Domain Tax Tip
I should preface this post by saying I am not anything close to a tax expert, and in fact, I received a D in Financial Accounting in college (granted I was pledging a fraternity). Nevertheless, I want to talk about taxes with regards to your domain business. I know it’s barely September, but if there are things you can do to lessen your tax burden before the end of the fiscal year, now is the time to do it.
The tax problem I generally have with my business is that I frequently spend quite a bit on acquisitions after a big domain sale, and taxes are an after thought. For example, after selling a domain name for $80,000 and making a $40,000 profit, I am often inclined to go out and buy a $70,000 domain name. However, assuming a 35% tax rate (state and federal combined), I would owe the government $14,000, leaving me with $66,000. Since taxes aren’t taken out at the time of the sale, I might feel safe spending $70,000, but if I develop the new name, I have to come up with the extra $4,000.
That said, there are ways to lessen your tax burden by spending money on expenses such as new computer equipment, office upgrades, web development, research, self-employment pension plan contributions… etc. All of those with the exception of the SEP contribution are things that need to be considered before the end of the year. It doesn’t make sense to go out and spend a boatload of money in the middle of December simply to lessen your tax burden. You will end up with lower quality things since you are essentially spending to spend.
My best piece of tax advice is to speak with a professional accountant. While an accountant may not know the ins and outs of your domain business, he should be able to understand the jist. Regardless of his experience with a domain-related business, your accountant can give you general business tax advice, including how to lessen your tax burden.
Again, I am not a tax expert, but I believe now is the time of year to have a conversation with your accountant to show him how you’ve done so far and see how you can run your business more efficiently. As your business grows, you will want to meet with him more often, but at the very least, a once annual check-up is smart (aside from when he is doing your taxes). Also, now is a good time to teach him about your domain business, as he will have more time to learn now than in March or April.
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