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In the last blog I talk about ensuring that you have the accounts sorted out. Just like any business this issue is absolutely crucial to your domain business. Without good accounts you're flying blind.
 Here's the next problem. You may discover that the tax office in your country doesn't have a clue about how to treat domain names for taxation purposes. We finally approached one of Australia's highest qualified tax lawyers who after a few hours said, "This is really interesting, pay me lots more money and I'll see what I can work out."
Some people treat domains as stock items. This means that you are now trading in domain names and it will also mean that you will not be able to get any of the capital gains tax provisions for any domains that you sell, as they are just stock. You'll now have the joy of paying the corporate tax rate on each transaction. The other problem is if you don't treat your domains as stock items and still sell some of them then the tax office may consider that you are still trading in domains.
Is a domain name an asset? Under the terms and conditions of domains it specifically indicates that domains aren't an asset but a license agreement that is not owned by the domainer. Well, from an accounting perspective isn't a license agreement an asset and since it's controlled by the domain owner then it should be brought to the balance sheet? Not necessarily and here's the next issue, the license agreement typically expires after 12 months.
So how long can you depreciate a domain name over? There is a line of thinking that suggests that since a domain name expires after 12 months then you should be able to expense the cost of any domain name in 12 months. Sounds great but is unlikely to fly with the tax office. We've decided to depreciate our domain names over a number of years although there is a strong case that there should be no depreciate at all but rather appreciation.
There is one thing that is clear, you should be able to expense the registration for a domain name. In Australia we've applied the small business rules and have expensed any domain name purchase less than $1,000 and capitalised purchases over $1,000. This now means that you have the management overhead of having to keep track of every domain name transaction and the values you paid and sold for them.
I have a good domainer friend of mine that is being audited by his countries tax office and they've been VERY harsh and have expected documentation with every transaction. This could potentially mean the death of the "handshake" deals that are currently being made everyday in our industry.
As you can see the issue of how to best account for domain names is like quicksand. I would love the ICA (Internet Commerce Association) to see if they can plant a peg in the sand that we could all hang our hats on. This would provide certainty in our very fluid world.
Like all things related to business it is imperative that you seek your own advice for your own personal circumstances. I am only trying to provoke you to ask questions of your own advisors so that you can protect yourself from unpleasant financial outcomes.
Wiki: ICA
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