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Subject: |
Bartering: A Legal And Tax Primer |
| Date: |
2009-04-27
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Bartering: A
Legal And Tax Primer
By Cliff Ennico
www.creators.com
"I run a professional services firm in a small town. Because of the
poor local economy, I'm finding that more and more of my clients can't
afford to pay my fees, so they're asking me to 'swap' my services for
something they can do. For example, an auto mechanic recently offered
to do a tune-up on my car if I would give him X hours of my time
without charge. Is it legal to agree to deals like this? And would I
have to report this on my taxes in some way?"
In difficult economic times, a lot of people resort to one of the most
ancient forms of commerce — bartering, swapping or "horse trading."
While our ancestors may have swapped chickens for corn, today's barter
transactions typically involve services — "I'll do your oil change if
you help me fill out my tax return."
The good news is that bartering is perfectly legal. The bad news is
that you can't avoid paying income or sales taxes when you barter
something instead of paying cash.
You can barter things directly with someone else, or you can
participate in a "barter exchange," many of which now exist online,
such as www.imsbarter.com or www.u-exchange.com. Here's how barter
exchanges typically work:
- You create a "posting"
offering something for sale on the exchange;
- Either you or the exchange
assign a "dollar value" to the products or services you offer for sale,
and award you "credits" equal to the dollar value of the items you are
bartering; and
- You can then use these
"credits" to purchase goods or services being offered by other members
of the barter exchange.
So what about taxes? If you swap
something for something having equal value, it's a "wash," and there
are no taxes to pay, right?
Well, not exactly . . .
In the IRS's view, a barter exchange is really two separate
transactions — you are "selling" something and "purchasing" something
in return, even though no actual cash changes hands. So the IRS
requires you to report a barter transaction the same way you would
report any other transaction — the market value of the goods or
services you "purchase" are recorded as income on your Schedule C, and
the market value of the goods or services you "sell" are recorded as an
expense. If the two transactions match up, then there is truly a
"wash," and no income taxes are payable. You may, however, have to pay
sales taxes on the market value of the goods or services you receive —
ask a local accountant or tax lawyer for details.
If you are swapping goods and services on a "barter exchange," you had
better get this right, because the exchange is required by law to send
you IRS Form 1099-B, "Proceeds from Broker and Barter Exchange
Transactions," next January. This form will show the market value
of all of the items you "purchased" on the barter exchange, but not any
of the items you "sold" — you will have to keep track of these
separately and report them as "expenses" on your Schedule C.
What if the market value of the item you receive in a barter
transaction is disproportionately large or small when compared to the
value of the item you trade away? The IRS looks upon any disparity in
barter value as income to the recipient — capital gains income if the
item received is a "capital asset," and ordinary income in all other
cases. So, for example, if you are a construction contractor, and I
form your limited liability company (LLC) in exchange for your building
an addition to my house without charge for labor, the IRS would require
me to pay tax on the difference between the market value of the
construction job (what you would normally charge) and the value of the
LLC (what I would normally charge). In a situation like this, you are
well advised to pay cash, what the IRS calls "boot," to make the values
more equal.
Also, you cannot avoid capital gains taxes by swapping an item that has
appreciated in value. For example, you buy a dusty old painting at a
flea market for $10. You have it cleaned by a local antiques dealer and
discover that it's an original Rembrandt worth $5 million. Rather than
sell the painting at Sotheby's, you swap it with another collector for
a Vermeer painting worth $5 million. While the "swap" in this case
would be free from tax, you would not be able to avoid the capital
gains tax on the $5-million market value of the Rembrandt (less, of
course, the $10 you paid for it).
One last thing: Barter should be only a very small percentage of your
business. The last time I looked, the IRS, your mortgage bank, your
landlord and your local supermarket will deal only in cold, hard cash.
If you're thinking about paying your rent in chickens, please talk to
your attorney first.
Cliff Ennico (cennico@legalcareer.com)
is a syndicated columnist, author and former host of the PBS television
series 'Money Hunt'. This column is no substitute for legal, tax or
financial advice, which can be furnished only by a qualified
professional licensed in your state. To find out more about Cliff
Ennico and other Creators Syndicate writers and cartoonists, visit our
Web page at www.creators.com.
COPYRIGHT 2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,
INC. Permission granted for use on DrLaura.com.
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