Tax Consequences of Bartering
Bartering is the oldest form of compensation there is. It still goes on today and many are surprised to learn there can be tax consequences associated with it in the eyes of the government.
What is bartering? It is a simple proposition. I have a jug of water. You have a loaf of bread. I am hungry. You are thirsty. I trade you some water for some bread. We have just bartered. No money has been exchanged, but we have both paid for some benefit. It doesn’t get any simpler than that.
Bartering has obviously become much less prevalent now that money is on the scene. That doesn’t mean it doesn’t occur. We trade services for products or services all the time and don’t really realize it. You might have car problems and ask a client who is a mechanic to work on the car in exchange for cutting their bill. This is bartering at its finest.
Bartering involves the exchange of a benefit. In the eyes of the government, this makes it a taxable event. Specifically, both parties that receive a benefit are supposed to report it on their tax returns and pay appropriate taxes. This raises the question of how such benefits are valued. The IRS indicates the valuation should be a “fair market” one. Most take this to mean the price that would have been charged if money was paid instead of bartering for the service.
You are probably rolling your eyes to some extent at this point. The taxation of bartering does seem a bit picky, but it can lead to a host of problems if you are not careful. Why? Well, assume you enter into a bartering exchange and give up a piece of inventory as your part of the deal. How will you explain that on your books? If your books don’t balance, the IRS will be very interested in why not. Further, multiple unreported bartering events can also be viewed as a form of money laundering, so be very careful.
The government is spending money like there is no tomorrow in an effort to get us out of the economic mess we are in. Well, there is going to be a tomorrow. The government is going to need a lot of money when it comes. Guess who they are going to be looking to for it? Make sure your tax situation is in good shape so you don’t run into problems down the road. That means reporting your bartering benefits.