PAYING TAXES ON BARTERING

 

The Internal Revenue Service (IRS) does consider the barter transaction of goods and services to be taxable income. If the transaction was not of equal benefit, the advantageous party might owe taxes on the difference in value received. Paying tax is often required in the following barter agreement situations:

• When someone barters for a good or service he or she would usually pay money for.

• When someone receives barter for at or near market rate.

• When someone actively works in the business of a service that he or she is using to barter.

• When someone receives an item in barter that would otherwise be seen as income if paid in cash instead.

It is not always a simple process to determine the taxable value of an item. The IRS requires that bartered items must be taxed at their fair market value of the property or services. Additionally, although the income reported is based on the monetary value of goods or services, the owed taxes are in the form of cash.

Fair market value refers to the monetary amount that most people are willing to pay for the good or service. There are many things that can complicate the fair market value, including:

• Pricing that is based on generosity or community involvement.

• When a barter does not involve two items of equal value.

• When fair market value does not match the goods or services traded.

It is possible to deduct any related expenses when reporting barter income on a tax statement. However, too many deductions regarding barter agreement contracts can be overwhelming and complex. If you are in the business of barter trades, it is best to work with an accountant that is familiar with barter agreements.

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