What are the Tax Responsibilities of Bartering Participants?

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.

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

Reporting Bartering Proceeds

If you barter your products or services through a barter exchange, you should receive a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The amount shown in 1099-B Box 3 Bartering is your barter transactions proceeds and is generally reportable as income and must be included on your tax return. Barter exchanges have an annual obligation to report your bartering proceeds to the IRS.

If a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are reported on Form 1099-MISC.

For example, an attorney represents a painter for nonpayment of business debts in exchange for painting the attorney’s law offices. The amount reportable by each on Form 1099-MISC is the fair market value of his or her own services performed. However, if the attorney represents the painter in a divorce proceeding, then there are two types of expenses involved in this transaction, painting the office is a business expense for the attorney but the divorce expenses are personal expenses for the painter.The requirement to report barter payments only applies to payments made in the course of a trade or business, Therefore, the attorney must report on Form 1099-MISC the value of the painting services because painting the law office is an activity that is related to the attorney’s trade or business. But the painter need not send a Form 1099-MISC to the attorney reporting the value of painting the law offices, because the work is in exchange for divorce legal services that are personal expenses and separate from the painter’s business. See Form 1099-MISC Instructions for more information. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business (PDF), or other business returns such as Form 1065 for Partnerships (PDF), Form 1120 for Corporations (PDF), or Form 1120-S for Small Business Corporations (PDF).

Nevertheless, even if no Forms 1099-B or 1099-MISC are filed, bartering is generally taxable to the extent of the fair market value of the products or services bartered under Internal Revenue Code Section 61. In the case of the example above, the painter would still have a taxable transaction in the bartering of painting for legal work by the attorney on the divorce proceedings even though no Form 1099-MISC is required to be filed by the attorney. Please refer to Publication 525, Taxable and Nontaxable Income, and Internal Revenue Code Section 61 for more information.

Staying in Compliance

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.

If you have failed to report this income, correct your return by filing an amended return such as Form 1040X (PDF). Refer to Topic 308 for Amended Return information. If you receive income from bartering, you may be required to make estimated tax payments.

What are Barter Exchanges?

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a barter exchange company. A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.

Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase.

Internet-based Barter

The Internet provides a new medium for the barter exchange industry.  Pure Internet-based barter companies differ from traditional, organized trade exchanges in that they do not have a physical office. In modern Internet barter exchanges, there is an agreement or process in place to value goods and services exchanged, which is facilitated by the barter exchange for a fee. A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves.

Trade Dollars

Barter exchanges have their own unit of exchange, usually known as barter or trade dollars.  Trade dollars or barter dollars are valued in U.S. currency for the purposes of information returns.   Trade dollars allow barter to take place between parties when one party may not have a simultaneous need or desire for the goods or services of the other members.  Barter exchanges act as the bookkeeper for keeping track of trade dollars that participants accumulate. Earning trade or barter dollars through a barter exchange is considered taxable income, just as if your product or service was sold for cash.

Requirement for Barter Exchanges to File Information Returns

Barter exchanges are required to issue Form 1099-B Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the Internal Revenue Service. Learn more about information return filing requirements  for barter exchanges.

What is Bartering Income?

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. It is the most ancient form of commerce. Any business owner or professional who has a product or service to offer can barter.

While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair. Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Tax Responsibilities

Income from bartering is taxable in the year it is performed. The rules for reporting barter transactions may vary depending on which form of bartering takes place. Refer to Tax Responsibilities of Bartering Participants for more information about reporting income and staying in compliance.

Home-Based Online Barter Business

If online bartering turns into a business, or you have recurring barter transactions and are purchasing items to barter with the intention of making a profit, you may have started a barter business.

If Your Bartering is a Trade or Business

If you are operating a viable bartering business, you may be entitled to deduct business expenses. Do you have an established business and are augmenting your sales with barter transactions? If so, include the sales from bartering in your business income.

Bartering Depreciated Business Assets

If you barter business assets or close your business you may have capital gains, ordinary gains and depreciation recapture (explained in chapter 3 of Publication 544) to report.

Bartering Appreciated Assets

Examples of appreciated assets often include art, antiques and collectibles. If you have barter transactions of property where the fair market value is more than your cost or other basis, you usually will have a reportable gain. These gains may be business income or capital gains.

Creating a New Economy:  Bartering

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Bartering Income

Income from bartering is taxable in the year it is performed. The rules for reporting barter transactions may vary depending on which form of bartering takes place. Learn about bartering assets and online bartering.

Barter Exchanges

A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.

Tax Responsibilities of Bartering Participants

Learn about your federal tax responsibilities for reporting bartering proceeds and staying in compliance.

Tax Requirements for Barter Exchanges

Barter exchanges, whether Internet based or with a physical location, are required to file Form 1099-B for all transactions unless certain exceptions are met.

Backup Withhholding and the “B” Process

Backup withholding can apply to most kinds of payments that are reported on Form 1099, including payments by broker/barter exchanges. Barter exchanges are required to issue “B” notices and are subject to performing back-up withholding if barter participants fail to furnish a valid Taxpayer Identification Number (TIN).

Record Keeping for Business Barter Transactions

Bartering transactions generally have associated tax reporting, accounting and record-keeping responsibilities.

Top Ten Tips for Taxpayers Making Charitable Donations

IRS Summertime Tax Tip 2010-21

Did you make a donation to a charity this year? If so, you may be able to take a deduction for it on your 2010 tax return.

Here are the top 10 things the IRS wants every taxpayer to know before deducting charitable donations.

1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, Cumulative List of Organizations, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.

2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

3. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the name of the organization, or a payroll deduction record.

6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.

7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description and good faith estimate of value of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.

9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.

10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

Employee vs. Independent Contractor – Seven Tips for Business Owners

IRS Summertime Tax Tip 2010-20

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1.  The IRS uses three characteristics to determine the relationship between businesses and workers:

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
• Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2.  If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

3.  If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

4.  Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5.  Workers can avoid higher tax bills and lost benefits if they know their proper status.

6.  Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7.    You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

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