IRS Bartering Tax Center - John R. Dundon II, Enrolled Agent
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IRS Bartering Tax Center

Business Entity Selection and the Tax Consequences of Converting

IRS Bartering Tax Center

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties in the year exchanged. The IRS has an online Bartering Tax Center that is worth checking out to help get it right.

I recently represented a client who had been advised to treat her barters as gifts which brought a layer of complexity to her audit that took about 10 extra hours of my time to straighten out.

Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.

The lesson learned here is if you are bartering regularly you should consider engaging the services of a barter exchange. A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.



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