Barter and Income Tax

A guide for businesses engaged in barter transactions

Table of ContentsTable of ContentsTable of ContentsTable of Contents

Part One. Part One. Part One. Part One. Different Types of BarterDifferent Types of BarterDifferent Types of BarterDifferent Types of Barter

Direct barter between businesses or individuals

Indirect barter (via a commercial barter exchange network)

Part Two. Part Two. Part Two. Part Two. General Information about Tax Implications and BarterGeneral Information about Tax Implications and BarterGeneral Information about Tax Implications and BarterGeneral Information about Tax Implications and Barter

Part Three. Part Three. Part Three. Part Three. TTTTypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Bartering

Part Four. Part Four. Part Four. Part Four. How to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter Transactions

Part Five. Part Five. Part Five. Part Five. Comparison Between Treatment of Barter Tax ThroComparison Between Treatment of Barter Tax ThroComparison Between Treatment of Barter Tax ThroComparison Between Treatment of Barter Tax Throughout the Worldughout the Worldughout the Worldughout the World

Treatment of Tax Barter in Australia

Treatment of Tax Barter in New Zealand

Treatment of Tax Barter in Singapore

Treatment of Tax Barter in South Africa

Treatment of Tax Barter in the United Kingdom

Treatment of Tax Barter in the United States

Part Six.Part Six.Part Six.Part Six. Tax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter Transaction

Direct barter tax checklist

Business-to-business barter exchange network tax checklist

Important Note: Important Note: Important Note: Important Note:

This book does not constitute legal, financial, taxation or accounting advice of any sort. Readers are requested to seek professional advice

from their own accountants, tax attorneys or other professionals. Ormita will not be held liable, under any circumstances, for any errors or

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Part OnePart OnePart OnePart One Different Types of BarterDifferent Types of BarterDifferent Types of BarterDifferent Types of Barter

There isn't any doubt that starting a business and managing its day-to-day operations can be a costly endeavor. Quite often, business owners find that the company's budget simply doesn't stretch as far as they might have hoped, leading to diminished success and financial woes. There is, however, a way that businesses can drastically cut operational costs and allow for their companies to thrive. By bartering, either with other business and individuals, or via an indirect barter exchange network, companies can receive the goods and services that they need without having to spend cash. In order to get a better idea of just how bartering can be beneficial, let's take a closer look at the two most common types of bartering: direct and indirect barter. Direct barter between buDirect barter between buDirect barter between buDirect barter between businesses or individualssinesses or individualssinesses or individualssinesses or individuals This particular form of barter is the one that many people have even used at some point in their lives. Whenever you have traded a service or product with someone else, and paid them in something other than currency, you were entering into a barter arrangement. For example, if one of your neighboring businesses agreed to trade you an hour of bookkeeping services for a cake that you prepared at your bakery, then this was, essentially, a barter deal. Direct barter can be extremely effective in cutting costs. However, you are somewhat limited by it. This is due to the fact that you have to be in need of the particular product or service the person is offering in order to truly benefit from the trade. For instance, if you didn't really need the bookkeeping services that the business owner was willing to provide, then the barter would not be worthwhile. In addition, quite often the trades that are made during a direct barter are uneven, meaning that one of the products or services is worth far more monetarily than what is being exchanged. Not to mention that direct barter can also cause conflicts or unnecessary stress, in the event that one of the parties is confused about the terms of the barter or feels as though they did not receive a “fair bargain”. Indirect barter (via a commercial barter exchange network)Indirect barter (via a commercial barter exchange network)Indirect barter (via a commercial barter exchange network)Indirect barter (via a commercial barter exchange network) The alternative to direct barter is indirect bartering, whereby you become a member of a commercial barter exchange network. This type of bartering can provide you with a variety of advantages (with few of the disadvantages that are common for direct bartering). In essence, businesses join these networks, and are then able to trade with other businesses for their products or services. In this case, you don't necessarily need to trade with the business who is offering the item that you want, as you will pay for the item with barter “credits”. For example, if you wanted to purchase marketing services from an ad agency who is also a member of the network, you would simply need to exchange the service for barter credits. These credits can be earned by selling your own products or services in the barter exchange network. Therefore, indirect barter allows for multilateral barter transactions, given that each product or service that you trade holds a certain barter credit value. Additionally, many barter exchange networks provide terms and services that each member must follow.

Part 2Part 2Part 2Part 2 General Information about Tax Implications and BarterGeneral Information about Tax Implications and BarterGeneral Information about Tax Implications and BarterGeneral Information about Tax Implications and Barter

While bartering can prove to be a highly useful tool, there are a number of tax implications that business owners have to keep in mind when choosing to utilize the barter system. Despite the fact that no physical currency is actually involved, barter is still considered to be “taxable”. This is generally not the case for individuals who are trading personal belongings or services, such as a neighbor who offers their lawnmower in exchange for an exercise treadmill. However, when businesses barter, taxation is involved. The general rule is: if you would normally be able to receive profit from a product of service that you are bartering, then there are tax implications. Typically, all barters that take place online and in person must be reported for that tax year. The IRS and other international tax bodies usually regard each barter dollar as the equivalent of an actual dollar. As such, your barter income must be reported in the same manner that you would report your cash income. For example, if you are a self employed business owner in who files a tax form each year for your cash income, then you would need to do the same for your barter income this fiscal year. When going through an indirect barter exchange network in the USA, a 1099-B form will be submitted, which records all of the barter transactions that you carried out throughout the course of the year. Therefore, you can rest assured that the barter filing figures that you provide for the IRS are accurate, and that you won't have to worry about any errors that may end up incurring penalties in the future. Other countries do not have such forms but the principal is the same, with each barter exchange network providing its members with a list of buy and sell transactions for the year. Barter exchange networks are considered to be “third-party record keepers”, which means that they are capable of producing taxpayer records of their members. When you barter for goods or services through a direct or indirect barter, the fair market value must be determined. Typically this figure can be determined rather quickly, as it's simply the amount that one would pay for the item or service in the current market if the purchase were made using cash. It is this fair market value that must typically be reported. If you fail to account for barter transactions, then the tax authorities will view that as a failure to report revenue and business expenses accurately. When bartering through a barter exchange network, the barter income and expenses that occur are on a cash basis. Essentially, when someone trades for one of your services or products, that is considered to be reportable income. When you “purchase” something via the network, that is an expense. This is mainly due to the fact that you are still receiving benefit from the products or services that were involved in the trade, even if that benefit it not currency. It is still considered to an asset or commodity, and must be accounted for. If the item or service that you are receiving in the barter is going to be for your own personal use, then it must be treated as a business draw or payroll advance. For example, if you barter for a new car that you aren't going to be using for your business, then you would act as if you withdrew the fair market value of the car from the business' income. This must also be reported on your yearly income tax forms.

Part ThreePart ThreePart ThreePart Three TTTTypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Barteringypes of Taxes Potentially Impacted by Bartering

If you are new to the world of bartering, then it may be a bit challenging to determine just which types of tax are actually impacted by bartering transactions. Here is what the IRS says (in regards to how barter taxes are handled): “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.”

This, essentially, means that barter can impact ALL types of taxes. From your personal income tax to the profit and loss statements that you submit for your business, those who barter should be aware of the fact that every form of tax can be involved. Given that is treated as income and expenses for a business, just like cash would be, barter transactions must be reported, if your business resides in the USA, to the IRS via the 1099-B Form. If you are bartering through a direct exchange network, then this 1099-Misc form will be provided for you. However, if you have had any direct bartering transactions throughout the year, then the business whom you received the products or services from are required to send you a 1099-Misc Form to report the exchange. This report should, typically be received no later than mid-February, and should be included with your tax filing. Here is the exact IRS statement regarding 1099-Misc forms and tax barter: “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.” As a general rule, barter transactions that you engage in for your business are to be reported on your self employment taxes. The transactions usually fall under the category of “business income” or “capital gains income”. This is one of the primary reasons why it's often wise to use all of your barter credits throughout the year, given that you can decrease your tax liability. This is mainly because your barter transactions may actually be categorized as legal business expenses. You may even find that the fee that you paid to join the barter exchange network is tax deductible. If you are ever in doubt about how barter transactions will directly impact your taxes, then it's recommended that you seek the guidance of a tax professional, or even ask your barter exchange network if they may have any helpful tax advice.

Part FourPart FourPart FourPart Four How to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter TransactionsHow to Handle Accounting for Barter Transactions

If you truly want to get the most out of bartering for your business (and make it as stress-free as possible), then you will definitely want to ensure that you keep accurate accounting records. This can enable you to report the correct taxable income each year, and to make certain that you are always aware of your current indirect barter exchange network balance. If you are carrying out a direct barter transaction, then you have the peace of mind of knowing that you have an up-to-date barter record when tax season rolls around. For indirect barters done through an exchange network, it's often a good idea to create an account checks and balances system in your books. This will allow for you to document any exchanges that you make via the barter system. For example, when you “sell” a product or service, you can record this as a deposit into your barter account. On the other hand, if you “purchase” an item with your barter credits, then you can easily deduct its fair market value from your credit balance. (Below you will find an example of how you can structure your “barter bank account” for bookkeeping purposes).

Product/Service Credits Drawings Balance

Sell Clothing $500.00 $500.00

Buy Marketing $225.00 $275.00

Buy Accounting $275.00 $0.00

Not only can this give you the ability to see just how much benefit you are receiving from bartering, but you can also more efficiently reconcile your barter exchange account at the end of each quarter or month, depending upon how you carry out your bookkeeping. In addition, recording barter transactions are often much easier and less time consuming, especially when going through an exchange network, given that you are only having to record one transaction at a time. The businesses expenses that you incur throughout the year through bartering can be taken directly off your bottom line. Therefore, if you balance your overall barter “sales” with barter “purchases”, then the impact of bartering upon your income taxes should not be significant. This is mainly due to the fact that balancing out your barter account so that there is not barter credit profit reflected in your books means that you can actually lower your tax liability. Maintaining an accurate, updated “paper trail” that can give you the power to monitor all of your bartering activities is the only real way to ensure your business' success through bartering, while staying current with your taxes.

Part FivePart FivePart FivePart Five Comparison Between Treatment of Barter Tax Throughout the WorldComparison Between Treatment of Barter Tax Throughout the WorldComparison Between Treatment of Barter Tax Throughout the WorldComparison Between Treatment of Barter Tax Throughout the World

Direct barter for all Countries ListedDirect barter for all Countries ListedDirect barter for all Countries ListedDirect barter for all Countries Listed All direct barter transactions are treated as though they are cash transactions. Therefore, there aren't any tax advantages or disadvantages, per say. All barter “purchases” are regarded as business expenses, while all barter “sales” are categorized as business income. The issue that many business owners face with direct barter, regardless of what area of the world they conduct their business, is that direct bartering transactions may not involve a “fair trade”. This means that they may receive an item that is worth much more than what they exchanged, which can result in increased tax liability, especially if there is a significant different in fair market value between the goods or services involved.

Treatment of Tax Barter in AustraliaTreatment of Tax Barter in AustraliaTreatment of Tax Barter in AustraliaTreatment of Tax Barter in Australia

Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter). This form of barter is treated the same as cash or credit transactions, in that it is both “assessable and deductible for income tax purposes” (according the Australian Taxation Office). Any and all transactions carried out by members of an exchange network are considered to be taxable. The fair market value is the figure that is used to determine the tax liability. NonNonNonNon----commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). The Australian Tax Authority does not typically tax barter transactions that are carried out through a non-commercial barter network. Any and all personal and social barters, as well as those for the purpose of “hobbies”, are not considered to be taxable.

Treatment of Tax Barter in New ZealandTreatment of Tax Barter in New ZealandTreatment of Tax Barter in New ZealandTreatment of Tax Barter in New Zealand

Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). New Zealand Tax laws dictate that all sales, income, grants, subsidies, and barter transactions carried out during the year shall be considered as part of a business' overall “turnover”. As such, each barter dollar is regarded as a New Zealand dollar when reporting taxable revenue and expenses. NonNonNonNon----commecommecommecommercial barter networks (Time Banks or LETS exchanges). rcial barter networks (Time Banks or LETS exchanges). rcial barter networks (Time Banks or LETS exchanges). rcial barter networks (Time Banks or LETS exchanges). There is no tax liability involved, as long as the neither party is receiving cash income that is equivalent to the value of the exchange. For example, if two parties are exchanging goods or services outright, then there are no tax implications.

Treatment of Tax Barter in SingaporeTreatment of Tax Barter in SingaporeTreatment of Tax Barter in SingaporeTreatment of Tax Barter in Singapore

Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). The tax implications in Singapore are quite similar to those found in the United Kingdom. An invoice must accompany all barters, and must include all of the pertinent details of the transaction. Each party involves is responsible for paying the sales tax and income tax on the barter.

NonNonNonNon----commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). These types of barters generally do not incur any taxation, as long as they do not result in cash profits or are to be used for business purposes.

Treatment of Tax Barter in South AfricaTreatment of Tax Barter in South AfricaTreatment of Tax Barter in South AfricaTreatment of Tax Barter in South Africa

Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). The value of each good or service must be evaluated by a qualified valuer. This will provide both parties with the appropriate tax amount that must be taken into consideration. If the value of each good or service is not equal, then the barter agreement must state how the difference is to be covered.

Treatment of Tax Barter in the United KingdomTreatment of Tax Barter in the United KingdomTreatment of Tax Barter in the United KingdomTreatment of Tax Barter in the United Kingdom

Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter).Commercial barter networks / barter dollars (indirect barter). The fair market value of the goods and services involved in the barter must be reported, even the goods or services being exchanged are not of equal value. In addition, a “contemporaneous” sales invoice should accompany the trade. The invoice must include all of the details of the trade, such as the date and fee, and must record how the barter was ultimately settled (what was exchanged and between which parties). Essentially, each party participating in the trade is responsible for the VAT that is involved. Also, each party must pay the VAT (sales tax) equivalent for the goods and services that they would have paid, had the transaction involved a cash exchange. NonNonNonNon----commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). As a general rule, items that are traded as “gifts” or aren't acquired for the purpose of making a profit are not taxable. Also, if the exchange is intended for a hobby or for personal use (not all business related), then it may also be classified as “non-taxable”.

Treatment of Tax Barter in the United StatesTreatment of Tax Barter in the United StatesTreatment of Tax Barter in the United StatesTreatment of Tax Barter in the United States

Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Commercial barter networks / barter dollars (indirect barter). Each barter dollar (or “credit”) is treated as though it is a U.S. Dollar in terms of tax liability. Barter exchanges are now required, by law, to submit 1099-B forms for each of their members, in order to report any barter exchanges that have occurred during the business year. This reporting is to be submitted to the IRS as well. All business trades are taxable, and are categorized as business expenses or income when filing taxes. NonNonNonNon----commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). commercial barter networks (Time Banks or LETS exchanges). Non-commercial barter transactions are tax exempt. The IRS provided three key reasons for this: lengths of time which are the same shall be regarded as such (a day's worth of work is a day's worth of work, regardless of what is being offered), these types of barters are only “backed by a moral exchange” and not actually legally binding, the purpose of these non-commercial barters is often a charitable one.

Part SixPart SixPart SixPart Six Tax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter TransactionTax checklist for Businesses Dealing with a Barter Transaction

For businesses dealing with a barter transaction, it may be helpful to have an easy-to-follow checklist to ensure that you have taken the proper steps when it comes to filing your barter income and expenses. Direct barter tax checklist.Direct barter tax checklist.Direct barter tax checklist.Direct barter tax checklist.

• Ensure that you have kept proper bookkeeping records throughout the fiscal year. You should have an accurate accounting of the items that you traded, as well as their fair market values.

• If your business is located in the USA, then any company from whom you received the

products or services from are required to send you a 1099-Misc Form to report the barter exchange.

• You are expected to file the tax return form that you would have normally filed (had

your income and expenses been strictly in cash form). For example, if you would have filed a Schedule C form (which is typically used for self employed business owners), you would use the same Schedule C form to report your barter income and expenses as well.

• You are not required to file a separate form for barter transactions, however. These

transactions should be disclosed on the same document as your other business profits and losses.

• If you are located outside of the USA then reporting is done the same as “cash”

income and expenses on your taxes. BusinessBusinessBusinessBusiness----totototo----business barter exchange network tax checklist.business barter exchange network tax checklist.business barter exchange network tax checklist.business barter exchange network tax checklist.

• Keep an up-to-date barter exchange network record that details your drawings and credits. (An example of this is featured in section four). Ideally, you will want your drawings to be equal to your credit contributions.

• The barter exchange network through which you carry out your barter transactions will

provide you with a 1099-B statement. This statement will detail your “Proceeds from Broker and Barter Exchange Transactions”.

• You will then have to complete the tax return form that you would have normally filed.

If you completed any direct barter transactions, then you will still need to report those separately when filling out your income tax forms.

*For both types of barter, you must ensure that you are only claiming business barter transactions as business losses and profits. All

personal barter transactions must be treated as such, and cannot be used as a business deduction or credit.

References Used:References Used:References Used:References Used:

1. http://www.cityoflondon.gov.uk/business/economic-research-and-

information/research-publications/Documents/research-2011/Capacity%20Trade%20and%20Credit_Full%20Report_Web.pdf

2. http://money.howstuffworks.com/bartering4.htm

3. http://www.tradeja.net/index.php?option=com_content&view=article&id=38&Itemid=5

4

4. http://www.irs.gov/taxtopics/tc420.html

5. http://www.investopedia.com/financial-edge/0312/the-tax-implications-of-bartering.aspx

6. http://biznik.com/articles/accounting-for-barter-transactions

7. http://www.ato.gov.au/nonprofit/PrintFriendly.aspx?ms=nonprofit&doc=/content/3534

9.htm

8. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tax-Responsibilities-of-Bartering-Participants

9. http://www.barterlaw.org/wiki/income-tax/

10. http://www.hmrc.gov.uk/vat/managing/special-situations/samples.htm

11. http://www.iras.gov.sg/irasHome/uploadedFiles/Quick_Links/Tax_Acts/Goods_and_S

ervices_Tax/goodsandservicestaxinternationalservicesorder.pdf

12. http://www.propertybarter.co.za/legal_matters.htm

13. Ormita Magazine – Barter and Income Tax