A Few Things to Consider if You Barter
Individuals and small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another and doesn’t involve the exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.
One common misconception is that bartering is prohibited by the IRS. This is simply not true. If handled properly, bartering is a viable means of exchange. The IRS position is that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange. But the service provided in exchange is also a cost. So in the end, there may or may not be any taxable exchange.
Here are a few things to know about bartering:
1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS. Even if you don’t receive a 1099-B from the Exchange, you’re still responsible for proper reporting.
2. Bartering income. Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received. But don’t forget about the cost of the services or goods you exchanged in return.
3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income. Best to check with your tax preparer if you barter. Do it right and you’ll be fine.
4. Reporting rules. How you report bartering varies depending on which form of bartering takes place. Again, check with your tax preparer for details.
The key to bartering is doing, and reporting it properly. Keep track of what you receive, what you provide in return and report both at tax time.
By: Evan A. Nielsen, Esq. (Licensed in California)