IRD Tax Implications
IRD TAX IMPLICATIONS
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.
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. 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.
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.
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.
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.
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 (PDF) 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
Recordkeeping Tips for Barter Transactions
Bartering transactions generally have associated tax reporting, accounting and recordkeeping responsibilities that go with them. The following information gives you tips for keeping records of certain types of barter. Bartering is the trading of one product or service for another. Usually there is no swap of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor, and employees, or it can take place on a third party basis through a modern Internet barter exchange. Bartering is an exchange of one taxpayer’s property or services for another taxpayer’s property or services. The fair market value of property or services received through barter is taxable income.
Once you have agreed to barter transactions with a vendor or customer, you must enter the transaction accurately in your accounting and tax records. Whether you maintain your books and records manually or use one of the many accounting and tax software packages on the market today, you need to keep and record some basic information about your barter transactions. Clearly mark or file all barter income and expense documents as “bartering,” and retain all original source documents pertaining to your barter transactions:
- Sales receipts and invoices
- Barter exchange statements and Forms 1099-B, Proceeds From Broker and Barter Exchange Transactions
Bartering Products or Services
The most important barter tax accounting concept is that the IRD treats bartering as income received, whether you use accrual-basis or cash-basis accounting.
Direct Barter Transactions
If you engage in the direct barter of products or services with an individual or a business you will generally not receive a Form 1099-B, but the transaction must be accounted for in your books and records just the same. Think of a barter transaction as just another sales transaction of your business goods or services you must include in your income at the time received. Accurate accounting and recordkeeping can help you manage barter transactions. For example, if a doctor agrees to give an accountant a personal medical exam in exchange for personal tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor. For simplicity sake, let’s assume the fair market value of both services is equal to say, $200. Note that all pieces of the transaction should be clearly marked as a bartering transaction in the books and records of both the doctor and the accountant. With the fair market value of both services being equal, both the doctor and the accountant must include $200 in their income as a result of the bartering transaction.
You may need to configure your accounting software to accept bartering transactions.
Barter Exchange Transactions
Exchanges occurring through a barter exchange are reported to IRD on Form 1099-B and show the value of cash, property, services, credits or scrip added to your account by the barter exchange. Recordkeeping and accounting for barter exchange transactions is basically the same as for direct barter transactions except that you are taxed on the value of the credit units added to your account even though you may not actually receive goods or services from other exchange members until a later year. You will have additional help in determining the taxable bartering amount by information reporting from the barter exchange. Barter exchanges record all transactions and report them to the IRD on Forms 1099-B. The value of trade dollars received for your products or services must be included in gross income for the tax year in which they are credited to your account. If your business is a corporation, you will receive one aggregate Form 1099-B annually. If you are a partnership, individual or a sole proprietor, you will receive a Form 1099-B from the exchange for each barter transaction with a value of $1 or more.
Bartering as Compensation
Barter can be used as compensation, too. A business can pay bartered goods or services as a bonus or as part of a compensation package to employees, partners and contractors. For example, a business may use barter bonus or sales incentive programs, with compensation including such items as vehicles, restaurant certificates or resort trips.
Just as cash business expenses associated with bartering are deductible, barter used as compensation is deductible and subject to employment taxes and information reporting. Barter used as a bonus or compensation for an independent contractor must be included on the contractor’s Form 1099-MISC, Miscellaneous Income, as non-employee compensation, and all barter compensation for employees must be taken into account on their Forms W-2. Barter compensation is subject to FICA, FUTA, and federal income tax withholding.
Other Examples of Bartering Transactions
Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient recordkeeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid. You need good records to prepare your tax returns. These records must support the income and expenses you report.
You are a self-employed financial planner who performs services for a client, a small business corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares of stock in your income on Schedule C or Schedule C-EZ of Form 1040. The expenses you pay in the performance of the financial planning services are also deductible.
You own a small apartment building. An artist trades you a painting in return for six months’ rent-free use of an apartment. You must report the fair market value of the artwork as rental income on Schedule E Supplemental Income and Loss on Form 1040. Generally, this would be the fair rental value of the apartment for six months. You can claim your normal rental expenses associated with the barter of the apartment. The artist must report the fair rental value of the apartment in income on Schedule C, Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ, Net Profit from Business, of Form 1040 as the artist would for any other sale of a painting. The artist can claim the normal cash business expenses associated with the bartered work of art such as canvas, paint, brushes, supplies and materials.
You are a self-employed house painter. In return for painting his personal residence, your attorney agrees to perform personal legal services. If you would normally paint such a residence for $3,000 you would report the $3,000 in your gross receipts and you would be able to deduct the ordinary and necessary business expenses associated with painting the residence (such as paint, brushes and equipment rentals) on Schedule C or Schedule C-EZ of Form 1040. The attorney must also report the fair market value of the services in gross income on Schedule C or Schedule C-EZ of Form 1040, and deduct his ordinary and necessary business expenses associated with the legal services.
You are a self-employed owner of an online retail Web site that sells bowling shirts, shoes, balls and supplies. In return for fully equipping a self-employed owner of an online retail fishing shop with bowling equipment with a fair market value of $1,000, you receive fishing rods and clothing also valued at $1,000. You must include the fair market value of the equipment you receive in your income on Schedule C or Schedule C-EZ of Form 1040. You will also increase your cost of goods sold by decreasing your inventory for the cost or other basis of the bowling equipment given up. The fishing shop owner will handle recordkeeping the same way if both maintain inventories. Both you and the fishing shop owner will report the income of $1,000.
Be sure to use a reasonable fair market value for the property or services received in a barter transaction to include in your income. The transaction is not a “wash” if you report the fair market value of the property received that is greater than your cost or basis in the property given up. In Example 4, if the bowling equipment given up has a cost or other basis of $500 to you there is a $500 gross profit on the transaction since the fair market value of the fishing equipment received is $1,000. Simply put, you should identify the transaction in your records and report the income and any related business deductions and cost of goods sold on Schedule C or Schedule C-EZ of Form 1040 transactions.
Tax Responsibilities of Bartering Participants
Learn about your federal tax responsibilities for reporting bartering proceeds and staying in compliance.
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 IRD. 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 IRD 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
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 uBarter exchanges, whether Internet based or with a physical location, are required to file Form 1099-B for all transactions unless certain exceptions are met. Barter exchanges are not required to file Form 1099-B for:
Exchanges through a barter exchange having fewer than 100 transactions during the year
Exempt foreign persons as defined in Regulations section 1.6045-1(g)(1)
Exchanges involving property or services with a fair market value of less than $1.00
For calendar year 2008, Copy B of Form 1099-B is due to barter exchange participants by February 2, 2009. Copy A of the form is required to be filed with the IRD by March 2, 2009. If filing electronically, the due date is March 31, 2009. Software that generates a file according to the specifications in Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Electronically (PDF) must be used by barter exchanges. The IRD does not provide a fill-in form option.
Caution: Paper forms are scanned during processing by the IRD. Forms 1096, 1098, 1099, or 5498 that are printed from IRD.gov will not be accepted.
Non-corporate client or member bartering is reported on a transactional basis on Form 1099-B, but additional information is to be added to the form by the barter exchange. Under Regulation 1.6045-1(f)(i), barter exchanges are required to make a return of information reporting the name, address, and taxpayer identification number of each member or client providing property or services in the exchange, the property or services provided, the amount received by the member or client for such property or services, the date on which the exchange occurred and other information required on Form 1099-B. This means that multiple Forms 1099-B may be required for member clients with multiple bartering transactions during the year. To learn more about 1.6045-a(f)(i), Returns of Information of Broker and Barter Exchanges, visit the Electronic Code of Federal Regulations site, click on “Simple Search” and enter 26 in the Title and “Returns of information of brokers and barter exchanges.” in the “Search for” field.
Corporate client or member bartering is reported on the aggregate for the year, rather than on a transactional basis. Under Regulation 1.6045-1(f)(ii), barter exchanges are required to file annual Forms 1099-B including the aggregate or total amount received by a corporate client or member during the year for property or services provided by the corporate client or member in all barter transactions through the barter exchange. Form 1099-B additionally requires the name, address, and taxpayer identification number of the corporate client or member.
Penalty for Not Filing or Filing Incorrect Forms 1099-B Failure to file Forms 1099-B can result in significant penalties under Internal Revenue Code Section 6721. The penalty is based on when correct information returns are filed. The penalties are:
$15 per information return if filed correctly within 30 days of the specified due date with a maximum penalty of $75,000 per year ($25,000 for small businesses, defined below).
$30 per information return if filed correctly more than 30 days after the due date, but by August 1 with a maximum penalty of $150,000 per year ($50,000 for small businesses).
$50 per information return if filed after August 1, or not filed, with a maximum penalty of $250,000 per year ($100,000 for small businesses).
A minimum of $100 for each unfiled information return for intentional disregard.
How to Determine if Your Business Qualifies as a Small Business for the Lower Maximum Penalties If your average annual gross receipts were $5 million or less for the three most recent tax years, or for the period you were in business if shorter, before the calendar year in which the information returns were due, then you are a small business qualified for the lower maximum penalties.
Back-up Withholding and the “B” Process
Back-up 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). For more information please refer to the Back-up Withholding “B” Processes page.
How to Get More Help
If you have questions about reporting on Form 1099-B, call the IRD information reporting customer service site toll free at 1-866-455-7438 or 304-263-8700 (not toll free). For TTY/TDD equipment, call 304-267-3367 (not toll free). The hours of operation are Monday through Friday from 8:30 a.m. to 4:30 p.m., Eastern Time.
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).
What is Backup Withholding?
Under the provisions of Internal Revenue Code, Section 3406(b), persons (payers) making certain payments to payees must withhold and pay to the IRD a specified percentage (see BWH Rate Table) of those payments under certain conditions.
Which payments may be subject to backup withholding?
Backup withholdin g can apply to most kinds of payments that are reported on Form 1099. These include:
- Interest payments (Form 1099-INT),
- Dividends (Form 1099-DIV),
- Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR),
- Rents, profits, or other gains (Form 1099-MISC),
- Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC),
- Payments by brokers/barter exchanges (Form 1099-B),
- Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC), and
- Royalty payments (Form 1099-MISC).
- Gambling winnings (Form W-2G) may also be subject to backup withholding.
- Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash. Payments that are excluded from Backup Withholding are real estate transactions, foreclosures, and abandonment’s, cancelled debts, distributions from Archer MSAs, long term care benefits, distributions forma any retirement account, distributions from an employee stock ownership plan (ESOP), fish purchases for cash, unemployment compensation, state or local income tax refunds, and qualified tuition program earnings.
Backup Withholding (BWH Rate Table)
28.0% on payments after December 31, 2002 until December 31, 2012. To be determined thereafter.
When is Backup Withholding Required?
To be subject to backup withholding, a payment must be a reportable interest or dividend payment under section 6049(a), 6042(a), or 6044 (if the patronage dividend is paid in money or qualified check), or an “other” reportable payment under section 6041, 6041A(a), 6045, 6050A, or 6050N. If the payment is one of these reportable payments, backup withholding will apply if:
- The payee fails to furnish his or her taxpayer identification number (TIN) to you,
- For interest, dividend, and broker and barter exchange accounts opened or instruments acquired after 1983, the payee fails to certify, under penalties of perjury, that the TIN provided is correct,
- The IRD notifies you to impose backup withholding because the payee furnished an incorrect TIN (CP2100 or CP2100A).
- For interest and dividend accounts or instruments, you are notified that the payee is subject to backup withholding (under section 3406(a)(1)(C), “C” notice), or
- For interest and dividend accounts opened or instruments acquired after 1983, the payee fails to certify to you, under penalties of perjury, that he or she is not subject to backup withholding. Some payees are exempt from backup withholding. For a list of exempt payees and other information, see Form W-9, Request for Taxpayer Identification Number and Certification, and the separate Instructions for the Requester of Form W-9. What is a CP2100 or CP2100A Notice?
It is a notice which tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers receive a CP2100 all other filers will receive a CP2100A.
Large Filer…250 or more error documents
Mid Size Filer…Less than 250 error documents and greater than 50 error documents
Small Filer…Less than 50 error documents
What to do if you receive a CP2100 or CP2100A Notice.
- Compare the listing(s) with your records.
- For missing TINs: Determine if you are already backup withholding on the account. If you are not, begin backup withholding immediately. You must make up to three solicitations for the TIN (initial, first annual, second annual) to avoid a penalty for failing to include a TIN on the Information Return.
- For incorrect TIN’s: Compare the accounts on the listing with your business records. If they agree, send the appropriate “B” Notice to the payee. If an account does not agree, this could be the result of a recent update, an error in the information you submitted, or an IRD processing error. If this is what happened, the only thing you should do is correct or update your records.