Now, here is a topic that oftentimes gets overlooked, but not by the IRS, that’s for sure!
As a matter of fact, there is even a Bartering Tax Center inside the IRS website which is intended to make sure that all barter transactions are treated just like any cash transactions.
But let us start with the beginning.
As everyone knows, bartering is the trading of one product or service for another. Usually there is no exchange of cash involved. It may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a barter exchange company.
With the existence of computers and, more importantly, of the internet, bartering has resurged in recent years, as it is easy and inexpensive now to bring the interested parties together and create markets for traders.
A barter exchange is an organized marketplace where members barter products or services with each other (or with the barter exchange). Some exchanges operate out of an office and others over the internet.
There are many different ways you can barter and it can be an effective way for small business owners to expand their businesses, reduce costs and collaborate with other business owners in their network.
But why would businesses be interested in bartering? It may be because:
It conserves cash since neither party has to use cash to obtain the desired goods or services;
It can generate sales and profits because inventory turns over more quickly and service providers sell more of their time;
It is a potential avenue for companies that want to reward their workforce in some way;
It is often suited for companies who want to unload excess inventory or old equipment (machinery, office furniture, etc.) while at the same time realizing some financial benefit. This is the green part of bartering;
It is an option for debtors to be paid in merchandise or services, which are subsequently sold on the barter network with the credit going to the small business that would otherwise have been unable to collect anything;
It is an opportunity for small businesses to contact and acquire new customers.
There are some disadvantages, of course, as some businesses that participate in bartering may find that the range of products or services available do not fully address their needs, or they may not be available when they are needed.
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Beyond advantages and disadvantages of bartering, there is the matter of how bartering is going to be taxed by the IRS.
The IRS considers income produced through barter to be taxable income. Bartering is treated like any other business transaction by the tax authorities. It has no tax advantages or disadvantages.
Both sides of a barter transaction have tax ramifications, and both parties must report their barter transactions when they file their federal income tax returns.
The IRS requires taxpayers to report income from barter transactions on their federal income tax returns for the year in which the barter was performed.
The taxpayers must report the fair market value of the bartered goods or services.
The type or reporting that is required of each participant depends on if the bartered goods or services were made in conjunction with the taxpayer's business or were for personal expenses.
Barter transactions may result in ordinary income, a capital gain or loss, or a personal loss. Even sales taxes may apply on certain transactions.
The barter exchange you enroll in keeps track of what you buy and sell and reports your trades to the IRS. The barter exchange should also provide you with a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, with the amount of taxable bartered transactions listed in Box 3.
If you have income or loss from bartering you must report it regardless of whether you received a Form 1099-B.
In most cases you must report your bartered income on Schedule C of Form 1040. You may be able to deduct certain costs you incurred to perform the bartering.
You may be responsible for paying income taxes, Social Security taxes, and self-employment taxes.
The IRS advises taxpayers to use the same careful accounting procedures for barter transactions as they do for cash transactions. If you keep good financial records, you are no more likely to be audited than any other taxpayer.
