3 Tips for Avoiding Tax Trouble in Business Bartering
Short on cash? Bartering can help you to obtain all sorts of products and services (anything from a new website to a doctor’s appointment) without paying out of pocket. But be advised: Uncle Sam requires you report the fair market value of anything you receive in exchange for goods or services you provide — and pay taxes accordingly — if the transaction relates to your business. Look at the IRS guidelines to find out the tax obligations for your situation.
Here are three tips for staying out of trouble:
- Keep thorough records of your barters. When you opt to make a trade — either directly or through a third-party bartering group — keep accurate records. Note what you’re providing and its estimated market value, as well as what you’re receiving and its estimated value. Follow the IRS Tax Center’s advice about record-keeping for barter transactions.
- Report exchanges in terms of income and expenses. The IRS expects all barter participants to pay tax on their gains, so calculate the estimated value of what you’ve received and report it when you file your annual income taxes. If the service or product you received wasn’t work-related (a haircut or a piece of artwork, for example), it should be listed in the “other income” section on line 21 of Form 1040. If you traded for a new website, a headshot, or another business-related item, report the estimated value on your Schedule C of Form 1040. You’re also able to claim business expenses related to the item or service you provided to the other party, so be sure to claim the estimated value as a tax deduction. Learn more about your tax responsibilities here.
- When in doubt, work with a barter exchange group. If the tax laws related to bartering seem too complicated to follow, veto one-on-one trades in favor of formal exchanges that have been organized through a professional bartering group. Internet-based bartering clubs are generally up to speed on how to stay on the IRS’s good side and will enforce proper tax collection on both sides of the exchange.