10 US Laws Every Domainer Needs to Know
|
|
|
| 1.3/5.0 (4 votes total) |
|
|
|
Aviva February 01, 2008
|
After the overwhelming popularity of our first ecommerce law article, ‘12 US Laws Every Blogger Needs
to Know‘ it became clear that there is a lot of demand for concise, plain
talk, tech related legal information. In this, our second installment, we cover
‘10 US Laws Every DOMAINER Needs to Know.’
With top-level domains appreciating at as much as 94% per year by some
estimates, it is little wonder that domaining is the new ‘hot’ industry in
the internet world. But despite the rapid growth of domaining,
there is surprisingly little consensus as to what industry best practices are,
or even what laws apply to domaining. In this article we try to sort through the
legal and accounting mumbo-jumbo to explain ten of the most important US laws
when it comes to domaining and provide some simple and straightforward tips for
safely navigating them.
1. Domain Sniffing
“I had a really great domain name idea, which was available when I searched
through the registrar, but then five minutes later when I went to buy the name
it was gone.” Anyone who has been in domaining for more than a month has heard
dozens of versions of that same story. Although not
everyone buys that domain sniffing actually exists, there is mounting
evidence that domain sniffing
exists in some form or another. The real question is, what legal recourse do
you have against these sniffers?
What is the Law?
Unfortunately, simply having the idea to register a domain name first gives
you no legal claim to the name over the person who actually registered it. So in
this case, your best bet is to argue that your privacy was infringed upon or
that your proprietary information was taken. The US laws governing electronic
privacy and trade secret rights are a patchwork of various laws which often
overlap.
Like almost every electronic claim, your first step should probably be to
write a cease and
desist letter. If you want to write your own (they’re really easy) just use
this
form. Anything beyond a C&D letter and you’re probably going to need an
attorney, which may make the decision to fight economically inefficient.
Privacy Violation:
The key to any good C&D letter is to point to some concrete laws that you
believe the sniffer may have violated. In this case, the first stop is probably
the Computer
Fraud and Abuse Act which really focuses on hackers that actually get onto
your computer and / or steal your password or personal information. If you had
to use a password or login to run the domain search you should in include a
reference to 18 U.S.C. § 1030 (the actual code of the law) in your letter.
Economic Espionage:
The next legal protection is to argue that the domain sniffer may have
committed economic espionage of a trade secret, which is a violation of the Economic
Espionage Act of 1996
Generally speaking, the Electronic Espionage Act criminalizes theft for
economic purposes (which is clearly the intent of domain sniffers) and it
applies to US citizens, people operating in the US, or where the offence would
have a substantial effect in the US. The relevant code, in case you want to
include this in your C&D letter, is 18 U.S.C. § 1831-1839.
Wire Fraud:
If neither of the above two options applies, the best protection is probably
“wire fraud” which applies
generally to any fraud by wire (which includes the internet). The phrasing of 18
U.S.C. § 1343 (which is the relevant code) is pretty broad and applies where a
person has concieved of a scheme to defraud. Fraud is a crime punishable by up
to 20 years in prison, so this isn’t the sort of threat you throw around
lightly. Make sure you have good cause and make it clear that this is a
suspicion based on what you have seen and that you aren’t making an outright
accusation at this point.
Misappropriation of a Trade Secret:
The final law that you will want to throw in in almost every domain sniffing
C&D letter is a reference to the Uniform Trade
Secrets Act (18 U.S.C. § 1832) which has been adopted by 45 states. The
precise form of the law differs in every state, so you will have to look up the
appropriate code for the relevant state to reference in your situation.
Generally speaking, however, the law is as follows:
The act defines a trade secret as information, including a formula,
pattern, compilation, program device, method, technique, or process,
that:(i) derives independent economic value, actual or potential, from
not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and(ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
How to Stay Out of Trouble?
Never use a C&D letter to fight for a domain that you believe
might have been legitimately obtained. Making wild accusations, specifically
criminal accusations, is a good way to get yourself countersued.
Always closely adhere to the standard C&D form. Model Cease and
Desist letters are carefully tailored in a way that conveys that you’re serious
about getting your domain back, but that doesn’t expose you to liability. So
make sure that you cover your bases by using the model format.
Consider that some domaining experts believe that domain sniffing
does not actually exist, but is just the jealous reactions of paranoid domainers
whenever they miss out on a good domain. Make sure that you don’t contribute to
that reputation by claiming that domain sniffing was committed every time you
lose out on a domain.
2. TradeMark Issues
People who have never traded in domains before instinctually think that one
of the best domaining strategies is simply to buy up trademarked names and then
hold out for a big payday when the company who owns the trademark wants to use
it. Experienced domainers are not so naive as to think that buying Starbucks.com
or Comcast.net before the actual company gets it is a viable business strategy.
That said, there is a lot of gray area when it comes to domain name trademark
issues, and knowing what the law is can help save you some money.
What is the Law?
The Anticybersquatting
Consumer Protection Act, passed in November of 1999, made it easier for
individuals and companies to take over domain names that are confusingly similar
to their names or trademarks. But because trademark infringement cases were
long, drawn out, and prohibitively expensive, few cases ever made it all the way
to trial. As a result, the Internet Corporation for Assigned Names and Numbers
(ICANN) decided to streamline the process by creating the Uniform Domain Name
Dispute Resolution Policy (UDRP). In theory, the UDRP was a big improvement,
since it made domain name disputes faster and cheaper, and also created a single
three-prong rule for all domain name trademark disputes. In a UDRP case, the
party seeking control of the domain need only prove three things:
- The trademark owner owns the trademark,
- The party that registered the domain name has no legitimate right or
interest in the name, and
- The domain name was registered and used in bad faith.
While the three prong rule is succinct on paper, in practice, it is far from
straightforward. In particular, there is no clear definition of “no legitimate
interest” nor “bad faith.” Blatant cybersquatting or typosquatting is clearly
illegal under the three part test; such as buying “www.Gooogle.com” and sending
Google an email saying that you’re going to put up porn on the site if they
don’t buy it from you for $10,000,000. But for less clear
cases, such as whether holding “www.Googles.eu” is a violation of Google’s
trademark, the UDRP three-prong test provides little guidance.
It’s also important to keep in mind that just because a trademark isn’t
formally registered doesn’t mean it doesn’t exist. Trademarks
can arise both through registration and through use. Trademarks that arise
through use can equally be enforced in the US and in most countries (though not
China) against people trying to cash in by using a confusingly similar name.
How to Stay Out of Trouble?
Never register a domain in the name of a known existing trademark.
The days when cybersquatting was a viable business plan are long gone, and
attempting to do so now is just going to cost you time and money. Make sure to
check online for public trademarks, but know that any search you make is likely
to provide you with only a partial view of the existing trademarks.
Always remember that just because a company’s trademark is a part of
your domain name does not mean you are necessarily in violation of that
company’s trademark rights. There are a number of
exceptions including fair use, parody, non-commercial use, and non-competing
use that may apply. In addition, trademarks are not universal, so the fact that
the company holds a trademark in one area does not mean that their trademark
necessarily applies to your domain.
Consider that many large companies overstate their trademark claims
as a matter of policy. If you are a domainer with a lot of holdings, be prepared
for overzealous C&D letters claiming that anything remotely close to their
trademark is in violation of the law.
3. What Legal Entity Should I Use?
Many domainers started out with nothing more than a few hundred dollars and
an internet connection. So when it came to spending time and money to create a separate legal
entity, many domainers just chose to operate under the default legal form
DBA, which offers no legal protection. Even now, many domainers remain confused
about whether they need to form a separate entity, which one they should choose,
and why. Unlike other issues in domaining law, thankfully the laws surrounding
entity types are pretty straightforward.
What is the Law?
When you own domains yourself (as opposed to through a legal entity) your
personal assets, such as your personal savings, car, etc., are at risk if
something goes wrong. So for instance, if you’re being sued for a trademark
violation and you lose the case, you could lose your personal assets as well as
the company assets. Suffice it to say, forming a separate legal entity for your
domaining company is important.
There are a few
major options when deciding which entity to form, each of which has its
drawbacks.
C-Corporation:
Most Fortune 500 companies are C-Corp’s,
which leads many new domainers to believe that it is the right choice for them.
For domainers, C-Corps just mean an extra layer of 15% taxes, and probably
aren’t desirable unless your company is planning on going public (a.k.a. having
an IPO) in the very near future.
General Partnership:
There’s two of you in the company and you call yourselves partners, so the
logical choice is to form a partnership, right? Wrong. A general
partnership is the ugly stepchild to the LLC and S-Corp, because in a
general partnership there has to be one person or entity designated as the
general partner. Whoever that is doesn’t get limited liability. Thus, if your
company got sued and it was formed as a general partnership, the general
partners’ personal assets (personal savings, car, etc.) would all be included in
the pot of money that creditors or the people that sue you can get to.
S-Corp:
Given that a General Partnership or C-Corp aren’t likely the best choice for
your domaining company, the real choice is between an S-Corp and an LLC. Both
offer limited liability to all the members (unlike a General Partnership) and
neither has an extra layer of tax (unlike a C-Corporation). S-Corp’s are
advantageous because they allow the owners to allocate part of the company
income to a salary and part as a profit distribution, whereas an LLC treats all
company profits as salary. The distinction is important because a domainer’s
salary is subject to a self-employment tax, whereas passive income isn’t. So if
you think your company is going to make enough money that it would exceed a
reasonable salary for you, and if you are already planning on having employees,
which means you’re already going to prepare payroll tax returns, then the S-Corp
may be the way to go.
Limited Liability Company (LLC):
LLC’s are the
newest legal entities and they provide an advantage over S-Corp’s because you
can allocate profits in your company differently than you allocate ownership
interests. That means that if you want to keep 100% ownership of your company
but give your employees a share in the profits you can with an LLC (but can’t
with an S-Corp). They also have the advantage of requiring virtually no
paperwork or technicalities like an annual meeting of the shareholders to remain
in compliance. The downside is that all of your company profits are treated as a
salary, which means you’ll be paying more in self-employment tax than you would
under an S-Corp. For most one or two person domaining companies, LLC’s are the
way to go. They offer as good of liability protection as any other form, have
low tax obligations, and give you some flexibility in how you want to structure
profits.
How to Stay Out of Trouble?
Never form a C-Corporation or Limited Liability Partnership unless
you have good reason to do so and have checked with an accountant first. The
administrative, legal, and tax problems from a small domaining company’s
perspective make these pretty terrible options for most.
Always write up a reasonable long-term projection for your business
before choosing your entity. Deciding which legal form is best for your company
depends not only upon your current situation, but also on the future, and
getting it right early is a lot better than trying to fix things later.
Consider that the choice between an S-Corp and an LLC is a technical
one which depends a lot on whether you plan to have other employees or not. That
means that before you decide between the two options you should figure out
whether the people that work for you are considered “independent contractors” or
“employees” (discussed below).
4. What State to Legally Form Your Company In
If you poke around the list of Fortune 500 companies, you’ll find that the
vast majority are incorporated in Delaware
or Nevada.
The reason why, is that these states have developed a set of laws which are
predictable and which tend to favor corporations and their officers over the
people suing them. By contrast, some states lean the other way and tend to favor
plaintiffs.
What is the Law?
You can form your
company in any state you want, but wherever you do it, you’ll need to have a
mailing address. So if you decide you want to take advantage of the pro-business
laws in Delaware, you’ll need to cough up about $300 a year in order to pay
somebody to be your “registered agent” in Delaware. There are online services
which do this, but in essence it just means that you’re paying somebody in
Delaware to accept mail on your behalf if the State of Delaware ever needs to
contact you (such as when somebody is suing you).
When choosing between Delaware and Nevada, there is very little difference.
Delaware has been the historical choice for corporations, but to get in on the
act Nevada simply adopted all of Delaware’s corporation law, plus it provided
the added bonus of allowing anonymous shareholders, officers and directors by
not requiring that corporate information be public record. But if you’re not
interested in remaining anonymous, there’s virtually no difference between
Delaware and Nevada.
A common rumor is that you can avoid taxes by incorporating in Delaware or
Nevada. States tax businesses at different rates; unfortunately, however, your
state taxes aren’t tied to where you’re incorporated, but where you operate. So
whether you choose to incorporate in Delaware, Nevada, or any other place,
you’ll still be paying your home state’s taxes for any money you make.
How to Stay Out of Trouble?
Never attempt to avoid taxes by forming your company in another
state. It simply doesn’t work, despite the fact that seemingly everyone who
isn’t an accountant or lawyer thinks it does.
Always read up on what legal commentators are saying about the
corporate laws in your home state before forming your company. Some states are
particularly archaic (e.g. Pennsylvania) and you should probably avoid forming
there, despite the added cost.
Consider that a state’s corporate laws are determined by a variety
of factors, so there’s no way of predicting absent research which home states
are corporate friendly and which aren’t. Some states with a historically strong
union presence or states with no real history of any corporations at all tend to
be especially bad because the plaintiff’s lawyers bar is so strong relative to
the defense lawyer’s bar. That said, the only real way to know how your state
stands is to check with a local corporate lawyer.
5. Piercing the Corporate Veil
The primary reason for forming a legal entity and not simply operating your
business as a DBA is for limited liability protection. But you only get that
protection if the law recognizes your legal entity as separate from you or the
other officers in your company. Thankfully, the law governing whether to
disregard your separate legal entity, also known as “piercing the corporate
veil” is a single test.
What is the Law?
As a general rule, there are three situations in which a court will disregard
your separate legal entity and decide that your personal assets should be
included along with company assets to pay a lawsuit or creditor’s claim:
- when the entity is operated as the owner’s alter ego;
- when the corporation is under-capitalized; and
- to prevent fraud.
The “alter ego” prong is the most dangerous for domaining companies. In
practice, a court is looking for situations in which the owner treats the
company bank accounts and records as his own personal bank accounts and records.
It is most commonly found when there is only one owner of a company, and where
the owner is constantly dipping into company funds to pay personal debts and not
keeping good records of these transactions. Essentially, the “alter ego” rule
says that if you don’t treat your company assets as separate from your own, the
courts won’t either.
The “under-capitalized” and “prevent fraud” prongs are far less commonly
invoked, and thus the requirements meeting those tests are less clear. Generally
if you aren’t pulling every dollar out of the company as soon as its made so
that your company is constantly teetering on the point of failure, then you meet
the “under-capitalized” prong. The final prong, “to prevent fraud” is just a
general catch-all prong which allows courts to disregard a legal entity when
they feel like someone has complied with the letter, but not the spirit, of the
law.
How to Stay Out of Trouble?
Never borrow money from the company for personal expenses if you can
avoid it. If you have to do it, make sure that you keep very accurate records of
how much was borrowed, and when it was paid back. To be safe you should also
charge yourself a reasonable interest rate for the money borrowed.
Always keep separate financial records for your personal accounts
and your business. When purchasing or selling a domain make sure to do so in the
company’s name, not in your own, so there is never any doubt who is
transacting.
Consider that even if you keep meticulous records and otherwise
treat your company as a separate entity from yourself, the “prevent fraud”
catch-all test will always provide wiggle room for a court to disregard your
separate legal status. So you may want to consider not owning 100% of your
company, as companies with divided ownership interests are almost never legally
disregarded by courts.
6. Is your business a “business” or just a “hobby”?
Starting a domaining company involves some initial cash outlays to buy your
first round of domains, but often the revenue doesn’t come until much later.
Therefore, domaining companies commonly lose money their first few years. Just
because a company loses money, doesn’t mean it’s not a legitimate company; after
all, most of the airline companies lose money in their initial years of
operation. But for the IRS, showing losses in more than two out of any five
years is an automatic trigger that your business will be treated as a “hobby”
for tax purposes.
What is the Law?
For domaining companies in particular, it is important to be treated as a
“business” and not a “hobby” because you cannot deduct the losses from a
“hobby.” That means that you will not be able to use the losses in the early
years of your company to offset the profits you make as the company matures,
ultimately subjecting your company to paying much more in taxes.
The IRS has made the “more than two out of any five” rule because they want
to discourage people from creating fake companies just to get tax deductions.
Without the rule, for example, someone might start a “food review” company which
never turns a profit, but through which the person can deduct all of their meals
as business expenses. But since there are obviously a lot of legitimate
companies that lose money in more than two out of any five years, there is a set
of alternative indicators which a company can use to show that it is in fact a
“business” and not a “hobby.” The alternative factors are as follows:
- You carry on the activity in a businesslike manner.
- The time and effort you put into the activity indicate you intend to make it
profitable.
- You depend on income from the activity for your livelihood.
- Your losses are due to circumstances beyond your control (or are normal in
the start-up phase of your type of business).
- You change your methods of operation in an attempt to improve profitability.
- You, or your advisors, have the knowledge needed to carry on the activity as
a successful business.
- You were successful in making a profit in similar activities in the past.
- The activity makes a profit in some years.
- You can expect to make a future profit from the appreciation of the assets
used in the activity.
How to Stay Out of Trouble?
Never make any formal representation that your company is “just a
hobby.” Your company is a for-profit company, and your financial records should
indicate your intent to reach profitability.
Always include in your annual financial records an indication that
you are aware of your your company’s lack of profits and detail your plans for
achieving profitability. Whether your plan is as simple as waiting until your
domains have appreciated enough to sell them, or as complex as changing your
business structure, it is important to have a plan to profitability in writing
if your company is losing money.
Consider that accountants are largely unfamiliar with domaining
companies, thus, they might simply view the business as a hobby or some
illigitimate tax-evasion scheme. As a consequence, it is important that you
insist on treating your company as a “business” and not a “hobby” for tax
purposes, and to explain the reasons why to your accountant.
7. Donating Domain Names
Domaining is still an illiquid market. Although everyone agrees that
www.CreditCards.com is worth a lot more than www.buy-your-credit-card-here.com,
the actual value of either site might vary from estimates by more than 100%
based upon whether the right buyer comes along. Faced with the proposition of
selling what in the right buyer’s hands is a $100,000 domain for a mere $10,000,
a lot of domainers decide that they’d rather donate the domain name to their
favorite charity and take the full value of the site ($100,000) as a tax
deduction. Unfortunately, however, the law on how much you can deduct for your
domain donations is less friendly than most domainers would suspect.
What is the Law?
The real issue is how you classify your domains for tax purposes. They could
be intellectual property, inventory, business assets, government licenses, a
form of real estate, or a host of other things. The truth is, nobody really
knows yet how they should be treated, so together accountants and domainers are
taking their best guess and hoping they don’t get audited. At this point that’s
about all you have to go on, so the best thing you can do is be aware of your
options.
If you decide to treat your domains as intellectual property, analogizing a
domain to a trademark, you can only deduct the lesser of your cost basis in the
domain or the fair market value. Assuming the domain name has increased in value
since you bought it, that means that you only get to deduct the amount you paid
for the domain minus any depreciations you have made.
Treating your domains as inventory is similarly limited to the lesser of your
cost basis or the fair market value. Again, assuming the domain has increased in
value during the time you’ve held it, that means you only get to deduct the
amount you paid for it, which may make donating the domain no longer worth
it.
The only categorization of domains that really helps you when it comes to
making donations, is treating your domains as long-term business assets. Domains
which are classified as long-term business assets and which your company has
held for over one year can be deducted at the full fair market value.
How to Stay Out of Trouble?
Never take a sizeable deduction without some documentation. If
you’re doing your own taxes, the best way to stay clear of really big problems
is to document everything. Get a third party appraiser before a donation, and if
you don’t want to do that, at least have a listing of the selling prices of
comparable domains during that timeframe so you can show some support for your
deduction. Also consider, that if
the charity sells the domain, you can use the actual selling price as the
fair market value for determining the deduction.
Always stay consistent in the way you you decide to categorize your
domains. A surefire way to get nailed in an audit is to treat your domains as
business assets in one area and inventory in another. Whatever you pick, stick
with it.
Consider that if instead of donating the domain you just don’t renew
it, the IRS will let you deduct as a loss the amount you paid for the domain
above the registration cost (minus any depreciation you’ve already taken).
8. Employees v. Independent Contractors
So your domaining business is growing, and its time to turn the one-man shop
into a two or three person operation. The question is whether the people you
hire are going to be treated as employees or independent contractors. The
question is important, because there are a whole lot of things you have to do
for employees, such as withhold taxes, pay payroll taxes, and face increased
workplace legal liability, that you don’t have to deal with for independent
contractors. Thankfully, if you know the law ahead of time, you can often
structure the agreement between you and the people who work with you to achieve
independent contractor status.
What is the Law?
The common law test for distinguishing independent contractors from employees
is the level of control you exercise over the person. Specifically, more you
control how they do their job rather than what they do, the more likely
they are your employee. That’s a pretty fuzzy test, so the IRS has come up with
a list of twenty questions which they ask to help distinguish employees from
contractors. The more “yes” responses, the more likely the person should be
treated as an employee rather than an independent contractor:
- Is the worker required to follow your instructions in completing the job or
accomplishing the task?
- Do you provide the training necessary for completion of the job?
- Are the worker’s specific personal services required for successful
completion of the job?
- Are the worker’s services crucial to the success or continued existence of
your company?
- Do you set work hours?
- Does the worker have a continuing relationship with your company?
- Do you hire, supervise, or pay any of the worker’s assistants?
- Is the worker precluded from seeking assignments with other companies or
from refusing assignments offered by your company?
- Do you specify the location where the work must be performed?
- Do you direct the order or sequence of tasks to be performed?
- Do you require progress reports?
- Is the worker paid by the hour, week, or month, rather than for the
completion (or stage of completion) of the project?
- Does the worker work only for your company?
- Do you pay business overhead and incidental expenses?
- Do you provide equipment, tools, and materials?
- Is the work performed on your premises or using your facilities?
- Are the worker’s services not available to the general public?
- Do you provide a minimum “salary” and therefore shield the worker from the
risk of profit or loss on the job.
- Do you have the right to terminate the worker even if the job results are
achieved?
- Are you required to pay the worker for time spent even if the job is not
completed?
How to Stay Out of Trouble?
Never assume that simply calling the person an “independent
contractor” makes them so. The the courts and the IRS are smarter than that, and
both have said that the title of the person has no bearing on their
categorization.
Always write up a formal work contract which explicitly states the
level of control you’re going to exercise if you want to categorize your workers
as “independent contractors.” If you get audited, a signed work agreement is
really good protection for having treated your workers as “independent
contractors.”
Consider that this area is so complicated (and important) that the
IRS actually lets you get a determination letter by filing Form SS-8 with the
district director of your IRS service center. Unless you have a really unique
situation, however, a good lawyer should have a pretty clear picture of the line
and may help you avoid a few landmines.
9. Inaccurate Registration Information
You bought the domain, you built the landing page, you may have even built a
site on top of it. So why does somebody else now own your domain?
GoDaddy recently made
waves in the domaining world by allowing a slew of top-notch domains to be
re-registered by other GoDaddy customers because the original Whois listing was
inaccurate.
Thankfully, the ICANN laws surrounding Whois listings are pretty
straightforward, but unfortunately, the penalties imposed for breach are very
draconian.
What is the Law?
ICANN allows registrars to operate contingent upon their compliance with
ICANN regulations, some of which pertain to holding accurate Whois data.
Specifically, ICANN has issued RAA Regulation
3.7.7.2 which requires registrars to maintain accurate Whois records. If
they discover inaccurate or unreliable information, the domain owner has 15 days
to respond to an inquiry by the registrar. If the domain holder doesn’t respond
or fix the information, the registrar should “in the absence of extenuating
circumstances … cancel the domain registration.”
There are a number of lessons to be learned by reading the actual ICANN
regulation, the most important of which are that your registrar must give you 15
days notice before taking action, and that they are not required to cancel your
registration if there are extenuating circumstances.
How to Stay Out of Trouble?
Never include false information in your registrations. If you don’t
want to sort through a ton of “I’ll buy your domain for $50.00″ emails, opt for
an anonymous
registration, or a registration by proxy, although the anonymity isn’t always foolproof.
Always insist on your rights. If for some reason your domain is
deleted without the 15 day notice period because of inaccurate registration
information, then you have a strong claim to getting your name back. Also, make
sure that whatever email address you designate is one that is checked no less
than once a week.
Consider that if you can’t beat them, you might as well join them.
If you come across inaccurate Whois data you can report it to the registrar. If in fact the
information is inaccurate, you might get a shot at buying the domain.
10. Depreciating v. Deducting Your Domains
Let’s say in year one of your domaining business you make $1,000 and you
spend $1,000 in purchasing new domains … no income tax right? Probably not. One
of the most controversial issues with running a domaining business is how to
deduct and / or depreciate your domains. If you aren’t familiar with tax law,
deducting a business expense means that you get to subtract 100% of that cost
from your revenue to calculate your income. Depreciation, by contrast, means
that you only get to subtract part of the cost of the business expense in year
1, and another percentage in year 2, and so on. The bottom line, is that you
generally want deductions rather than depreciations because it means you pay
less in taxes now.
The IRS has categories of goods, some of which qualify for deduction and
others for depreciation, unfortunately, there is no clear category for domains,
so that leaves domainers and their accountants guessing.
What is the Law?
Although many domainers deduct in full their domain purchases, most tax
experts agree that they should be depreciated in some way. Where they disagree
is over how many years they need to be depreciated. IRS Publication 946 lays out the
various categories, and include 7-years as the default for any property that
doesn’t fit elsewhere. While there are a few tax experts arguing that there
should be a depreciation schedule that is longer than 7-years (or none at all),
this is probably a reasonably safe position. If you want to get aggressive with
your tax deductions, you’re probably safe depreciating your domains over 5-years
since most general business assets fall into that category, but trying to prove
that a domain name has anything shorter than a 5-year shelf life may be hard to
pull off if you get audited.
How to Stay Out of Trouble?
Always deduct in full the registration fee for any new registration
domains you buy. When you buy a previously unregistered domain, the entire price
you pay is the registration fee which is fully deductable. Again, “deductible”
means you get to subtract it 100% from your revenue all in the current year, so
this is a big tax advantage over depreciation.
Never depreciate your assets according to a useful life of less than
5 years, unless you’ve got some really good tax advice and possibly even an
opinion letter from an accountant saying he thinks you’re on strong ground.
Consider that a lot of the other purchases you make also have to be
depreciated (not deducted). For example, your work computer gets depreciated
over 5 years, while office furniture and equipment gets depreciated over 7
years. |