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Barter Transactions and Business Taxes

Barter Transactions and Business Taxes

Trade by barter is an ancient means of transaction in which people exchange goods for goods without money.  These days, business exchange services with each other in a barter system. While money does not change hands, the transaction can be taxed, according to Uncle Sam.

It might be beneficial to small businesses to barter for goods and services rather than paying cash. For businesses that engage in bartering, it is essential to know that the fair market value of goods and service that comes from bartering is classified as taxable income by Uncle Sam. A business that exchanges service with another business both have taxable income. 

The income you realize from bartering activity is recorded the same way one records other forms of income on the tax return.


Barter Income and Business Tax

While money is not involved in a barter transaction, the IRS considers it taxable. It can affect your entire income liability, excise tax, self-employment tax like other income as well.

According to the IRS, barter transactions might shoot up your tax liability. In other words, it can increase your self-employment tax as a business owner. It could also trigger various business income, like capital gains income, which is taxable.


Reporting Barter Income to the IRS 

Like other income, we consider barter as a business income. As a result, all barter transactions should reflect on IRS form 1099B. Anyone who has gotten barter income from another party in a year must submit form 1099B. This form will reflect the amount your business got from the barter transaction.

By mid-February of the following year, you should have the form. Every barter transaction, including the income and source, must reflect on the tax return of your business income. From the tax point of view, barter income is similar to other income. 

While there are no serious exemptions for barter transaction, it is not essential to report barter transactions that are:

  • Below $10

  • Not up to 100 transactions in a year

  • Done with certain "exempt foreign persons."

Also, the IRS specifies that there is no need to report transactions that "involve corporate members, or people involved in barter exchange that might reflect on an aggregate basis."


Reporting Barter Income: IRS Form 1099-B

Form 1099B is one of the series of the 1099s. The business or party that paid in the barter transaction must complete it. For instance, if you bartered your lawn care service for various exchanges in the year, the value of the service must reflect in the form. The other party, as well, will complete their 1099B that will show the value of the service they did.

There are cases one might need to file a 1099 MISC form to take care of barter exchanges. Your tax professional should guide you in this case. 


How Does Barter Related Expense Affect Tax?

The expense arising from barter transactions can be classified and deducted as a legitimate business expense. 

Let us consider an example of someone that barter counseling service must make a trip to meet the client. It is possible to deduct the travel expense for this transaction. Paying to register a barter exchange as well could classify the registration fee as a business expense. The income can be reduced from these deductible expenses.


Advice from Uncle Sam about Barter 

On a final note, it is safe to classify barter transactions (both expenditures and income) in the same way one would classify other business income and expenditure. Their effect in terms of tax liabilities, types, and amount of tax is the same.

The IRS advises that one should maintain essential records, enlist the service of trusted barter exchange, and work with a professional should there be any question. 


Using a Barter Exchange 

As expressed above, many businesses prefer to use a barter exchange to take care of all barter transactions. They also serve as a bank to help record barter transactions between members.

All members of a barter exchange will receive form 1099B that reveals the tax year's income amount when the product and services were bartered. This income, alongside other barter income that comes from all partners involved in bartering, should reflect on the tax return.


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