Should Content Expenses be Considered an Operating Expense or Capital Expense?

[Soy Dev]

Content is an operating expense on a content website, right?

I just read an interesting article about why it should be treated as a Capital expense for valuation purposes, which makes a lot of sense IMO.

Assuming 30x monthly, a site earning 10k/mo with 9k/mo content spend shouldn't be worth ~30k, if you turn the content production off it's still gonna earn close to 10k for a while (assuming some outside factor doesn't change this), then again 300k doesn't seem appropriate either, probably somewhere inbetween is the sweet spot?

Apparently FE does some fancy maths to find appropriate middle ground, and EF followed suit, some other brokers disagree with the premise.

Interested to hear any insights on this, I'm sure some of the folks around here can shed some light.

But for calculating taxes, content is def OpEx? eh?

Also when you sell a content site, it's a capital asset, not regular income eh? What if profit is basically none or negative (with content as opex), but if you value it with content as a capital expense then it's profitable, so you make some gains selling it, but no income from operating it. would you then you'd have to treat those capital gains from selling as income?

At what point would you go from a content website being the "business" to being "in the business", and you're in the business of buying, operating, selling these assets and therefor have to pay regular income tax when you sell one. Like holding stonks vs actively trading.

Another question, anyone using a US LLC as a non resident alien? I've read that a single person LLC is a disregarded entity so only pay regular income tax in your tax home. But it's not a disregarded entity if you do business in the US... is getting paid from US affiliate and ad networks doing business in the US? Then become liable for tax in US, but not if double taxation agreement in place?

Thanks!

 

[Ryuzaki]

In the past I've written off content production expenses (writers, image sourcers and formatters, content formatting, all of it) as an operating expense. I spent it on the business, why should I pay taxes on money I didn't make.

In the past when I've sold a site that I built from the ground up, I've charged it to the taxman as an asset at capital gains rates. But I did not deduct any cost to purchase the site (because I didn't purchase it) nor did I try to get sneaky and deduct any extra content expenses since I had already done so in my normal operations.

I could see you do it the other way around, where you'd not report content expenses in your normal taxes until you sold the site, in which you'd deduct it from the total you pay capital gains on. The conundrum is now you're not able to deduct the cost of content from your normal taxes, which are at a much higher rate than capital gains. Depending on the scale of the operation, you're going to lose out doing it this way.

However you do it, keep immaculate books and records and receipts so if you get audited you can be like ¯\_(ツ)_/¯ I did my best, as evidenced by my immaculate record keeping.

In terms of tax code, this is a fairly leading edge situation and it's not clear what the right way to pursue it is. Do what benefits you and trust that the they're so massively behind on taxes that if you aren't doing anything absolutely stupid, enough time will pass that you'll slide right outside the window of an audit time frame. I'm not saying to do so maliciously, either. Do what's right and what's beneficial to you and let them tell you otherwise, if they can get around to it in time.

 

[Soy Dev]

In the past I've written off content production expenses (writers, image sourcers and formatters, content formatting, all of it) as an operating expense. I spent it on the business, why should I pay taxes on money I didn't make.

In the past when I've sold a site that I built from the ground up, I've charged it to the taxman as an asset at capital gains rates. But I did not deduct any cost to purchase the site (because I didn't purchase it) nor did I try to get sneaky and deduct any extra content expenses since I had already done so in my normal operations.

I could see you do it the other way around, where you'd not report content expenses in your normal taxes until you sold the site, in which you'd deduct it from the total you pay capital gains on. The conundrum is now you're not able to deduct the cost of content from your normal taxes, which are at a much higher rate than capital gains. Depending on the scale of the operation, you're going to lose out doing it this way.

However you do it, keep immaculate books and records and receipts so if you get audited you can be like ¯\_(ツ)_/¯ I did my best, as evidenced by my immaculate record keeping.

In terms of tax code, this is a fairly leading edge situation and it's not clear what the right way to pursue it is. Do what benefits you and trust that the they're so massively behind on taxes that if you aren't doing anything absolutely stupid, enough time will pass that you'll slide right outside the window of an audit time frame. I'm not saying to do so maliciously, either. Do what's right and what's beneficial to you and let them tell you otherwise, if they can get around to it in time.

Appreciate the response

My instinct is to do pretty much what you've described.

It's pretty ambiguous/open to interpretation as I see it, I'll just make a reasonable effort to do it right depending on specific situations, and not stress it.

Interesting to think about though, depending on how you operate in this business time-line wise, and how you view these assets, what if any entities you use, it seems like you could treat it a variety of quite different ways with different pros and cons.

 

[bernard]

Interesting question.

It's usually an operating expense in terms of tax, but an investment in terms of valuation - in most cases.

Depending on the business type of course.

If you're running a news site or sports site or something that requires constant updates to stay on top, then I'd pay attention to that.

If you're running an evergreen site that is "set and forget", then it mostly is equivalent to buying inventory or new equipment, it has value in itself, unlike say advertising spend. The content can be resold even apart from the rest of your business (theoretically).

When we're talking capital investments in a company, depending on the value, the spend either gets written off instantly, similar to an operating expense, or it gets written off over a couple of years (depreciation).

You could very well argue that larger content investments, in some cases, are business capital investments to be written off over say 3 years (which coincides with a typical content cycle from publishing to peak to decline).

That would probably give a more realistic accounting valuation. In the real world, people are either aware of this or not. Earnings is everything most people look at. A surprising number of people intend to buy websites and never publish a post again.

 

[zbones]

Content is an operating expense on a content website, right?

I just read an interesting article about why it should be treated as a Capital expense for valuation purposes, which makes a lot of sense IMO.

Assuming 30x monthly, a site earning 10k/mo with 9k/mo content spend shouldn't be worth ~30k, if you turn the content production off it's still gonna earn close to 10k for a while (assuming some outside factor doesn't change this), then again 300k doesn't seem appropriate either, probably somewhere inbetween is the sweet spot?

Apparently FE does some fancy maths to find appropriate middle ground, and EF followed suit, some other brokers disagree with the premise.

Interested to hear any insights on this, I'm sure some of the folks around here can shed some light.

But for calculating taxes, content is def OpEx? eh?

Also when you sell a content site, it's a capital asset, not regular income eh? What if profit is basically none or negative (with content as opex), but if you value it with content as a capital expense then it's profitable, so you make some gains selling it, but no income from operating it. would you then you'd have to treat those capital gains from selling as income?

At what point would you go from a content website being the "business" to being "in the business", and you're in the business of buying, operating, selling these assets and therefor have to pay regular income tax when you sell one. Like holding stonks vs actively trading.

Another question, anyone using a US LLC as a non resident alien? I've read that a single person LLC is a disregarded entity so only pay regular income tax in your tax home. But it's not a disregarded entity if you do business in the US... is getting paid from US affiliate and ad networks doing business in the US? Then become liable for tax in US, but not if double taxation agreement in place?

Thanks!

I would look at any content spend as COGS (same as OpEx for purpose of this thread). And if it's a US taxpayer you're taxed on a cash basis until you reach I think >$10 million revenue or you can elect to be accrual basis as a C-corp. So for tax purposes whether you capitalize it on your books or expense it, it doesn't matter because you're paying based on cash out the door for the tax man.

Also depending on how you have the LLC set up for tax purposes (sole proprietorship, partnership, S-Corp, C-Corp) will determine how you classify business income and it's tax effects can vary. Not all profits are ordinary income.

As for a US LLC as a non-resident alien. Again depends on how you're set up for tax purposes. As a non-resident your options are sole proprietor, partnership, or C-Corp. The advantage of a C-Corp is you don't have to expatriate the income as the profits are taxed at the corporate rate and stay in the US until you expatriate them. But this will induce a double taxation so you'll want to ensure this is right based on your situation.

Sounds like you're set up as a sole proprietor currently which is a disregarded entity and all profits flow to you personally as ordinary income. Generally speaking, ordinary income won't get double taxed just taxed at the highest rate of the US or your home country.

 

[ryanisra]

as a buyer, if I'd avoid people who sell up their site with every content spends counted as capital gain.

In terms 80/20 rules, not all content will earn you money, mostly even sucks, 20% will give the most traffic and revenue.

But you can put it as "prospected" to earn more revenue if optimized.