In a recently issued Chief Counsel Advice Memorandum (CCA 201543014), the IRS has concluded that costs incurred by a taxpayer to acquire internet domain names from a secondary market to use in their trade or business must be capitalized under § 263(a) as an intangible asset. However, when certain requirements are met, these costs may be amortized under § 197 over a 15-year period as a customer-based intangible asset.
Generally, an internet domain name is categorized as either a “non-generic” or a “generic” domain name. This distinction is important. If a non-generic domain name is registered as a trademark or functions as a trademark, the capitalized costs of acquiring the domain name can be amortized as a trademark asset under § 197(d)(1)(F). A trademark is any company or product name that is used to identify a particular good, service, and/or business and the name distinguishes the service or good from competitors. Well-known examples of trademarks are Coca-Cola, Apple, and Kodak.
In the circumstances where a non-generic domain name does not qualify as a trademark, the costs associated with acquiring the domain name can still be treated as a customer-based intangible under § 197 if the taxpayer uses the non-generic domain name in its trade or business to provide goods or services through a website that is already constructed and will be maintained by the acquiring taxpayer.
A generic domain name is not a company or product name; rather the domain name uses generic terms people associate with the service or good, such as “toothpaste.com” or “snowblowers.com.” Generic terms cannot be trademarked and thus do not qualify as a trademark asset under § 197. However, as with non-generic terms that do not qualify as a trademark, a generic term would qualify as a customer-based intangible asset under § 197 if the taxpayer uses the domain name in its trade or business to provide goods or services through a website that is already constructed and maintained by the acquiring taxpayer.
In summary, the cost of acquiring a non-generic internet domain name that qualifies as a trademark can be amortized over a 15-year period under § 197. Also, the cost of acquiring a generic or non-generic domain name can be amortized over a 15-year period under §197 if it was used on an established website prior to acquisition and the taxpayer continues to use the domain name in their trade or business. The cost of acquiring a domain name that does not qualify as a trademark and has not been previously used on a website (no goods or services have been offered) would not qualify for amortization under § 197. Such costs would represent an intangible asset that could only be amortized in cases where the taxpayer could show that the asset has a limited useful life.
Contact us if you have or are planning to acquire an internet domain name and have questions regarding the tax treatment of these actions. Visit the Our Thoughts On tax blog for more timely articles on tax topics.