Purchase of web site

[tmike]

I have a small business client that has recently purchased an existing web site(domain) for 25K. Is this something that should be amortized, treated as 3yr. property(software), section 179, expensed as an advertising cost or any other option? I have not dealt with this one before and cannot find any clear guidance. Any help would be much appreciated. -Mike-

[ed_accountant]

I would suggest capitalizing and amortizing over 3 years or it's estimated useful life due to the large amount.

Per, http://www.irs.gov/publications/p946/ch01.html

"Computer software. Computer software is a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

It is readily available for purchase by the general public.

It is subject to a nonexclusive license.

It has not been substantially modified.

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. "

Here is an interesting link to an IRS examination Technique guide:

Retail Industry ATG - Chapter 3: Examination Techniques for Specific Industries (Electronic Business, Online Retail)

http://www.irs.gov/businesses/small/articl...=141491,00.html

"The tax treatment of the following items may result in potential tax issues. Many of these potential issues boil down to capitalization versus expensing and timing of deductions. The tax treatment of these items is still under consideration by Counsel and issues involving the tax treatment of these items and online retail should be referred to the E-Business & Emerging Issues staff for assistance.

Business Start-up Costs (Internet Business)

Acquisition of Domain Name(s) and Website Development Costs

Acquisition of Hardware

Acquisition of Intangibles, including Costs of Production of Literary Content, Graphics, Sound or Video

Acquisition of Software and Software Development Costs Lease Expense

Catalog Costs

Research & Experimental Expenditures and Credit "

[Julie]

I don't think the purchase of a domain name (essentially an exclusive license to a given web address) or a web site (going business) would qualify as a software purchase. If I understand the question correctly, this might be closer to buying a trade name. (sec 197, see pub 535 p 27.)

I would suggest capitalizing and amortizing over 3 years or it's estimated usefule life due to the large amount.

Per, http://www.irs.gov/publications/p946/ch01.html

"Computer software. Computer software is a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

It is readily available for purchase by the general public.

It is subject to a nonexclusive license.

It has not been substantially modified.

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. "

Here is an interesting link to an IRS examination Technicque guide:

Retail Industry ATG - Chapter 3: Examination Techniques for Specific Industries (Electronic Business, Online Retail)

http://www.irs.gov/businesses/small/articl...=141491,00.html

"The tax treatment of the following items may result in potential tax issues. Many of these potential issues boil down to capitalization versus expensing and timing of deductions. The tax treatment of these items is still under consideration by Counsel and issues involving the tax treatment of these items and online retail should be referred to the E-Business & Emerging Issues staff for assistance.

Business Start-up Costs (Internet Business)

Acquisition of Domain Name(s) and Website Development Costs

Acquisition of Hardware

Acquisition of Intangibles, including Costs of Production of Literary Content, Graphics, Sound or Video

Acquisition of Software and Software Development Costs Lease Expense

Catalog Costs

Research & Experimental Expenditures and Credit "

[BulldogTom]

I am with Julie on this one. I think 15 year amortization.

Tom

Lodi, CA

[tmike]

Thanks for the input. My client is an on line retailer and bought an existing site that did the same thing. Given the world we live in today I was hoping to find some clear guidance with this issue but could not find any. Are most of you using section 197 amortization? -Mike-

[Lion EA]

What if the price were substantially lower? I was able to buy my domain name DollarsSense.com for $700. (I already had DollarsSense.biz for $39 for three years or something like that.) Do I really have to amortize that over 15 years?

[OldJack]

I am a little late in posting to this subject.

Since this is really a right to the use of a website rather than owning much of anything, I would go with either the 3 year write-off or just expense the whole thing as a ordinary business expense since the purchaser is in the same business before. I would take that position inasmuch as the IRS really has no idea what their position is on this situation. In other words if in doubt.. deduct (assuming client agrees).

[TAXBILLY]

Welcome back Old Jack! We missed your expertise and advice.

taxbilly

[OldJack]

Why thank you for the nice comment, taxbilly!! I don't know about such expertise, but I always have an opinion. :)