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If you are the owner of a business, you may sometimes find
it to your advantage to barter for goods and services rather
than paying in cash. You should be aware, however, that the
fair market value of goods that you receive in bartering is
taxable income, just as if you had received a cash payment.
Exchanges of services result in taxable income for both parties.
Say, for example, that a computer consultant agrees to an
exchange of services with an advertising agency. Both parties
to the transaction are taxed on the fair market value of the
services received. This is the amount they would normally
charge for the same services. If the parties agree to the
value of the services in advance, that will be considered
the fair market value unless there is contrary evidence.
Income is also realized where services are exchanged for
property. For example, if an architectural firm does work
for a corporation in exchange for shares of the corporation’s
stock, it will have income equal to the fair market value
of the stock.
Many business owners join barter clubs that facilitate barter
exchanges. These clubs generally use a system of “credit
units” that are awarded to members who provide goods
and services and can be redeemed for goods and services from
other members.
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If you
participate in a barter club, you’ll be taxed on the value of
credit units at the time they are added to your account, even
if you don’t redeem the units for actual goods and services
until a later year. For example, say that in Year 1 you earn
2,000 credit units, and that each unit is redeemable for one
dollar in goods and services. In Year 1, you’ll have $2,000
of income. You won’t pay additional tax if you redeem the units
in Year 2, since you’ve already been taxed once on that income.
When you join a barter club, you’ll be asked to give the
club your social security number or employer identification
number and to certify that you aren’t subject to backup withholding.
Unless you make this certification, the club must withhold
tax from your bartering income at a 28% rate.
By Jan. 31 of each year, the barter club will send you a
Form 1099-B, which shows the value of cash, property, services,
and credits that you received from exchanges during the previous
year. This information will also be reported to IRS.
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