Tax Implications of Bartering for Small Businesses

Bartering tax rules:

The basic rule (IRC 61 and Treas. Reg. 1.61-2(d)(1)):

• Both parties report the FMV of the goods or services received as income
• If you received services, the FMV of those services is your income
• If you received goods, the FMV of those goods is your income
• The income is the same type as if you’d been paid in cash (business income on Schedule C, rental income on Schedule E, etc.)

Self-employment tax:

• Barter income from a trade or business is subject to SE tax (15.3%)
• This is in addition to income tax
• Both parties pay SE tax on the value received

Formal barter exchanges:

• Organized barter exchanges issue Form 1099-B to each member
• The exchange reports the total barter transactions to the IRS
• Members receive “trade dollars” or credits that can be used with other members
• Each credit earned is taxable income when earned (not when spent)
• IRC 6045 requires the exchange to report

Informal barter (no exchange):

• The same rules apply, but no 1099-B is issued
• Both parties are responsible for reporting on their own
• The IRS can discover unreported barter through audits of either party
• If Party A reports the expense but Party B doesn’t report the income, the IRS can match the discrepancy

Deductions from barter:

• If the goods or services you RECEIVED are a deductible business expense, you can deduct them
• The deduction and the income may offset, resulting in zero net tax effect
• But if what you received is NOT deductible (personal use items, non-deductible expenses), you have income with no offsetting deduction

Timing:

• Income is reported in the year the barter transaction occurs
• For barter exchange credits: income is reported when the credit is earned, not when it’s spent