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PostHeaderIcon Buying and Selling Websites – A Tax Case Study (Part 1)

Websites have become big business and while general business brokers have existed for years, you can find now websites that are dedicated to buying and selling websites.  In addition, there are some great podcasts surrounding internet marketing and how to develop your internet footprint but I can’t remember ever seeing anything on the tax implications of buying and selling websites.

This is most likely going to be a four part series.  Part one (which you’re reading right now) deals with what happens when the asset (the website) is purchased.  Part two deals with when you buy a company that owns a website (i.e. you buy an LLC or corporation that holds a website as one of its assets).  I’ve dealt with the differences between an asset purchase/sale and a stock purchase/sale but I’ll touch on the basics of an asset purchase again here.  Part three deals with what happens when you buy a website then resell that website at a later date.  Part four is going to deal with website dealers, which is someone who creates multiple sites with the expectation of selling them.

Just a disclaimer, this is going to be a general example.  Everyone’s tax situation is different so if you’re buying any kind of business (website or otherwise), I highly recommend you consult with a professional.

Background

First let’s lay out some facts and I’ll start by introducing you to “Website Seller.”  Website Seller got into internet marketing a couple of years, picked out an idea to write about and his site got some traction.  Eventually he was able to monetize the site and he continued to work at it for a couple of years but now he has a fresh idea.   Rather than split his time he decides to sell his old website (whether it’s to cash in or just to free up some time for the new venture) so he goes to one of the great website brokerage sites like Empire Flippers (which has a great podcast and website) and Flippa (another great resource with a helpful blog which I believe has a podcast coming soon) and puts his website up for sale.  Website Seller gets some offers but he eventually sells his website to Website Buyer for $7,500 (I picked this number to make the math easy).  For the sake of this discussion, we’re going to assume both Website Buyer and Website Seller are subject to US income tax and those implications are what I’ll be discussing here.

What Happens to the Seller

Website Seller has a tax event in the year he sells his website.  We are going to assume that any costs he’s had with his website including hosting, design and development were taken as deductions in the year they were incurred. That means his basis is zero so the entire $7.500 is a taxable gain.  Since he held it for more than one year and he’s not a dealer (more on this later), its classification would be a capital gain and he’ll report it on Schedule D of either his personal return or the tax return of his business entity.

What Happens to the Buyer

Website Buyer is now out $7,500 but he has a website.  Not to get to existential but what is a website?  You can’t hold it in your hand.  There’s nothing “physical.”  You can see it, but it’s just bits on a computer screen.  What you own is called an intangible asset.  When you buy an intangible asset in an asset purchase, you’re allowed to amortize the cost over fifteen years.  In this case, you’d get $41.67 a month in amortization deductions or $500 a year (if it’s a full year).  If the site was purchased on July 1, you’d get $250 of amortization expense in years one and sixteen and $500 in each year in between.

This is over and above whatever expenses you incur in operating the website.  You’d now be required to file a tax return (or form) appropriate to your business entity. If you’re a single member LLC, you’d most likely file a Form 1040, Schedule C each year you operate the website.  If you put it into a corporation you’d file either a corporate return or an S-Corporation return.

Form 8594

Form 8594 is required whenever assets are acquired and both Website Buyer and Website Seller will need to attach this form to their tax filing in the year the sale goes down.  Part 1 will vary based on whose return we’re talking about (whether it’s the buyer or seller) but Part II should be the same for both sides of the transactions.  In a more complicated transaction where several assets are purchased, you might have numbers on each line but in this case, there’s just an intangible asset.  Intangible assets (other than goodwill) are Class VI assets so you’d have $7,500 in both columns of the Class VI row.

Website Dealers

Whether Website Seller is a dealer is an important distinction.  In our example, the sale of the website was secondary to the operation of the website.  If Website Seller set up websites, monetized them and then sold and churned them within months, having multiple website sales a year, Website Seller might be considered a dealer.  This comes up more in real estate but it basically means you’re a retailer and your product is websites.  It changes the characterization of the gain from a capital gain to ordinary income and if you’re operating your business as a single member LLC or without a business entity and you’re filing Form 1040, Schedule C, you’ll also be subject to self-employment tax.

The IRS keeps dealer status kind of grey and doesn’t specifically specify what constitutes being a dealer.  My recommendation is to go more with what your intent is.  If your intent was to sell the website from the beginning and you’re doing multiple transactions a year, you’ll probably be considered a dealer.

International Considerations

If you’re the seller and you operate your website overseas and you’re a US citizen, you should still be reporting the gain on the transaction on a US tax return.  You might not have to pay tax on it but this is something that could have a post by itself. I’ve dealt with overseas investors (mostly in the real estate arena) but I’m not an expert.  In a lot of cases, you’ll have to report it both in the country you’re living in as well as on a United States tax return.

Installment Sales

If the seller doesn’t receive the full amount of the purchase price at the time of the sale, the seller can elect to defer some of the gain as an installment sale.  In this case, the best way to think about it is as if the seller financed the sale with the buyer who is paying some of the purchase price at a later date.  I did a blog post on this already so I recommend you go check that out that out in the event of an installment sale.

Conclusion

Buying and selling a website (the asset) doesn’t have really complicated tax consequences but it’s not without its challenges and it does require extra forms for both the buyer and seller.  If you have any specific questions, feel free to contact me in your favorite form.  If you want to know when Part 2 drops, be sure to like my Facebook page.

PostHeaderIcon New Late S-Corporation Election Rules

S-Corporations are fairly popular and they can be a powerful tool in your tax strategy.  In order to qualify as an S-Corporation there are some requirements you have to meet and then you have to make the election.  The requirements include

1)  Being a domestic corporation
2)  Having shareholders that are only individuals, estates or trusts (or a disregarded entity like a single member LLC)
3) Having only citizens or US residents as shareholders?
4)  Having only one class of stock
5)  You can’t have more than 100 shareholders

From there, you have to make an S-Corporation election.  This must be made on or before the 15th day of the third month of its tax year in order to be timely.  So if you form a corporation and want it to immediately be treated as an S-Corporation, you have two and a half months after it’s formed for a timely election.  If you have an existing C-Corporation and you want it to now be treated as an S-Corporation, then you have two and a half months after its year end to get the election filed timely.

If you don’t make the election in time, you can “try” to make a late election.  I’ve done this before and I’ve never had a late election turned down, which makes the whole deadline thing seem moot but it requires a few attachments to your return and there would always be the chance that you’d get turned down.

Last week, the IRS issued Revenue Procedure 13-30 which now simplifies this late election process somewhat.  What you have to do doesn’t change but it includes the rules for late S-Corporation elections as well as late QSub elections and entity change classifications.  The revenue procedure is long but at the end of the procedure are some really handy flowcharts to help you navigate the waters.  The Revenue Procedure also combines a few different revenue procedures so it’s one stop shopping from here on out.  As always, I’d suggest you talk to a professional and preferably one who’s done a late S-Corporation election in the past.  If you’re interested in seeing how an S-Corporation might benefit you, I recommend this blog post I wrote earlier in the year on the subject.

PostHeaderIcon Tax News – August 16, 2013

Not a lot of news the last couple of days so I’m going to double up.

I’m from the Detroit area and Bill Davidson, who passed away a few years ago, is a well known name in Detroit sports.  Amongst other things, he owned the Detroit Pistons  and I even interviewed for a job at his company, Guardian Glass, over a decade ago.  It looks like his estate is being questioned and the IRS has sent out a $2 billion (yes, that’s a “b”) notice for estate and gift taxes due.  Some of it is estate tax but they’re also questioning some past gifts that were made to heirs with valuations lower than what the IRS thinks.

While this article talks about farm equipment, it’s a Section 179 issue and it’s available to all businesses.  Normally if you buy fixed assets, you have to depreciate them over their useful life.  If you don’t buy a lot of assets, you have the option of immediately expensing them via Section 179.  With bonus depreciation, this has been less of an issue but the amount a person can deduct is going to drop from $500,000 in 2013 all the way down to $25,000 if Congress doesn’t do anything about it.  This is one of those things where every year or two, Congress bumps it up but makes the increase temporary.  While not an extender (the law has been around for a long time), the amount has been the equivalent of an extender in that you never quite know what the amount is going to be until Congress acts.  Also interestingly, I found a website that’s specifically dedicated to the Section 179 deduction with ticker and all.

Finally, we have an agreement between the US and the Cayman Islands to fight tax evasion.  I wonder if there was a run on Cayman banks this week.

PostHeaderIcon Tax News – August 14, 2013

I’m going to start with a quick sell.  About a year ago, I started an email list for special reports.  I did one, and never got to the second.  I’m going to change gears and do a monthly newsletter instead.  I’m still working on the specifics but if you like the content on the website, I’d recommend you sign up for it.  You can find the signup box on the top left section of the website.  Anyway, on to the news…..

If you have a large estate and want to save on income taxes, a CRUT may be for you.  CRUT stands for Charitable Remainder Unitrust and they’re going to be even more relevant with the Obamacare taxes taking effect as well as the taxes on higher income individuals that were enacted this year.  They work especially well if you have appreciated assets like stocks and if you’re into giving for charity, it’s something you might want to consider.  The article does a good job of explaining the specifics so rather then rehashing it, I recommend you click through and check out the article.

What’s tax reform (if and when it passes) going to cost and who’s going to foot the bill?  This article talks about how corporate tax reform is most likely going to fall on the individual.  Since I think tax reform is up there with fairy tales at the moment, take it all with a grain of salt.  And it’s not that I’m against tax reform (I’m very much for it), I just think with the current political climate (i.e., nothing substantial is getting done), it’s not going to happen anytime soon.

One of the movies my son wants to see is RIPD.  While it looks like a solid flick, it’s been a box office disaster.  Now there’s reports coming out the film received more in tax credits than made at the box office. Some of the tax credits are even transferable so they might just be able to make money on it, just at the expense of the state of Massachusetts and its taxpayers.

PostHeaderIcon Tax News – August 13, 2013

No silly intros (or is that what this is?).  Let’s get right to the news.

Yesterday I linked to a story about taxpayers who hadn’t filed their taxes in a while.  One of the tips they recommend is you get a copy of your transcripts.  With that, here’s more information on getting a copy of your transcripts.  It looks like it was cut and pasted from the IRS website but I didn’t check to confirm this.

The IRS announced that they are softening the rules for innocent spouse tax relief.  Under the news, taxpayers have up to ten years to apply for the program in order to stop collections.  The old rule used to be two years.

This article talks about how you can defer taxes on your vacation home by using a like kind exchange.  The rules are tricky for like kind exchanges so if you’re thinking about doing this, get all of your ducks in a row now.  You’ll have to also hire a third party intermediary because you can’t take possession of the money without tainting the exchange.  This article gives a good summary of the rules involved in a safe harbor exchange.

Peter Reilly’s latest discusses when you too many rules collide.  In the Elmer Nuss case, we have divorce, tax and military retirement rules all coming into play.  Things got messy when his VA benefits were reduced but the court case is an interesting read.

 

PostHeaderIcon Tax News – August 12, 2013

I let a short vacation derail my daily tax news updates but now I’m back.  Let’s get caught up…..

The title to this article is a little deceiving but small businesses are getting tagged by the newer 1099-K form.  If you do business via credit card or a third party service like paypal, you will receive a 1099-K from your service provider showing how much your sales were with them.  In the IRS’s effort to get everyone else to do their job for them and the income you report doesn’t at least match what’s on your 1099-K, then it’s going to create a notice.  That’s what is meant by “target” in this article.  If you file a Schedule C for your business (for all of you single member LLC business owners out there), there’s even a special line for putting in your 1099-K income.  If you don’t do the form right, you will probably have some explaining to do so be sure to either do it right, or have someone who knows how to do it prepare the return for you.

In some cases, if you receive money from an estate and taxes aren’t paid on it like you should, the beneficiaries might see the IRS come after them.  This article’s title is also deceiving because in this case, the tax should have been paid and someone got a little crazy with what they did with the money (that is, they lost it).  Then the IRS came after some distributions that were made to the beneficiaries.

If you haven’t filed your taxes in a while, this is a good article on how to get caught up.  I didn’t know there was a special number for tax practitioners so I’ll have to look into that.

In the, “I’ll believe it when I see it category,” we have some discussion on how real estate benefits could be cut if tax reform is enacted.  In some ways, this is already the case with the AMT and the itemized deduction phaseout out there but I don’t see the home interest deduction going anywhere.

Do you think the new 3.8% tax on investment income is going to apply to you?  The IRS recently released a draft of the new Form 8960.  There’s also some links to details on the new tax so if your income is in the higher range, there’s plenty of information here.