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Bartering is one of the oldest forms of trade. You may find it beneficial to barter in order to save your cash. Plus, the advent of the internet has made it super convenient to engage with likeminded businesses.
However, bartering is a taxable income transaction. And your business must report the fair market value of goods and services that you received in these types of transactions. Plus, if you exchange services with another business, it results in taxable income for both parties.
Fair Market Value Of Bartering Taxable
Here are a few examples of an exchange of services:
- A website design agency agrees to offer website maintenance to an advertising agency in exchange for free advertising.
- A plumber contractor does repair work for a marketing company in exchange for marketing services.
In these cases, both parties are taxed on the fair market value of the services received. The fair market value is the amount they would normally charge for the services given. Unless there is contrary evidence, the parties can agree to the value of the services in advance that will be consider the fair market value.
Additionally, income is also realized if services are exchanged for property. For example:
- If a CPA firm does work for a medical facility in exchange for unused supplies, it will have income equal to the fair market value of the inventory.
- An accounting firm provides work for a corporation in exchange for shares of the corporation’s stock, it will generate income equal to the fair market value of the stock.
Joining a Club
There are a number of business that facilitate barter exchanges for businesses. Most of these clubs use a system of ‘credit units’ which are awarded to members who provide goods and services. And credits can also be redeemed for goods and services from other club members.
Generally, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year.
For example, let’s say that you earn 3,500 credit units one year, and that each unit is redeemable for $4 in goods and services. In that year, you’ll have $14,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income.
You will also be asked to provide your Employer Identification Number or social security number when you join a barter club. Plus, you will need to certify that you are not subject to backup withholding. If you cannot make this certification, the club is required to withhold tax from your bartering income at a 24$ rate.
Tax Reporting
A barter club will send participants a Form 1099-B, by January 31st of each year. This form shows the value of credits, services, property and cash that you received from exchanges during the previous year. This information is also reported to the IRS.
Exchanging Without Using Cash
By bartering, you can provide services or trade away excess inventory during slow times, all while hanging on to your cash, but it will be considered taxable income. When a client doesn’t have money on hand to complete a transaction, you may also find yourself bartering.
While these transactions can benefit all parties involved, you should be aware of the state and federal consequences. If you would like more information about bartering and its taxable income, please contact us.
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