Ellsworth & Associates CPAs - Accountants in Cincinnati
  • About
  • Services
    • Tax Preparation
    • Financial Planning
    • Accounting
    • Outsourced Accounting
    • Business Consulting
  • Individuals
    • Individuals
    • Real Estate Investors
    • Clergy
    • Business Owners
    • Professionals
  • Businesses
    • Small Businesses
    • Mid-Size Businesses
    • Real Estate Investors
  • Organizations
    • Churches
    • Non-Profits
  • Resources
    • Calculators
    • Pay Your Bill
    • Tax Resources
    • Tax Calendar
    • E-File
  • News
  • Contact
    • Contact Us
    • FAQ
    • Review Us
  • Login

How Is Bartering Taxed?

8/24/2017

0 Comments

 
How Is Bartering Taxed?
​The IRS is clear on their point of view. If you barter you must include the barter activity's fair market value as income on your tax return in the year the barter activity is performed. But is it really that simple? Here are some things to consider if you barter.

What is fair market value?

​The classic definition of "fair value" is the price someone is willing to pay and someone else is willing to receive for the exchange of goods or services. But we all know this requires a level of judgment. What if an item is on sale when the barter activity is performed? Are prices always the same for a similar item or service? Prior to establishing the value of a barter item, shop around and take the lowest defendable value possible for your bartered item.

Example: You barter dog grooming for accounting work. If you offer a range of prices from $20 to $60 for your grooming service and a dog owner can readily get the same service done for $15 somewhere else... what is the fair market value? If you can reasonably substantiate the $15, this lower amount could become your fair market value.

​What about your costs? 

The IRS barter documentation is so focused on capturing and taxing your barter income, it under informs taxpayers on the reasonable reporting of costs associated with that income.

Example: If two retailers exchange wholesale goods of equal value for resale, the cost of goods could logically eliminate much of the fair market value of the barter income. What if the fair market value of the goods received is worth less because you discover it is distressed? Then you could actually have a barter based loss on your books.

​Is the barter fair? 

​If you are bartering with another firm, look at the “tax value” of the barter. This is because a part of a barter of services may include your time. In the example below, one can expect there to be more hard costs for a painter (paint, brushes and other supplies) versus a lawyer. This can change the true tax value of a barter for two sole proprietors.
Example: A painter exchanges $3,000 house painting with a law firm for legal services.
Item
Painter
Law Firm
Barter Income
$3,000
$3,000
Less: Hard Costs
(1,000)
(250)
Net Barter Income
$2,000
$2,750
If both firms are sole proprietors, the salary of the owners is reflected in their net income. Self-employment taxes, sales taxes, and other taxes would also need to be applied to the net income number of each barter participant. In this case, the barter does not appear equal.

​Caution with Barter Exchanges

With barter exchanges you receive credits (vouchers) for your provided services prior to using those credits on another service. Since you are required to report income when your service is provided, you could potentially have barter income without receiving the benefits for your barter activity until later years.

Clear Reporting

If you use bartering in your business, you generally report the activity on 1099-B's each year, separate from other informational reporting.
0 Comments



Leave a Reply.

    Archives

    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016

    Categories

    All
    Business
    Capital Gains
    Deductions
    Donations
    Healthcare
    Investing
    IRS
    Life Changes
    Non Profit
    Personal Finance
    Real Estate
    Retirement
    Security
    Self Employed
    Social Security
    Taxes

    RSS Feed

Ellsworth & Associates, Inc. CPAs
513.272.8400
Cincinnati: 9624 Cincinnati Columbus Road, Suite 209, Cincinnati, OH 45241
Dayton: 42 E. Rahn Road, Suite 105, Dayton, OH 45429
Northern Kentucky: 1717 Dixie Highway, Suite 421, Ft. Wright, KY 41011


Terms of Use
Privacy Policy
FAQ
© 2017 Ellsworth & Associates, Inc.
  • About
  • Services
    • Tax Preparation
    • Financial Planning
    • Accounting
    • Outsourced Accounting
    • Business Consulting
  • Individuals
    • Individuals
    • Real Estate Investors
    • Clergy
    • Business Owners
    • Professionals
  • Businesses
    • Small Businesses
    • Mid-Size Businesses
    • Real Estate Investors
  • Organizations
    • Churches
    • Non-Profits
  • Resources
    • Calculators
    • Pay Your Bill
    • Tax Resources
    • Tax Calendar
    • E-File
  • News
  • Contact
    • Contact Us
    • FAQ
    • Review Us
  • Login