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Taxes & More - Taxes, Barter and The Recession

So - every day there is someone new in the news telling us that we are now in a recession. It’s been pretty apparent to a great many Americans that we are in a recession and have been in a recession for awhile now but I guess it doesn’t hurt to get validation of that fact from those who are supposed to know for sure. Needless to say whether we have validation or not the rising prices have people scrambling to find creative ways to cut spending to make ends meet. One way that may work out well is to look into bartering. Now you have to be careful how you structure a barter transaction if you are in business as it could be considered a taxable transaction by the IRS. According to the IRS, “bartering occurs when you exchange goods or services without exchanging money”. Unfortunately, the IRS doesn’t like it if people actually find ways to beat the system.

What exactly is barter? According to dictionary.com barter means “to trade by exchange of commodities rather than by the use of money”; and in today’s world bartering means just that - to exchange goods and/or services rather than exchanging money. On the surface this sounds like it could be a good idea in times where cash isn’t always available to meet all needs. For example Farmer John has more tomatoes than he can sell or process before they begin to rot and his car needs an oil change and Jimbo the owner of Jimbo’s Auto Repair has 10 kids and has trouble keeping food on his table. What if they decide to barter goods and services and make a trade? Well that would work out swell for the two guys but would the trade be a taxable barter transaction? If the fair market value of the property and services exchanged are equal then there is no recognition of income; but technically both parties should report the fair market value of the transaction as income as technically both parties are bartering business services for personal needs expenses not deductible on their books, not comparable business expenses. Now if Legal Eagle Sam handles a business transaction for Adam Accountant and Adam Accountant prepares Sam’s tax returns and the services are comparable in value, these transactions also must be reported but there is no recognition of income as the income and expenses they record on their books cancel each other out.

Barter exchanges are organized by a person or organization and the members or clients contract with each other to trade goods and services. Now it is important to note that these barter transactions and arrangements do not apply to INFORMAL exchanges of similar services or goods on a non-commercial level. So if you give your neighbor Suzie 1 dozen of your best sugar cookies for 1 dozen of her best chocolate chip cookies that does not constitute a barter exchange that is reportable.

For those businesses who are involved in barter exchanges it is important to note that the IRS requires the filing of Form 1099-B for all business related barter transactions although I use the word all loosely as there are certain exceptions. More information on bartering and 1099-B requirements is available on the IRS web site at www.irs.gov by searching Barter.

So in this tricky economy is bartering a viable option of individuals and businesses? Well, decide for yourself. If you are a business that uses bartering for goods and services even though you may have to recognize some taxable income at tax time, you do not have to exchange cash if your cash flow is tight. If you are an individual and you and your friends and neighbors can exchange goods and services to help each other by trading again you can sometimes get goods and services that you each need without expending cash if your cash flow is tight.

So I’d like to summarize my thought on bartering by quoting the lyrics of a great Rolling Stones song, “you can’t always get what you want, but if you try sometimes, you just might find, you get what you need!

Download Rolling Stones You Can't Always Get What You Want MP3 on Amazon



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