Bartering for business and what it means for taxes

Fair trade

When you start out in your business, you may not have much cash to pay for the services you need to get your enterprise off the ground. One solution? Bartering. Some budding entrepreneurs offer to provide their products or services in exchange for good or services they need for their own business.

What is bartering?

So, what exactly is bartering? The IRS defines it as the trading of one product or service for another, usually without an exchange of cash. A bartering transaction may take place either informally between people and businesses, or it can occur through a barter exchange company on a third-party basis.

What is a barter exchange?

A barter exchange is a person or group of people (called members) who contract with each other or the exchange itself to barter goods or services with one another. The members of the exchange are not under any obligation to barter or purchase from a seller, but when the member barters either a product or service to another member, their account with the exchange is credited (increased) for the fair market value of the item sold. If a member buys something, the account is debited (decreased) by the fair market value of the item purchased.

How does bartering affect taxes?

Now, keep in mind that just because no money changed hands you don’t get out of your tax obligations.

The IRS considers barter or trade dollars identical to real dollars for the purpose of tax reporting. You would still have to report the fair market value of what you receive on your tax return.

When you engage in bartering, you should get a Form 1099-B, Proceeds from Broker and Exchange Transactions. You’ll find the proceeds of your bartering transactions in Box 3, which you will need to report on your tax return, either as income on your 1040 or revenue for your business on Schedule C. However, if a business makes payments to another business (that is not a corporation) greater or equal to $600 during the tax year, the payments would be reported on form 1099-MISC.

Another component of bartering is backup withholding. Backup withholding is a 28-percent tax that the IRS imposes on certain types of transactions, including bartering. However, you are exempt from backup withholding if you send a W-9 to your clients with your correct name and Social Security or business Tax Identification Number (you get this when you register your company with the IRS) listed on it, and indicate that you are exempt from backup withholding.

The W-9 is a form used to report your name and Social Security number or business Tax Identification Number to people who you provide goods or services. It is a fairly simple form to fill out, but if you run into questions, just ask a good accountant.

Tax tips for bartering

So, what should you do if you engage in bartering? First, as with everything in your business, keep track of all your transactions — no matter how small or inconsequential they might seem. Next, if something doesn’t make sense, or if you have any questions, talk to a tax professional before engaging in any transactions to see what the tax effects would be.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.