Bartering Could be Taxable Income

Sounds like a good deal.  You paint my house, I prepare your tax return.  Or an employer gives an all-expense paid vacation to employees meeting certain performance goals. Everyone benefits and no one pays taxes on the transaction.  Not so fast.  These transactions are known as “barter” and are subject to income tax laws, the same as if you had received cash.    Bartering is the exchange of one product or service for another and the fair market value of the goods or services received is taxable income.

In a direct barter exchange you deal with the other party face to face.  Generally speaking, no tax-related paperwork is required but this needs to be recorded in your accounting records and reported on your tax return.  It’s just like a sale for cash.  Whether you are a cash-basis or an accrual-basis taxpayer, the IRS treats bartering as income received.

For example, suppose you are a plumber.  Your neighbor is an income tax preparer.  He prepares your income tax return and you fix his kitchen sink.  The value of the services rendered to your neighbor is $250.  You report $250 income from the barter transaction.  The cost to you for tax preparation  is $250.

It is not uncommon to participate in a barter exchange.  This simplifies bartering as you don’t have to find someone who has what you want and needs what you have.  With a barter exchange, you receive credits for goods or services you perform, which may be exchanged for goods or services you need.  Use of a barter exchange does not change the nature of the transaction.  It remains taxable income.  However, use of a barter exchange carries an additional twist to the process.  The barter exchange is required to issue you a Form 1099-B.

You may be saying, “Wait a minute.  Isn’t a 1099-B the form I get if I sell stocks or other securities.  Yes, that’s correct.  The actual name of that form is “Proceeds from Broker and Barter Exchange Transactions.”  The barter part is often overlooked.

Obviously, you should maintain records of any bartering transactions you enter into.  The IRS suggests that you label all barter income and expense documents as “bartering” and retain all original source documents such as invoices or Forms 1099-B.

Bartering as compensation is another issue in this regard.  A business may pay bartered goods as a bonus or part of the compensation package to employees.  Referring to the all-expense paid trip mentioned at the beginning of this article, if that trip was obtained by the employer in exchange for advertising (to use an example) the company should report that barter exchange in its records.  But it also must report the bartered items as compensation on the employee’s W-2.  It is also subject to employment taxes.  The same reporting holds true if the company “gives” the bartered item to an independent contractor.  It must be reported on a 1099-MISC issued to that contractor.

It has been said many times that “there is no such thing as a free lunch.”  Once again, that proves to be true as that bartered lunch could be taxable income.