Barter is the exchange of goods and services between businesses and self-employed individuals. Although no money is exchanged in the barter transaction, barter is still considered taxable by the IRS.
The IRS says:
If you engage in barter transactions you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
If you are wondering about taxes on barter transactions, this statement may be troubling. But looking at it more closely, here is what it means:
Reporting Barter Income
Barter is considered as income to a business, just like other income. Barter transactions must be reported to the IRS on Form 1099B. If you have received barter income from another business or individual during 2009, they are required to submit Form 1099B showing the amount paid to your business through barter transactions. This form must be submitted to you by mid-February 2010. Then, you must include the barter income from all sources on your business income tax return, along with all other income. So, barter income is just like other income, from a tax standpoint.
Effect of Barter Income on Taxes
When the IRS says that barter transactions may increase your tax liability, it is telling you that, like other income, it may increase items like self-employment taxes for you as the business owner, and it may result in various kinds of business income (primarily ordinary business income and capital gains income).
Effect of Barter-related Expenses on Taxes
The expenses related to your barter transactions may be deductible as legitimate business expenses. For example, if you barter consulting services, and you must travel to meet the client, your business travel expense for this transaction is probably deductible. Or, if you paid to register on a barter exchange, the registration may be a business expense. These deductible expenses can reduce your income from the barter transaction.
So, in conclusion, barter transactions, both income and expenses, are considered in the same way as other income and expenses for your business in terms of their affect on your tax liabilities and the amount and types of taxes you must pay. The IRS reminds you:
Treat barter income as you would any other business activity. Keep good records, work with a reputable barter exchange and consult the IRS or a tax professional if you have questions.
Back to Barter and Taxes Information