Recordkeeping for Barter Transactions
Barter is an alternative purchasing strategy used by many small businesses. Probably as old as commerce itself, barter is simply the exchange of goods and services instead of cash.
Barter can take place directly between participating businesses and individuals or via a third-party (usually online) barter exchange. In the latter, participants receive credits that enable them to “buy” products or services from other exchange members.
Bartering can be a great way to conserve money when cash flow is tight, because it allows each party to obtain something it needs by providing a product or service to the other party instead of parting with valuable cash. But keep in mind as you’re trading goods and services that there’s no free lunch with bartering from a tax perspective.
The IRS considers barter transactions to be taxable events with associated tax-reporting, accounting, and recordkeeping responsibilities for participating businesses. Failure to properly account for barter transactions and pay taxes due could result in back taxes, penalties, and fines from the IRS.
In short, the fair market value of products or services you receive via barter must be reported as taxable income to the IRS. This could mean income, self-employment, or excise tax liability, as well as capital gains or losses.
If you make transactions via a third-party barter exchange, you should receive a Form 1099-B from the exchange that shows the value of cash, property, services, or credits added to your barter account the previous year. Regardless of whether or not you actually use credits to buy goods or services from other members, you will be taxed on the value of the credits added to your account during the year.
If you engage in informal direct barter with colleagues or business associates, you probably won’t receive a Form 1099-B reflecting the value of goods or services exchanged. However, you must still account for the transaction in your financial records so that you can accurately report the value of goods or services received as current income.
The easiest way to approach this is to simply think of barter transactions the same way you do sales transactions, and then record them as “income” when you receive the goods or services. The IRS recommends clearly labeling all barter income and expense documents as such and holding on to all original source documents relating to barter transactions, including sales receipts and invoices, barter exchange statements, and Forms 1099-B.
Also, be sure to put informal barter agreements with colleagues or business associates in writing, clarifying exactly what products or services are being exchanged and their dollar value, so that you can report it accurately on your business tax return. If you use accounting software, you may need to configure it so it will accept barter transactions.
Many businesses also use barter as compensation, paying out bartered goods or services as bonuses or as part of sales incentive or comp packages to employees, partners, and independent contractors. When used as compensation, barter is deductible and subject to employment taxes and information reporting, just like cash.
When paid to an independent contractor, barter compensation must be included on the contractor’s Form 1099-MISC as non-employee compensation. When paid to employees, barter compensation must be included on their Form W-2, where it’s subject to FICA, FUTA, and federal income tax withholding.
Don Sadler is a freelance writer and editor specializing in business and finance. Reach him at don@donsadlerwriter.com.
