Do you or your business engage in bartering transactions? If so, there are a number of things you need to know when it comes to bartering transactions and taxes.
The International Reciprocal Trade Association estimates the recorded barter industry to be worth between $12-14 billion.
That is a lot of flow of value. As gains and losses can be realized in bartering just as they can in ordinary transactions—the IRS expects their share of the pie.
Failing to report barter transactions is deemed as tax evasion, the same as it would for regular transactions. Because of this, it is very important to understand what your obligations as a taxpayer are when it comes to bartering and your tax return.
It can be tricky at first to get to grips with all the ins and outs of this additional aspect of tax reporting. However, with a little knowledge under your belt, you can ensure that you are 100 percent tax compliant when it comes to the swapping of goods and services.
The best place to start is right here, as we are about to give you the rundown bartering and its tax implications for small businesses.
The Definition of Bartering
Bartering is commonly viewed as a nostalgic thing everybody did back when there was no money.
Interestingly, little to no evidence suggests that a largescale barter economy ever truly existed—until today.
As it turned out, the internet, and the 2007 US recession, spurred a widespread adoption of bartering. Both individuals and businesses were able to take advantage of online platforms to facilitate bartering transactions.
For businesses, this meant that they could move inventory when the market was sluggish. For the IRS, this meant an even bigger system of non-cash transactions to regulate.
Despite these changes, bartering is still defined as the way it was traditionally, as the exchange of goods or services of equal value. However, nowadays, rather than occurring at the market place or in the street, it’s more likely to happen on a verified bartering platform.
What Bartering Transactions Are Taxed
The IRS has been taxing bartering since the 70s when barter trade first experienced an upswing in popularity.
However, not all bartering transactions are taxable.
In general, bartering done on a casual non-business basis among individuals is not taxable. Bartering done for business purposes is generally taxable.
For example, if you and your neighbor make a trade that he mows your lawn if you feed his dogs when he goes away on vacation—this is not likely a taxable situation. Especially if both of you are not involved in lawn maintenance or pet sitting in any professional or business-related way.
However, if you are a part- or full-time pet sitter, then the value of the barter is deemed as income for tax purposes. This is then subject to federal income tax.
What’s more, if what you are swapping for is not related specifically to your business, then you cannot claim the other side of the barter transaction as an expense.
In this case, if the neighbor is mowing the lawn of your home, this is a personal expense and is not deductible. If, on the other hand, he is mowing the premises of a business that you run, then that would be deductible.
There are a few other exemptions when it comes to bartering. These include:
- Fewer than 100 bartering transactions per year
- Bartering transactions under $1 in value
- Barter with certain “exempt foreign persons”
Now let’s take a look at how bartering transactions are taxed.
How Barter Transactions Are Taxed
Depending on what you are exchanging, barter transactions can be taxed in a couple of different ways.
If goods or services are exchanged that would generate income, then any profits realized would be taxed as such.
Example: you own a computer shop, and you swap $1,000 worth of equipment to a carpentry company in exchange for new wall cabinetry and counters, which are also valued at $1,000.
The computers cost you $5,500 when you bought them in. This means that you realized a gain of $4,500. However, you also incurred a business capital expense of $1,000 for the installation of your cabinets and counters.
As Capital Gains
On the other hand, if you are swapping an asset, such as property, a vehicle, etc. this could attract capital gains tax. This occurs if you realize a gain on the asset at the time of swapping it.
In short, if the asset increases in value while you own it, and you can then get more for it when you barter it, you have just made a capital gain.
Capital gains fall into two categories. Short term capital gains and long term capital gains.
Short term capital gain tax is incurred on assets sold within a year of their purchase date. It has a higher rate of taxation than long term capital gains.
Long term capital gains tax happens when you sell an asset that you have had for more than a year. It is lower than short term capital gains tax.
As Self Employment Tax
If you are self-employed, then any profits realized from bartering will increase your overall profit for the year and impact your self-employment tax.
Besides these basics forms of taxation, you might also be liable for excise tax.
How to Report Bartering Income
Bartering income is, in the case of most sole proprietors and individuals, reported on IRS Form 1099B on Schedule C. In certain instances, you may need to file a 1099-MISC form.
If you have bartered with other parties for the purposes of a business, they are required to send you a Form 1099-MISC. You will need to report all of the amounts stipulate on any 1099-MISC forms when filing.
Partnerships will need to fill out Form 1065, corporations Form 1120, and small business corporations Form 1120-S.
Estimating the Value of Bartered Goods
To file your bartering income you will need to correctly calculate the value of the goods and services swapped. This is done by analyzing historical sales of these goods/services.
If you can’t figure out a fair value from looking at historical prices, you can also report bartering transactions based on their carrying value. This is worked out by taking original cost – accumulated depreciation.
Besides the filing requirements listed above, you may also be required to provide those you have bartered with a Form 1099-MISC. This is usually only needed if you are bartering as a business.
Are You Doing a Lot of Business Bartering?
If you are doing a lot of bartering in a business capacity, the reporting responsibilities can get a little complicated.
To take the stress out of large volumes of taxable barter transactions, the smartest plan is usually to pull in some professional help.
Call us. You won’t regret it.