issue of tax treatment has become more clear.
Decide Whether It's an Asset or an Expense
The Internal Revenue Service treats assets differently from expenses, and which category your domain name falls into will affect your tax situation. In 2003, U.S. Appeals Court Judge Alex Kozinski reversed a lower court’s ruling that domain names didn’t meet the basic legal definition of property. His decision in Kremen v. Cohen -- the Sex.com case -- established that domain names could be considered “intangible property.” Because a domain is property, it can be treated as an asset, particularly if it's critical to a business’s brand identity -- as with Amazon.com. In other scenarios, however, such as ancillary domains that forward to your main website, they can be considered a recurring expense. That said, even if your primary domain is considered an asset, the hosting and renewal fees can still be deducted as expenses.
Domains as Assets
A domain name can be considered an asset in several situations. If a domain name is purchased and developed into a brand identity, the IRS generally regards the money spent as capital costs that have to be depreciated over time. In this case, the value in a domain that makes it an asset is its role in brand recognition, which can result in long-term business benefit. If you buy domains with the intent to sell them later, they could be treated as inventory and expensed as cost of goods sold. Another scenario is someone who buys domains and finds ways to monetize the traffic that passes through them. Such domains are basically tools used in the generation of revenue -- assets, in other words.
Domains as Expenses
Domains have to be renewed periodically to maintain your ownership of them, and you can add services and protections, such as private registration and hosting space. Those fees, payable to registrars like Network Solutions or GoDaddy, are considered recurring expenses. Even if your domain is your business's brand identity, those maintenance fees aren't adding to its value. As mentioned above, domains purchased simply as "forwarding addresses" usually don't add value to your brand. For example, you might decide to purchase a domain that's a common misspelling of your business's name to increase traffic to your website. Those can be treated as expenses.
Keep a Paper Trail
One of the basics of accounting -- and taxes -- is documentation. Being able to prove what you spent and why you spent it can save your bacon if the IRS ever decides to audit you. It will also help your accountant decide how to treat your domain names to minimize your tax bill.
Christopher Williams has owned and operated his own small business since 2002, and has a wide range of professional experience in retail, sales and insurance industries. He's been writing professionally since 2004.