To Barter or to Not Barter

If you have ever wondered if you should enter into barter agreements and how to account for them then this post is for you. (B2B stands for business to business.) The IRS has specific criteria and guidelines for this type of business transaction. The below is from an IRS newsletter.

Five Things You Should Know if You Barter

Bartering is the trading of one product or service for another. Often there is no exchange of cash. Small businesses sometimes barter to get products or services they need. For example, a handyman might trade office repair work with an accountant for tax services. If you barter, you should know that the value of products or services from bartering is taxable income. Here are five facts about bartering:

1. Barter Exchanges

A barter exchange is an organized marketplace where members barter products or services. The exchange can take place in person or electronically. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.

2. Private Bartering

Private bartering refers to any barter transaction that takes place outside of a formal exchange marketplace. These barter exchanges will not use Form 1099-B, instead, they may be required to file form 1099-misc, to report income information to the IRS.

3. Bartering Income

Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they receive.

4. 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.

5. Reporting Rules

How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.

For more information, see the Bartering Tax Center in the business section on IRS.gov.

For more tips and best practices check out our Guidebook, Becoming a Sensible Business Owner.

~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters.

The article is for informational purposes only and should not be construed as business, accounting, or legal advice. Details are subject to change without notice.

Each business’s tax situation is different, be sure to consult with your tax professional on your specific tax plan.