After looking at the poll results I was surprised by the number of people that were interested in hearing about how to run a domain business. When I sat down and thought about it I realised just how confusing it can actually be.

Running a domain business is like any other business with a twist. The first thing that you need to do is ensure that you keep a tight reign on your accounts. The numbers of domainers that I've spoken to that do not understand the difference between profit and cash is quite scary. This is very important as I'm sure that the taxation office in your country will get it right every time.

To illustrate the problem let's imagine that you've earned $100,000 and spent all of the income on 8 domains for $10,000 each for a total of $80,000. Let's imagine that your total expenses for the year were $20,000. Many domainers look at this and say that they made $0 profit for the year, which means that they don't have any tax to pay.

WRONG! The tax office will actually view your accounts as $100,000 income less $20,000 expenses which provides a profit of $80,000. Depending upon your country they will then ask for about a third of that amount or just under $30,000. The reason for this is that you purchased $80,000 worth of capital assets which in Australia can not be expensed in that year.

The really bad news for the domainer is that they don't have $30,000 worth of cash to pay for their taxes. Whoops! Have you ever noticed that a number of high value domains always come onto the market around tax time? We all have to pay the tax man.

The challenge for the domainer is to not do that brilliant deal and spend the tax man's money, as he will come knocking at the door.

What I've learned over the years is that it is vital to the success of any business to have a good book-keeper and an even better accountant. I find that my book-keeper and accountant keep each other "honest" and ensure that I'm kept out of trouble. I would HIGHLY recommend that if you haven't gotten advice in the financial area that you do so immediately. Domains are a new area for the tax man and he's likely to take a hard line with them.

In my next article I'll go through some of the other domain business mine fields that I've seen people fall into.

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