In the tough times that small businesses are going through today, many business owners are choosing to levy payments for goods and services by bartering. It’s important to recognize that the fair market value of the goods or services provided or exchanged is still taxable income.
By definition, bartering is the exchange of products or services for another in lieu of paying cash. However, the fair market value of the goods and services must be reported as part of the business at the end of the year.
Here are 4 essential tips on how bartering affects your tax return:
1. Barter Exchange: Barter usually functions where businesses trade products or services among themselves. No matter whether the business has a physical location or operates over the internet, it is normally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, at the end of the year to its clients and to the IRS.
2. Barter Income: For the purposes of tax reporting, barter dollars are equal to real dollars. You must report the fair market value of the products of services exchanged on your tax return.
3. Taxes: The income generated through bartering is taxable in the year it is performed. Your barter may result in ordinary business income, capital gains or losses, or you might have a nonrefundable personal loss. It may result in liabilities for income tax, self-employment tax, employment tax, or an excise tax.
4. Reporting: Generally, the rules for reporting bartering services vary based on which form of bartering takes place. You should report this type of income on Form 1040, Schedule C Profit or Loss from Business, or on other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.
If you are uncertain about how to go about reporting your barter income as part of your tax return, please contact one of our trained and knowledgeable Tax Patriots who can help you understand and file such returns.