Barter transactions can provide your company with important financial, sales, and marketing benefits. Like other transactions, however, barter sales are taxable, and your company must report them to the IRS. This is also true of credits you receive or spend through a barter exchange; regardless of how you use barter credits, they're taxable as if they were cash.
Barter Income and the IRS
The U.S. Government considers barter exchanges to be legal third-party record keepers, similar to banks, brokerages, and other firms that deal with taxpayer records. Barter exchanges are required to complete and submit Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, for each of their members and the IRS. For the exchange to complete this form, you'll need to give the broker your Taxpayer Identification Number.
As far as the IRS is concerned, barter dollars are identical to real dollars. As a result, you won't get any special tax benefits (or penalties, for that matter) from using a barter exchange. If you conduct any direct barter — that is, barter for another company's products or services — you'll have to declare the fair market value of the items you sold as taxable income.
This same-as-cash standard also applies to barter purchases. If a barter purchase is business-related, you can deduct it from your taxes, but if it's for personal use, you can't deduct it.
Barter Accounting Tips
There are a few accounting guidelines to remember when you conduct barter transactions. First, keep in mind that all barter income is dealt with on a cash basis, and the IRS treats barter as income received, whether you use accrual-basis or cash-basis accounting. Also, you must report and pay taxes on barter income for the year in which it accrues; if your business is profitable you should try not to have unspent barter credits at the end of the fiscal year. (If you're unprofitable, and your barter income does not make you profitable, the IRS won't tax it.)
What should you do if you have unspent barter credits at the end of the fiscal year? If your barter exchange allows it, you may be able to contribute them to charity and deduct them from your taxes.
Using Barter as Compensation
Barter can be a great way to provide bonuses or other types of compensation without raiding your company's bank account. Just keep in mind that barter compensation, like cash, is subject to personal taxes. If you use barter to compensate a contractor, include it on their Form 1099; if the recipient is a regular employee, declare it on their W-2 and withhold all appropriate taxes.
What Does the IRS Think about Barter?
Some businesspeople believe that the IRS takes a dim view of barter transactions. As a result, they might assume that using barter subjects them to possible audits or other legal scrutiny. The truth is that a company using barter is no more likely to get audited than any other business. IRS rules concerning barter are now well-established, and the government considers the barter industry to be a perfectly legitimate business.
Treat barter just as you would any other business activity. Keep good records, work with a reputable barter exchange, and consult a qualified CPA if you have any questions or problems. If you handle barter transactions properly, they can be a useful — and profitable — part of your business.