Bartering for Services and Products Is Taxable
Tax Tip
Bartering is the trading of one product or service for
another. Often there is no exchange of cash. In addition to individuals, small
businesses sometimes barter to get the products or services they need. For
example, a plumber might trade plumbing work with a dentist for dental
services. Bartering 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 modern barter exchange company.
Some individuals and small businesses believe that
bartering avoids taxable income because there is no exchange of money. This is
not true, however; barter exchanges are considered taxable income by the IRS.
The fair market value of goods and services exchanged must be included in the
income of both parties to the exchange.
Business Owners – If you are the owner of a business,
you may sometimes find it to your advantage to barter for goods and services
rather than pay in cash. You should be aware, however, that the fair market
value of the goods that you receive through bartering is taxable income, just
as if you had received a cash payment.
Exchanges of services result in taxable income for both
parties. Say, for example, that a computer consultant agrees to an exchange of
services with an advertising agency. Both parties to the transaction are taxed
on the fair market value of the services received. This is the amount they
would normally charge for the same services. If the parties agree to the value
of the services in advance, this will be considered the fair market value,
unless there is contrary evidence.
Income is also realized when services are exchanged for
property. For example, if an architectural firm does work for a corporation in
exchange for shares of the corporation’s stock, it will have income equal to
the fair market value of the stock.
Barter Exchanges – Individuals and business owners
sometimes join barter clubs that facilitate barter exchanges. Some exchanges
operate out of an office and others over the Internet. Unlike one-on-one
bartering, members of exchanges are not obligated to barter or purchase
directly from a seller. Instead, when a barter exchange member sells a product
or a service to another member, their barter account is credited for the fair
market value of the sale. When a barter exchange member buys, the account is
debited for the fair market value of the purchase. These clubs generally use a
system of “credit units” that are awarded to members who provide goods and
services and can be redeemed for goods and services from other members.
If you participate in a barter club, you’ll be taxed on
the value of credit units at the time they are added to your account, even if
you don’t redeem the units for actual goods and services until a later year.
For example, say that in Year 1, you earn 2,000 credit units and each unit is
redeemable for one dollar in goods and services. In Year 1, you’ll have $2,000
of income. You won’t pay additional tax if you redeem the units in Year 2,
since you will already have been taxed once on that income.
When you join a barter club, you’ll be asked to give the
club your social security number or employer identification number and to
certify that you aren’t subject to backup withholding. Unless you make this
certification, the club must withhold tax from your bartering income at a 28%
rate.
By January 31st of each year, the barter club will send
you a Form 1099-B, which shows the value of cash, property, services, and
credits that you received from exchanges during the previous year. This
information will also be reported to the IRS.
If you have questions related to bartering income,
please give this office a call.
Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com
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