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Buying a website: is it a deductible expense?

     
2:06 pm on Sep 14, 2007 (gmt 0)

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Strictly speaking, business acquisition is not a deductible expense, the cost is capitalized.

But in the online world the border between expense and capitalization is so fuzzy! Sometimes, I buy a website that has no value beyond the development cost. I really just buy a script (a software), and I feel it is fair to write the expense off. It's like buying any other software for my office.

Of course, when you are buying a well established website, things might look different, but again, depending on the interpretation, at least part of the expense can be written off.

I am just wondering, how do you handle this?

The same question applies to domain acquisitions. I would certainly write off a new domain registration cost, but what about "valued" domains bought at the secondary market?

4:05 pm on Sept 14, 2007 (gmt 0)

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It depends on how you use it.

If you are buying a domain name on speculation, then it's more of an investment.

If you are paying a premium price for a domain name, then one could argue that the premium amount is goodwill and should be amortized like other goodwill.

5:07 pm on Sept 14, 2007 (gmt 0)

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You should certainly check with an accountant familiar with your tax situation, but I think LifeInAsia has covered the most common situation. Websites often have few tangible assets, so you are buying a bunch of intangibles.

It's language like this that keeps CPAs in business (from the U.S. IRS):

An intangible described in 197(f)(9) (a section 197(f)(9) intangible) is treated as
an amortizable section 197 intangible only to the extent permitted under 1.197-2(h).
The purpose of the anti-churning rules of 197(f)(9) and 1.197-2(h) is to prevent
the amortization of section 197(f)(9) intangibles unless they are transferred after the
applicable effective date in a transaction giving rise to a significant change in ownership
or use. Section 1.197-2(h)(1)(ii).

That's a totally random paragraph I plucked out of a publication for partnerships dealing with amortization of goodwill. Your CPA should know which regs apply to your situation and how to interpret them.
7:09 pm on Sept 16, 2007 (gmt 0)

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If you are paying a premium price for a domain name, then one could argue that the premium amount is goodwill and should be amortized like other goodwill.

I wonder if this might be a little different situation. The I.R.S. in the U.S. is big on saying you need to depreciate assets like this over the expected life of the asset, i.e. 30 years for commercial real estate, 3 years for computers etc.

However the question begs asking of your accountant (and IRS office) what is the expected life of an income producing web site? The fact is this will be different for every site. Some sites will be fads and come and go in a year or less. Some will have substantial value for several years and beyond.

I am not sure if there is an answer on this yet, although it wouldn't surprise me if some IRS tax junkie hasn't thought up a totally illogical regulation for this, but the question is what is the life of a web site and how can such a life be standard across all sites?

I would think there is a case to be argued by your accountant and you to the IRS on the exact length something like this might be depreciated.

 

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