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Businesses Can Lower Domain Name Acquisition Costs Via Amortization

The IRS recently concluded that certain domain names have to be capitalized as intangible assets and amortized over a 15-year period under Section 197 of the Internal Revenue Code. This means that a business that acquires qualifying internet domain names will be able to realize financial benefits by recapturing 100% of the purchase price through amortization, but will not be able to immediately expense the acquisition.

Because domain names are valuable business assets and often command significant prices when purchased and sold on the secondary market, this guidance will enable business owners to substantially reduce the applicable net acquisition costs.

For a domain name to qualify as an amortizable asset, it must meet certain requirements. Non-generic domain names must meet the definition of either a trademark or a customer-based intangible. Because a generic domain name cannot, by its nature, meet the definition of a trademark, it must meet the definition of a customer-based intangible.

To be considered a trademark under Section 197, a domain name must “identify goods or services and distinguish them from those provided by others”. Note that under this definition registration with the U.S. Patent and Trademark Office (USPTO) is not required. For tax purposes, a non-generic domain name can be a Section 197 trademark without being registered with the USPTO. To be considered a customer-based intangible, the domain name must correlate with an established website which will continue to be maintained by the acquiring business and which will be used to provide goods and services.

As more and more domain names are bought and sold on the secondary market for increasing market prices, either individually or as part of an overall asset acquisition, businesses will benefit from uniform amortization for qualifying generic and non-generic domain names. The decision whether to expense or capitalize an intangible asset remains fact specific. While certain computer software may be expensed in a single year under Section 179, qualifying domain names have to be amortized under Section 197.