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Do Small Businesses Pay Taxes When Bartering?

July 6, 2012 by Ed Becker

As cash flow gets tighter and tighter many small business owners look to the oldest form of commerce, the exchange of goods and services in lieu of cash.  The fair market value of property or services received through barter is considered taxable income and the IRS wants to know about this and requires you to report it.

Income from bartering is taxable in the year it is performed. The rules for reporting barter transactions may vary depending on which form of bartering takes place, so always consult with your CPA to ensure proper treatment.

Here are several concepts related to barter the IRS wants small business owners to know and can be found in more detail at the IRS Website

General Description of Barter

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter 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 barter exchange company. A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis. 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.

Internet-based Barter

The Internet provides a new medium for the barter exchange industry.  Pure Internet-based barter companies differ from traditional, organized trade exchanges in that they do not have a physical office. In modern Internet barter exchanges, there is an agreement or process in place to value goods and services exchanged, which is facilitated by the barter exchange for a fee. A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves.

Trade Dollars

Barter exchanges have their own unit of exchange, usually known as barter or trade dollars.  Trade dollars or barter dollars are valued in U.S. currency for the purposes of information returns.   Trade dollars allow barter to take place between parties when one party may not have a simultaneous need or desire for the goods or services of the other members.  Barter exchanges act as the bookkeeper for keeping track of trade dollars that participants accumulate. Earning trade or barter dollars through a barter exchange is considered taxable income, just as if your product or service was sold for cash.

Requirement for Barter Exchanges to File Information Returns

Barter exchanges are required to issue Form 1099-B (PDF) Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the Internal Revenue Service.  Make sure this information gets to your CPA in order to file accurate tax returns.

As a small business owner, not reflecting true sales for barter transactions understates your sales which can understate the true growth of your business.  Although the net income remains the same, it can distort your financials if you are considering selling the business.

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