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The Online Advisor - May 2000
Bartering can be beneficial -- but it's not tax-free
People have been bartering for thousands of years, and the transaction is still basically the same: you provide someone with a product or service, and they provide a product or service in return.
For example, say a printer and an auto mechanic want to barter services. The printer might provide the mechanic with advertising fliers, and the mechanic might repair the printer's delivery van. Or, instead of bartering directly, the printer might join a barter exchange. In that case, the printer would receive barter credits (or barter dollars) in return for providing printing services to members of the exchange. The printer could then "spend" the barter dollars on products or services provided by other exchange members.
Individuals often trade services, but bartering is especially popular with businesses. If cash is tight, bartering can be a good way for your company to obtain needed products or services. Bartering can also help you dispose of excess inventory or occupy unused production time. A satisfied bartering partner might even refer cash-paying customers.
Contrary to what many people think, bartering doesn't offer any tax advantages. According to the IRS, you earn income equal to the fair market value of any bartered property or services that you receive. You also earn income as soon as you receive barter credits, even if you don't actually "spend" those credits until a later year. If you're a member of a barter exchange, the exchange must provide you (and the IRS) with Form 1099-B, reporting the value of the property, services, and barter credits that you received during the year.
If you have barter income, remember that you must pay tax on that income in cash. So consider putting aside some money during the year to cover the bartering part of your tax bill. If you barter extensively, you also may need to begin making quarterly estimated tax payments or increase the amount of your current estimates.
Bartering can be a good supplement to your cash business, as well as
an enjoyable way to profit from your skills or hobbies. But bartering isn't always as simple as it seems. If you
have any questions about the tax or business aspects of bartering, give us a call.
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