Don’t Let the Tax Consequences of Barter Hurt Your Business

Posted by Christina Lopez on May 16th, 2010

In the face of a tough economy, more and more small businesses have begun bartering to cut costs and conserve cash flow. Office space, web design, marketing assistance, accounting services, and even products are just some of the things your business may barter for.

While bartering helps your business, it can hurt you when it comes to tax time. Few business owners realize that improperly managed bartering can get you in trouble with the Internal Revenue Service (IRS).

According to the IRS, income from bartering is taxable in the year the transaction takes place. If you barter, you have to report the fair market value of the products or services received on your tax return. Depending on exactly what was bartered, you could also be responsible for paying income tax, excise tax, or self-employment taxes associated with the barter activity. You might also have to deal with the tax consequences of capital gains, capital losses or nondeductible personal losses.

Using a barter exchange is one way to simplify the tax headaches of tracking your barter activity. The barter exchange will send you a Form 1099-B showing your barter activity for the year, and will also report any of that activity to the IRS. This way, you know everything is being recording and reported accurately.

However, many entrepreneurs barter informally, and you may not want to go to the trouble of joining a barter exchange and convincing the people you barter with to do so as well. You can still barter through this type of arrangement, but you need to document in writing explaining exactly what is being exchanged. (The bonus benefit is that the agreement not only documents your barter activity for accounting and tax purposes, but also protects your company in case a problem ever arises with your barter partner.)

If you’re not sure whether your business’s barter activities are in compliance with the IRS or don’t know how to track these activities, talk to your accountant to assess the situation. When it comes to the IRS, you don’t want to take any chances.

Going forward, keep detailed records of your barter activity, work with your accountant or tax preparer to ensure you’re in compliance and, if you decide to use a barter exchange, vet it carefully to ensure it’s legitimate.

Visit the IRS website for more information about barter, links to necessary barter-related tax forms, tips on how to keep records regarding your barter activity and additional resources.

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