USA Are domains or hosting services considered assets on business tax forms? & is an annual LLC filing fee a miscellaneous expense?

[New@Taxes]

I have three domains/website addresses for my business that will come to $32.94 annually. The business's hosting service will come to $126. I thought that for an expense to be an asset it had to be over $200 and a physical product, so I wasn't going to list these two things as assets on the tax forms. I was just going to list these two things as miscellaneous expenses. Is this proper, please?

The only other annual business expense is the LLC filing fee of $53; should this be listed as a miscellaneous expense, please? Or, should it perhaps be listed as a Taxes and Licenses expense?

 

[Werner Reisacher]

One of the fundamental accounting principles is the "matching principle". Revenues and their related expenses are recognized in the same accounting period. Since the web/domain related expenses create an economic benefit that is limited to one year, they must be expensed during a 12 month period. If you start your websites in March of a fiscal year, you will have to charge 9 months of the monthly expenses to that particular fiscal year. (assuming your LLC's fiscal year is identical with the calendar year.
For tax reporting purposes, you can either allocate your LLC's filing fees to miscellaneous or License fees.

 

[New@Taxes]

An interesting word in your reply is the mention of a "fiscal" year … . When I formed the LLC, I specified December as the tax closing month. I'm thinking this means that the business's fiscal year begins in January and ends in December? Unless- despite this, does the fiscal year always have to end in March? However, this first year of 2019 the business was formed May 8th, with a tax certificate registration effective date of September 8th- just to complicate my search for which months my particular business’s fiscal year contains.

I was thinking that anything I bought in 2019 was an expense, but it sounds like even though you buy something that is charged annually in advance, you don’t count it until as the years go by? For example: if, in advance, I bought twenty years of a domain charged at ten dollars per year in 2019 for the sum total of two hundred dollars, at the start of 2020 I would only write down the domain expenses of 2019 as ten dollars, rather than two hundred?

I’m thinking this means that a domain/website address isn’t considered an asset, but like more of a miscellaneous expense? I think I’ll go with miscellaneous expense on the LLC’s annual state filing fee, because a license doesn’t sound like quite the right word for it to me … . How nice to know that I could go with either!

 

[Drmdcpa]

One of the fundamental accounting principles is the "matching principle". Revenues and their related expenses are recognized in the same accounting period. Since the web/domain related expenses create an economic benefit that is limited to one year, they must be expensed during a 12 month period. If you start your websites in March of a fiscal year, you will have to charge 9 months of the monthly expenses to that particular fiscal year. (assuming your LLC's fiscal year is identical with the calendar year.
For tax reporting purposes, you can either allocate your LLC's filing fees to miscellaneous or License fees.

Do you ever get tired of confusing people?

 

[Drmdcpa]

An interesting word in your reply is the mention of a "fiscal" year … . When I formed the LLC, I specified December as the tax closing month. I'm thinking this means that the business's fiscal year begins in January and ends in December? Unless- despite this, does the fiscal year always have to end in March? However, this first year of 2019 the business was formed May 8th, with a tax certificate registration effective date of September 8th- just to complicate my search for which months my particular business’s fiscal year contains.

I was thinking that anything I bought in 2019 was an expense, but it sounds like even though you buy something that is charged annually in advance, you don’t count it until as the years go by? For example: if, in advance, I bought twenty years of a domain charged at ten dollars per year in 2019 for the sum total of two hundred dollars, at the start of 2020 I would only write down the domain expenses of 2019 as ten dollars, rather than two hundred?

I’m thinking this means that a domain/website address isn’t considered an asset, but like more of a miscellaneous expense? I think I’ll go with miscellaneous expense on the LLC’s annual state filing fee, because a license doesn’t sound like quite the right word for it to me … . How nice to know that I could go with either!

Technically there is no dollar value or requirement for physicality to capitalize expenditures as opposed to writing them off immediately as an expense.

There is a category of fixed assets called intangibles. Also the Internal Revenue Code defines certain software as needing to be capitalized and written off over three years.

With that said, the expenses you mentioned are in fact expenses. If you are on the cash basis, as most taxpayers are, you expense those items the year you pay for them.

You do have to consider the life of what you purchase and materiality. In your example of prepaying something for 20 years, first do not do that, but if you do, in such a case you would have to capitalize 19 years, and take each year as an expense as it is used.

The example I often give is office wastebaskets. Large companies and learning institutions buy a large amount of small often plastic trash cans for each office or room. Technically since the waste basket is defined as 7 year property and should be used for several years, it should be capitalized.

But each waste basket may cost a few dollars at best, thus immaterial. So what happens when the institute buys hundreds or thousands at a time. The total cost is no longer immaterial and must be capitalized. Moral of the story do not group purchases of immaterial items into one large material group if possible. Given the number of wastebaskets purchased annually, large institutions cannot be bothered with purchasing a few each time.

As for the LLC fee, if you are referring to registration fees, it should be posted to licenses and permits or something comparable. If you are referring to a tax like they have in CA, it goes to local or state tax expense; deductible for Fed purposes but not for state purposes.

 

[New@Taxes]

Hello, Drmdcpa! Thank you very much for responding! Because of your message, I now know the difference between the cash method and the accrual method. You were correct; I had been instructed to write down that the business would follow the cash method in the Operating Agreement, but could never understand the difference between the two methods. The way you talked about capitalizing or immediately writing off the expenses- along with the rest of your response, made this very clear to me; thank you very much!

I am very glad of this information, because I had figured up the expenses by the accrual method in the Sample 1 image below, and the cash method in the Sample 2 image below and I was see-sawing on which I was expected to use. The cash method is so much easier!

At first I did not realize that you had answered my original question … , and then I looked up the meaning of intangibles, and was so astonished. Now I'm just like- bless you so much for remembering the original question!

Ah! I was wrong about the listing for the Taxes and License expenses; thank you for correcting me!

I'm not sure I understand the wastebaskets … . If I have it right: One would be an idiot to buy a large amount of wastebasket/domains in bulk, because then one would have to capitalize them. Large businesses do this out of necessity and should not be imitated, or else you would be an idiot … . I hope I haven't misunderstood with the domains being intangible assets and falling under the cash method, and should instead be using the accrual method for 3 years, or something … .

But, I think I've got it right! Thank you again for your kindness in responding and excellent response!