Many cash-challenged businesses have started bartering for goods and services instead of paying cash for them during the COVID-19 pandemic. What many don’t realize is that if your company has bartered for goods or services, keep in mind that the fair market value of goods that you receive is taxable income. If you exchange services with another business, the barter transaction is considered taxable income for both companies!
Examples
Let’s say an advertising agency decides to exchange services with a computer consultant. Both parties will be taxed on the fair market value or amount they’d normally change for those services. In most cases, if the parties agree to the value of the services in advance, that will be considered the fair market value unless contrary evidence exists.
Additionally, if services are exchanged for property, income is considered to be realized. For example, if a construction company does work for a retail business in exchange for unsold inventory, the contractor incurs income equal to the inventory’s fair market value.
Barter exchanges
Many businesses have joined barter clubs that facilitate these transactions. Generally, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
Bartering is generally taxable in the year it occurs. If you participate in a barter club, however, you may be taxed on the value of credit units at the time they’re added to your account — even if you don’t redeem them for actual goods and services until a later year.
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that they received from exchanges during the previous year. The IRS will also receive this information.
If you join a barter club, expect to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income.
Potentially beneficial
As long as you’re aware of the federal and state tax consequences, business bartering transactions can be beneficial. Contact us if you need assistance or would like more information.