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Selling a Website, Any Advice With U.S. Tax issues?

how should it be taxed?

     
4:56 am on Apr 25, 2018 (gmt 0)

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I'm in talks to sell my largest website to a major corporation.

We're discussing seven figure amounts and while the amounts sound good I'm more worried about properly taxing whatever amount we agreed on.

I've spoken to several accountants and there appears to be confusion over whether or not the amount should be taxed as a capital gain or income - which is a huge difference if it's 20% or 39%, especially when it comes to a seven figure sum.

Because I've worked full-time on it since 2010 and generated very high revenue every year, while taking all of my deductions yearly on my tax returns, some accountants are having a hard time determining a cost basis. And one accountant warned that if I take a capital gain with a zero cost basis that I will likely trigger an audit, but at the same time he said I cant claim expenses over the years that I've already taken deductions on.

And other accountants are stating that I will have to show intent (if I get audited) that I started the site as an investment property to eventually sell one day - rather than a business to become my own boss and earn money. I've only worked full-time on the site for 8 out of the 15 years it's been online. I had a full-time job for the other seven years and the site was more of a hobby at first, but eventually exploded.

Even one tax attorney I spoke to was confused on how I should handle the tax end, because he's never had any client dealings with a website being sold.
5:02 am on Apr 25, 2018 (gmt 0)

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I would keep looking for an attorney with the specific experience needed to counsel you on this deal.
5:21 am on Apr 25, 2018 (gmt 0)

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@keyplyr, any pointers?

There has to have been members on here, over the years, who sold decent sized sites for big bucks.

If I have to bite the bullet and tax it as income at 39%, then so be it, but I would rather not.

It's actually 37% I think for 2018, but I may be getting confused because I think everything over 600K is taxed at 37% and the rest going down is taxed in brackets.

I do have the option to do a structured payout, where the sell amount will come to yearly instead of lump sum.
5:28 am on Apr 25, 2018 (gmt 0)

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Sorry no pointers. I'm not an attorney.

I think it's a mistake to give opinions about any type of legal matters if it's not from an attorney... and a qualified attorney who has specific experience with the issue at hand.
5:49 am on Apr 25, 2018 (gmt 0)

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There have been several discussions on this topic - both selling and buying - in the Domain Names Forum [webmasterworld.com] you might find points of interest for your own transaction there - but as keyplyr says, when it involves money, find the right attorney for your interests.
7:09 am on Apr 25, 2018 (gmt 0)

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Look at it this way.

Taking the most conservative numbers: 17% (37% - 20%) of $1 million (“seven figure amounts”) is $170,000. If you budget for an investment of 10-25% of the expected return, you’re looking at a minimum of $17,000 to find the right attorney.

Go spend the money. It might cost a heck of a lot more if you just cross your fingers and hope for the best.
8:51 am on Apr 25, 2018 (gmt 0)

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i'm quite certain there are many local attorneys qualified in the specialized legal and tax implications you are facing.
the ones who are worth anything will likely charge north of $400/hour.
if you are seriously talking seven figures you should find someone who is in more demand than a $400/hour attorney.

any "legal counsel", suggestions, personal experiences, etc described here should be taken with a grain of salt until you hear the same from a qualified attorney.

the difference could be a great 2018 vs a great retirement plan.
9:13 am on Apr 25, 2018 (gmt 0)

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For the moment, I'm waiting to receive a binding offer.

We're still in deep talks and have two conference calls lined for this week alone to discuss all sorts of details regarding site functions and trademarks. We already went over my financials in separate calls.

They may not send an actual binding offer until the sometime in May, I'm not really sure.

I may not even accept the offer. Ive had other big players approach me over the years (site is 15 years old), and I've turned them down for one reason or another.

The site in question generates a lot of money and has done so for years. I live very, very well, so an offer where 37% might go to taxes won't be that tempting if it maps out to a few minor years of revenue. However, part of their offer will be a multi-year deal to continue forward with running the website in my current editorial role - with a nice salary, but even that has not been discussed yet, so I have no idea what that salary would even be.

The negotiations will continue, I think, at least until early May. But this is the first time where I've actually even mulled the possibility of accepting an offer.

Once a contract comes, and there will be more than one, I can assure you that a legal counsel will look it over.
10:00 am on Apr 25, 2018 (gmt 0)

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I don't know for the USA, but when I have questions of this kind, I simple write my IRS's office. Explaining the situation simply, and they always answer me precisely, and giving arguments to the interpretation they have. I do what they tell me to do, and I keep preciously their answer, in case one day I have to explain why I did such or such thing. (nb: I never tried to optimize tax things, I am just doing what they tell me, like that I do not worry).
11:18 am on Apr 25, 2018 (gmt 0)

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You might even consider two attorneys, one based in corporate tax matters and another versed in intellectual properties. While the two might seem the same, they are very different in final outcomes.

Again, we can't give legal advice at WW, but we can have opinions.
3:43 pm on Apr 25, 2018 (gmt 0)

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I'm in talks to sell my largest website to a major corporation.
Because I've worked full-time on it since 2010 and generated very high revenue every year, while taking all of my deductions yearly on my tax returns,
You're confusing the issue- the website is an asset owned by your business, annual deductions deal with the operations of your business.

And one accountant warned that if I take a capital gain with a zero cost basis that I will likely trigger an audit,
Huh? Why on Earth would the IRS audit you when you paid the maximum possible taxes on a transaction? Best case scenario (for them) is the audit determines you were right. But it's much more likely an audit would determine a higher basis, resulting in a low tax.

but at the same time he said I cant claim expenses over the years that I've already taken deductions on.
That's certainly true.

All the talk about getting lawyers involved is probably not helpful- few of them understand the tax implications. You should be talking to a tax specialist who has experience in this issue- not necessarily an accountant, but an Enrolled Agent (EA) who can not only help you structure the deal for the best tax advantage, but will be able to justify your tax return to the IRS if/when you get audited. (Most accountants/lawyers can not represent you in front of the IRS.)

IANAL, but I was an EA before I went back to IT. I haven't dealt with something like this directly, and it's been several years since I did tax work. But if you treat the website as a revenue-producing asset, most accountants should be able to figure out how to treat it properly. However, since the site generates high revenue, I would argue that you're actually selling part of your business, not just an asset. As such, the value of your company's goodwill comes into play. So I change my suggestion- you should consult a tax specialist with experience with selling all/part of a business, preferably one that was e-commerce related.
3:50 pm on Apr 25, 2018 (gmt 0)

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when I have questions of this kind, I simple write my IRS's office. Explaining the situation simply, and they always answer me precisely, and giving arguments to the interpretation they have.
In the U.S., write 3 letters to the IRS and you'll most likely get 3 different answers. :) Especially if it is more than just a little complicated.
I do what they tell me to do, and I keep preciously their answer, in case one day I have to explain why I did such or such thing.
That will probably keep you from being charged with intent to avoid taxes, but most likely won't help you avoid penalties, and it definitely won't let you avoid interest on any tax differences.

Better to talk to a tax specialist who has a vested interest (his reputation, his liability for giving you wrong advice, and the potential to get/keep you as a long-term client) in providing you with the correct action.
4:04 pm on Apr 25, 2018 (gmt 0)

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@lifeinasia

Is the website considered a company asset if I've always filed normal taxes with a schedule C for deductions. I have an LLC (mostly to create a business bank account and protect my personal assets), but never filed corporate taxes because my accountant said "a one man LLC is viewed by the IRS as a sole proprietorship"
8:47 pm on Apr 25, 2018 (gmt 0)

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Is the website considered a company asset if I've always filed normal taxes with a schedule C for deductions.
Irrelevant. All forms of businesses (corps, LLCs, sole props) can have assets. Even individuals have assets. However, depending on how you have been deducting your expenses all along can affect things. I found this interesting read about amortizing/deducting website design costs [lansingbusinessnews.com].

Instead of treating it as a standalone asset, it might be better to include it as part of "goodwill" in regards to intangible assets. Again, you'll need to talk to a tax pro with experience in this area. I've been out of the tax game long enough to know I can't give concrete advice in this instance, especially without knowing more details about how you've been deducting things. My (minor) involvements in similar transactions have been either selling the entire company or selling just a domain (with no developed web site).
9:15 pm on Apr 25, 2018 (gmt 0)

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@lifeinasia

Ive been taking deductions for server costs, writers, video content, photo content, event travel, etc. Any site related costs to hiring coders, developers, scripts, items like Cloudflare, etc. Normal 1040 with a schedule C.

I spoke to the IRS' business department and they said the transaction should be treated as a normal business sale, regardless of whether or not it has a physical presence or an online presence.
9:24 pm on Apr 25, 2018 (gmt 0)

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I spoke to the IRS' business department

Get a letter , or eventually an e-mail, to have a proof of what they told you, just in case :)
3:03 pm on Apr 26, 2018 (gmt 0)

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I hope that those who took part to this topic to "help", will get a share of the sale :) (joking)