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Filing Taxes: Deducting the cost of a website purchase

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Filing Taxes: Deducting the cost of a website purchase

Postby Cynthia » Sun Sep 07, 2008 2:23 pm

I'm not finding any information on this topic in IRS documents so I'm hoping someone here will have some info to share.

How would you deduct the cost of a website purchased? I do all business under my sole proprietorship DBA account and file all on my personal tax return.

It seems this would be an assets expense to place as a MACRS Depreciation but I may be way off on that. Has anyone here purchased a website and deducted that expense over time or as an outright one time deduction?

Thanks!
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Re: Filing Taxes: Deducting the cost of a website purchase

Postby kirkward » Sun Sep 07, 2008 2:35 pm

Cynthia wrote:I'm not finding any information on this topic in IRS documents so I'm hoping someone here will have some info to share.

How would you deduct the cost of a website purchased? I do all business under my sole proprietorship DBA account and file all on my personal tax return.

It seems this would be an assets expense to place as a MACRS Depreciation but I may be way off on that. Has anyone here purchased a website and deducted that expense over time or as an outright one time deduction?

Thanks!

Cynthia,

The purchase of an ongoing "website" would be considered the same as the purchase of an ongoing business, with the same rules for handling goodwill, etc., not as an asset under MACRS.

If you have allocated some of the purchase price to assets such as the pages and software used on the site, you may be able to deduct it under the rules for deducting software purchases. An "after the fact" allocation is not allowed.

Monthly hosting and service charges are expensed.

I've been out of it too long to give you actual charts and tables, but hopefully those guidelines will help you find the appropriate pubs and code sections.

Kirk
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Postby Cynthia » Sun Sep 07, 2008 3:05 pm

Hi Kirk and thanks for your reply. :)

I've never purchased a business so I have no idea how to file it the same as an ongoing business. All my searching at IRS just brings up pages and pages of business purchase information but nothing specifically about the lump sum cost of business. Can you give me some direction? Thanks!
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Postby Cynthia » Sun Sep 07, 2008 3:21 pm

I found this here: http://www.irs.gov/publications/p551/ar02.html

Would this be my starting point?

Trade or Business Acquired

If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order.

1.

Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.
2.

Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes.
3.

Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business.
4.

All other assets except section 197 intangibles, goodwill, and going concern value.
5.

Section 197 intangibles except goodwill and going concern value.
6.

Goodwill and going concern value (whether or not they qualify as section 197 intangibles).

Agreement. The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.

Reporting requirement. Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594 to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.

More information. See Sale of a Business in chapter 2 of Publication 544 for more information.
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Postby kirkward » Sun Sep 07, 2008 3:52 pm

That it are.

Item six, goodwill is basically what is left over. I think they have new rules for that. Used to be that you could not deduct it.

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Postby Cynthia » Sun Sep 07, 2008 4:07 pm

Thanks Kirk :)

More digging I found the form to file - Form 8594 Asset Acquisition Statement
Form Under Section 1060

All of the cost is seemingly coming under goodwill and intangible assets. The sales contract gives the full sale amount in Exhibit C "Allocation of Purchase Price" as Intangible assets and goodwill --- $xx,xxx.xx

Still a bit lost about how to deduct the amount paid though... :(
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Postby kirkward » Sun Sep 07, 2008 4:21 pm

Cynthia wrote:Thanks Kirk :)

More digging I found the form to file - Form 8594 Asset Acquisition Statement
Form Under Section 1060

All of the cost is seemingly coming under goodwill and intangible assets. The sales contract gives the full sale amount in Exhibit C "Allocation of Purchase Price" as Intangible assets and goodwill --- $xx,xxx.xx

Still a bit lost about how to deduct the amount paid though... :(

Hi Cynthia,

Previously you could not deduct goodwill. I think there is now a provision that allows it, over a period of time. It may be as many as fifteen years. I'll look and see if I am right or wrong ... it's usually a tossup.

Kirk
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Postby kirkward » Sun Sep 07, 2008 4:24 pm

FS-2007-17, March 2007

The Internal Revenue Service has issued a number of educational fact sheets reminding taxpayers to know the rules for deducting several specific business expenses. This fact sheet, the tenth in the series, reminds taxpayers to follow appropriate guidelines when deducting expenses that fall under the category of “Other” on the Schedule C, Profit or Loss from Business.

“Other” business expenses account for just part of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

In general, taxpayers may deduct ordinary and necessary expenses incurred in conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Although many common expenses are deducted on designated lines of the tax schedule, some expenses may not fit into a particular category. Taxpayers can deduct these as “other” expenses. A breakdown of “other” expenses must be listed on line 48 of Form 1040 Schedule C. The total is then entered on line 27.

Examples of “other” expenses include:

* Amortization of certain costs, such as pollution-control facilities, research and experimentation, and intangibles including goodwill.
* Bad debts. Business bad debts must be directly related to sales or services provided by the business, must have been previously included in income and must be worthless (non-recoverable). If a taxpayer deducts a bad debt expense and later recovers it, the amount must be included in income in the year collected.
* Business start-up costs. These are costs related to creating an active trade or business, or investigating the creation or acquisition of an active trade or business. Generally these costs are amortized. However, taxpayers who started a business in 2006 may elect to deduct up to $5,000 of certain start up costs, subject to limitations. Refer to chapter 7 of Publication 535, Business Expenses, for more information.
* Gulf Opportunity (GO) Zone clean-up costs. Fifty percent of qualified clean-up costs for the removal of debris from, or the demolition of structures on, real property located in the GO Zone which are paid or incurred in 2006 are deductible as “other” expenses. The property must be held for use in a trade or business, for the production of income, or as inventory.

Personal, living and family expenses, do not qualify as deductible “other” business expenses.

Further information is available in IRS Publication 535, Business Expenses.

**********************

I'm going to Pub 535 now.
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Postby kirkward » Sun Sep 07, 2008 4:26 pm

See Pub 535, Page 27 regarding deducting Section 197 expenses over 180 months.
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Postby Cynthia » Sun Sep 07, 2008 4:35 pm

Thanks so much!

Do you still work in accounting Kirk?
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Postby alexc » Sun Sep 07, 2008 6:14 pm

Additionally it probably would not hurt to talk to a CPA for this years taxes just to ensure that you get all the information you need and have someone able to walk you through all the forms and processes. Not that Kirk hasn't done an amazing job providing information, it is just handy to have someone right there who is current and able to assist you.
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Postby Cynthia » Sun Sep 07, 2008 6:16 pm

Problem is I live abroad so that's not as easy as it might be for someone living in the US. Unless, of course, there are CPAs who do phone or email assistance?
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Postby alexc » Sun Sep 07, 2008 6:28 pm

Ah, well that does change the situation a bit to be sure. But I'm always up for a challenge :) First stop, go to the U.S. Embassy and see if they can't help put you in touch with a local US tax professional. They almost certainly have someone that they can recommend. Next step, check out this website: http://tax.aicpa.org/ and http://www.cpadirectory.com/ to get a list of CPAs and go from there.
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Postby kirkward » Sun Sep 07, 2008 6:29 pm

Cynthia wrote:Thanks so much!

Do you still work in accounting Kirk?

No Cynthia,

When I got old, tired and ugly, I retired and have started trying to earn an untraceable income on the internet that I can hide in an offshore bank account in some Caribbean hideaway.

Shhh.
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Postby Cynthia » Sun Sep 07, 2008 6:32 pm

LOL!

Mums the word Kirk. :D You should write an ebook on the topic and sell it!

Alexc - thanks! I'll check that out.
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