Taxation and capital assets – important for all webmasters

TaxRunning websites often starts out as a hobby for most of us and progresses into a career once you realise the potential income available if you devote more time & effort to build your portfolio.

One of the biggest misconceptions soon arises which I want to mention today as it is an easy mistake to make and can have dangerous consequences.

Imagine this scenario
You hobby as a webmaster, build up a couple of websites and manage to make $12,000 in a year which you are happy with and want to build on and improve. Rather than pay tax on that $12,000 you decide that it would be better to re-invest that $12,000 in a website or two which then can push you towards your overall goal quicker so you spend the $12k earned to buy a site and increase your overall income for the next year.

Assumption
Logically you would view this as making $12k and spending $12k and therefore no tax liability as you did not make a profit for the year? Make sense yes? Wrong!

In the UK and I believe most European countries, USA & Canada this could land you in trouble, purchasing websites or domains can be viewed as capital purchases and therefore they would not be expenses in the business but a capital item. It is an area of taxation that is more grey than black/white and one you need to discuss with your accountant however if you compare it to buying a shop for you to sell your goods the purchase price of the shop is not an allowable expense, any interest on a loan taken to purchase a domain or website would be allowable.

In Summary
So theoretically if you earned $12k in a year and spent it all on a new website purchase you could still end up with a tax bill on your full $12k earned for the year and no money to pay it seeing as you have re-invested it all.

Obviously this is not meant as professional advice and you should seek out professional advice in your own country by a qualified person before making business decisions but I feel it is an important point to make – do not assume that re-investing your money will negate any tax liability as that often isn’t the case and you could end up in trouble.

About Scott Jones

Scott hails from the north east of Scotland and started earning online at the end of 2000 building websites for local businesses during which time he won an award from Lord Alan Sugar for Excellence in Enterprise. After having quite a bit of success with domaining Scott mainly runs educational evergreen websites which generate over 3 million visitors per month but is always on the lookout for a fresh thinking out of the box way to turn a buck. Follow on Twitter.

Comments

  1. Sound advice. I’ve foolishly fallen foul of this with a site purchase, the site doesn’t actually make a profit so my accountant is doing some sort of depreciation over the next few years. Way over my head.

  2. Did you cut and paste this from the whizzbang blog and just changed the figures?

    http://www.whizzbangsblog.com/content/view/269/86/

    W

    • That post did remind me to cover this topic WW – it’s something I experienced around 3 years ago personally in an offline capacity so always worth mentioning.

  3. Thanks for the advice, I wasn’t aware of this and would have assumed it would be classed as an expense, although my accountant may know (probably not though!)

    • I think accountants seem to struggle as well with domains & websites Carl and whether they should be deemed as capital as I have heard differing opinions – contacting your local tax office may be the only solution for specific examples, especially website purchases.

  4. hm.. I’ve this perception as well ( reinvesting means earn zero thus no tax 🙂 ) and I manage to convince myself very well.. And now you ruin my belief.. 🙁

  5. Domain names are service contracts – some mistakenly think them to be tangible personal property (including accountants). As service contracts, tax advisor’s should handle domain name sales by applying tax rules related to trademarks. Conveying this and making your accountant understand this will make a world of difference 🙂

  6. I didn’t realize when I started out that domains and sites were not expenses they were assets. I think that sucks since you are really only leasing the domain name on a yearly basis. If you don’t renew it goes away.

  7. Interesting thanks i would have written it off also! I will have to get more creative 😉

  8. Thanks for the great info, I was starting to wonder about related items. I have an interest in building more sites on the web. Still have a lot to do on the first one.

  9. nice tip

    but whats the min annual income before you get taxed here in the UK?

    does it have a limit too on the age?

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