SmallBizResource Blog -- Government

Bartering Fair Game For Uncle Sam

Posted by Gayle Kesten Tuesday, Apr 14, 2009, 06:32 AM ET

We're down to the tax wire, yet one point I haven't seen among the tips scattered across the blogosphere till now: Business-related bartering is subject to taxation.

"Many small business owners are conserving their cash by bartering for the goods and services they need. Don't assume that there are no tax consequences from bartering; on the contrary, you may be taxed on your bartering activities if they relate to your business," according to tax expert Barbara Weltman (who I profiled last month).

Whether you participate in a formal barter exchange or informally designed your neighbor's company Web site in exchange for two months' worth of free banner advertising, you are required by the IRS to report the value of those products or services you received on your tax return.

Weltman points to the following points about bartering from the IRS:

• Barter Exchange: A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is Internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.
  
  
• Barter Income: Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter - barter for another’s products or services - you will have to report the fair market value of the products or services you received on your tax return.

• Taxes: Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

• Reporting: The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

For more information, check out the IRS' Bartering Tax Center. If you already sent in your return and now realize you need to amend it, then click here.

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Government