Barter was the very first currency. “I’ll trade ya,” came out of a human’s mouth long before the query of “How much is that?” To this day, many entrepreneurs accept bartering as a form of doing business especially with customers who are short on cash, but have something valuable to give up either in the form of product or services.
The IRS views these transactions as taxable, which means the value of the transaction must be reported on your income tax return. If the barter takes place in the course of your trade or business (sole proprietor or partnership), it is also subject to self-employment tax.
To properly track these activities, enter the value of the trade in your accounting software. Report the value as sales and the offset accordingly. For example, if you trade a $600 product for $600 worth of legal fees for business advice, you have a business deduction against that income. So for you accounting types, create a journal entry to credit sales for $600 and debit legal and professional fees for $600, thus reporting the income and expense. Be sure to identify the transaction as “barter” so that if you are audited years from now, the auditor isn’t looking for a bank deposit to correspond to the sale or for a cancelled check to match up to the expense.
If what you received for the $600 in legal fees was landscape services at your personal residence or some other personal benefit, the offsetting debit would be to your draw account.
Because we’re talking about tax law, this process can get complicated. Perhaps you have a home office. If so, be sure to record those landscape services in such a way that you will remember to deduct the pro rata share as home office expense come tax time.
Most recently, a client came in with a quick question, which took all of five minutes to answer. On her way out, she asked, “how much do I owe you?” I started to wave her off, and then I remembered her line of business: baking delicious, mouthwatering ham and cheese breakfast croissants for local B&Bs. I requested payment in food. She brought by a platterful which I shared with my staff.
The first thing I had to do in this situation was create a value for the trade. We both considered it an even exchange. The dozen croissants she provided were valued at $25, so I valued my time to her at that amount. In this situation, I would credit sales $25 and debit crew meals or even office supplies $25. But if I ate every single one of them myself (and don’t think I didn’t think about it!), I would have had to debit my draw account and end up paying taxes on the “income.”
There are barter exchanges business owners can join to generate sales. A barter exchange tracks the trades among its members, and at year end it is required to issue Form 1099-B Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to each member who participates in barter transactions. A copy is filed with the IRS who will be looking at your sales to ensure that these activities have been included.
For more information on this topic, go to the IRS website and visit Bartering Tax Center.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook