By: Ryan Beethoven-Wilson, CPA, Tax Supervisor | Manufacturing, Distribution & Retail Industry Team
In a recent release of Chief Counsel Advice 201543014 (CCA), the IRS has clarified the tax treatment of internet domain names. While the CCA is publicly-available and cites relevant sections from the Code and related regulations, a CCA is not considered substantial authority but rather is the IRS’s position.
In the fact patterns covered by the CCA, the taxpayer had purchased domain names to be associated with a website that is already constructed and will be maintained by the taxpayer. The domain names were purchased for use in the taxpayer’s trade or business, specifically to provide a place to sell ad-space or to market its own goods or services.
When domain names are purchased, whether as part of an asset acquisition of another trade or business or from existing holders of the domain names, the IRS indicated that the domain names meet the definition of an intangible asset. Under the specific fact patterns, it is revealed that the domain names do not fall under any of the exceptions for capitalization under Sec. 197 or the related regulations. Taxpayers therefore generally will capitalize for tax purposes the cost of acquiring the domain names.
With the requirement to capitalize, taxpayers will be interested to know whether the newly-created intangible is eligible for amortization deductions. The short-answer is yes, and the IRS comes to that conclusion from several different angles.
- If the domain name is registered as a trademark: Registered trademarks by definition are amortizable over 180 months (15 years) under Sec. 197.
- If the domain name is not registered as a trademark, and the domain name is non-generic: Non-generic domain names are used to identify the good, service, and/or business associated with the website. In some situations, the domain name may still meet the definition of a trademark, even if it is not registered, if the domain name itself identifies good/service and distinguishes those provided by others. If the domain name does not function as a trademark, then the domain name (as described in the fact patterns) can be considered a customer-based intangible. Either way, Sec. 197 still applies and the capitalized domain name is amortizable over 180 months.
- If the domain name is not registered as a trademark, and the domain name is generic: This is a situation where the domain name describes a good or service using commonly-associated terms. This removes the trademark qualification, however the domain name can still qualify as a customer-based intangible and thus would be amortizable over 180 months.
In the advice provided in the CCA, the domain names purchases must be associated with a website that is already constructed and will be maintained by the taxpayer, and the domain names must be purchased for use in the taxpayer’s trade or business, (to provide a place to sell ad-space or to market its own goods or services).
Questions on this topic, or any other tax-related issue? Feel free to contact your Keiter representative or call us at 804.747.0000 | email: email@example.com.
**Disclaimer: IRC § 6110(i)(1)(A) defines CCA as written advice or instruction, under whatever name or designation, prepared by any National Office component of the Office of Chief Counsel that A. Is issued to Field or Service Center employees of the Service or Field employees of the Office of Chief Counsel, and B. Conveys any legal interpretation of a revenue provision, any Service or Office of Chief Counsel position or policy concerning a revenue provision, or any legal interpretation of State law, foreign law, or other Federal law relating to the assessment or collection of any liability under a revenue provision. CCA includes both taxpayer specific and nontaxpayer specific advice. While CCA advice is a helpful tool, it does not carry enough authority to be used as legal precedent.
Ryan works with both large and mid-market clients in the professional services, real estate, construction, manufacturing, and retail industries. He assists his clients with tax planning and saving opportunities to help their businesses grow. He is a member of Keiter's Professional Services and Manufacturing, Distribution & Retail teams. Ryan also serves on the Firm's State and Local Tax Committee and International Tax Committee. Ryan participates in the Greater Richmond Chamber of Commerce’s Helping Young Professionals Engage (HYPE) program and in the Richmond Venture Forum. Read more of Ryan’s insights on our blog.