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Tax Tip - October 6th,  2008

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Bartering income: Is it taxable?

It's no wonder barter transactions sound appealing when your business experiences rising inventory levels or slowing cash flow. Swapping goods and services with other business owners, either through a barter exchange or more informally, can help you move inventory and conserve cash in tough times.

But even though you may associate bartering with cashless trades, keep in mind there can be tax implications.

Here are two ways bartering can affect your tax return.

  • Income. The fair market value of goods or services you receive in bartering transactions is includible in your business income at the time of receipt.

    Illustration: Say you swap your graphic design services for office supplies. The value of the supplies you receive is income to you.

  • Deductions. Bartered goods and services you receive and use in your business to produce income are deductible, just as if you paid cash. In the above example, you'd expense the office supplies when you receive them.

    Other costs related to bartering are also deductible, including commissions or fees you pay to bartering exchanges and costs you incur performing bartered work.

    However, remember that items you convert to personal use are not deductible.

    Example: You barter your graphic design services in exchange for a vacation. In that case, you have income but no offsetting expense.

State and local income and sales taxes may apply to bartering transactions. Give us a call if you're considering trading work or products with other businesses. We'll be happy to help you review the rules.

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