Often, I find barter transactions in a client’s books by accident. This prompts a conversation about what the tax implications of the services being provided and received looks like.
I imagine the initial barter conversation goes like this:
Small Business Owner #1 (SBO#1): “Hey, I would love your [insert service] but I can’t pay for it. How about we trade [insert service] to pay you for said service.”
Small Business Owner #2 (SBO#2): "Okay…I don’t really need [insert service] but okay."
And then they both forget to account for these transactions in their income and expenses…but do they need to?
Yes! The IRS says that the fair market value of the goods and services exchanged must be reported as income by both parties.
Back to the above conversation.
Let’s say SBO#1 & SBO#2 barter their services. SBO#1 provides a business service such as tax and accounting services to SBO#2 and SBO#2 provides personal services such as house cleaning to SBO#1. Let’s assume the services are equal in value of $2,500 for the year.
What needs to happen?
SBO#1 – Tax & Accounting Services:
SBO#1 recognizes $2,500 in additional business income for the year, fully taxable. Because the service they bartered for is a personal service there is no business deduction for the cleaning services.
SBO#2 – House Cleaning Services:
SBO#2 recognizes $2,500 in additional business income for the year and deducts $2,500 in Tax & Accounting services as a business deduction, netting zero taxable income on this barter transaction.
Also, if required, an 1099-MISC should be issued for the any services valued at or greater than $600 regardless if cash is exchanged.