One of our Podcast listeners wrote us with the following question. I have chosen to answer it here so it will be easier for other readers to find.
“How do I account for bartered transactions in my accounting software, and how do I value the cost/price of the transaction?” In my case, my company recently was issued stock in another private company for consulting work we did for them.
To begin answering this question, I am going to explain what I believe the IRS’s position is on bartering. First, as long as the transaction is accounted for in the year it takes place and the value of the transaction is based on “fair market value,” I don’t believe the IRS has heartburn over bartering.
The IRS has a 299 page publication for businesses, Publication 17, which is a good source of material for many kinds of business accounting and tax questions. Page 89 (and other pages) of that document discusses the tax implications of bartering and the trade of services and merchandise.
Although most of us would not initially think we have entered into a “bartering” transaction during the past year, if we thought about it carefully, the correct answer is we really have.
For example, if I do some consulting for a company which results in part cash and part stock compensation, I must show the fair market value of the stock I received for my services as income. Valuing a share of stock could become complicated, but the key is that the value be based on fair market value at the time of the transaction.
A few years ago I did engage in such a transaction. At the time the stock was granted to me, the company I did consulting work for and I agreed the value was $.50 / share. That happened to be the same price a recent investor paid for the stock so it is a good approximation of fair market value. When I completed my taxes for that year, I had to show as income the total value of the stock at the time it was issued to me. I am still holding the stock and hopefully it has appreciated in value, but what mattered to the IRS is that I declared as income the total amount of stock at the time of the award. I traded my services for the stock.
I use QuickBooks for my accounting software, so I showed the value of the stock as non-cash income. I used the individual share basis of $.50 x the number of shares I received for the fair market value. My company balance sheet now shows an asset of $X dollars for the stock that was issued to me. The stock is not publically traded so I cannot practically update the value of the item. Hopefully when company whose stock my company owns sells, I will be paid a share price many times higher than the value on the balance sheet. At that point I must pay additional taxes on the gain of the value of the stock. If the stock losses value when I sell it, I can declare a loss on the stock and get some small tax benefit.
It really doesn’t matter whether the asset you are trading for product or service is stock in another company or any other property. The first thing you need to do is to declare the fair market value of the item given to you as non-cash income. The second is to account for all the costs and fair market value of the items you gave back to the other party. If the value of both sides of the transaction were approximately equal, then there should be little or no tax consequences to you at the time of the bartering transaction. Later, you may gain or lose value on the item which may cause additional consequences.