IRS: Recordkeeping Tips for Barter Transactions

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Courtesy of IRS.gov.

 

In today’s economy, small business owners sometimes look to the oldest form of commerce — the exchange of goods and services, or bartering. The Internal Revenue Service wants to remind small business owners that bartering transactions generally have associated tax reporting, accounting and recordkeeping responsibilities.

 

Bartering is the trading of one product or service for another. Usually there is no swap of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor, and employees, or it can take place on a third party basis through a modern Internet barter exchange.

 

Bartering is an exchange of one taxpayer's property or services for another taxpayer's property or services. The fair market value of property or services received through barter is taxable income.

 

Recordkeeping Tip

Once you have agreed to barter transactions with a vendor or customer, you must enter the transaction accurately in your accounting and tax records. Whether you maintain your books and records manually or use one of the many accounting and tax software packages on the market today, you need to keep and record some basic information about your barter transactions.

Clearly mark or file all barter income and expense documents as “bartering,” and retain all original source documents pertaining to your barter transactions:

  • Sales receipts and invoices
  • Barter exchange statements and Forms 1099-B, Proceeds From Broker and Barter Exchange Transactions

 

Bartering Products or Services

The most important barter tax accounting concept is that the IRS treats bartering as income received, whether you use accrual-basis or cash-basis accounting.

 

Direct Barter Transactions

If you engage in the direct barter of products or services with an individual or a business you will generally not receive a Form 1099-B, but the transaction must be accounted for in your books and records just the same. Think of a barter transaction as just another sales transaction of your business goods or services you must include in your income at the time received. Accurate accounting and recordkeeping can help you manage barter transactions.

For example, if a doctor agrees to give an accountant a personal medical exam in exchange for personal tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor.

For simplicity sake, let’s assume the fair market value of both services is equal to say, $200. Note that all pieces of the transaction should be clearly marked as a bartering transaction in the books and records of both the doctor and the accountant. With the fair market value of both services being equal, both the doctor and the accountant must include $200 in their income as a result of the bartering transaction.

 

Recordkeeping Tip

You may need to configure your accounting software to accept bartering transactions.

 

Barter Exchange Transactions

Exchanges occurring through a barter exchange are reported to IRS on Form 1099-B and show the value of cash, property, services, credits or scrip added to your account by the barter exchange.

Recordkeeping and accounting for barter exchange transactions is basically the same as for direct barter transactions except that you are taxed on the value of the credit units added to your account even though you may not actually receive goods or services from other exchange members until a later year. You will have additional help in determining the taxable bartering amount by information reporting from the barter exchange . . .  read more at IRS.gov

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