Bartering – the Oldest Form of Trade is Still With Us, Part IV
There are a few accounting guidelines to remember when you conduct barter transactions. First, all barter income is dealt with on a cash basis. The IRS treats barter as income received whether you use accrual-basis or cash-basis accounting. You must report and pay taxes on barter income for the year in which it accrues. If your business is profitable, you should try not to have unspent barter credits at the end of the fiscal year. What should you do if you have unspent barter credits at the end of the fiscal year? You may be able to contribute unspent barter credits to charity and deduct them from your taxes.
Using Barter as compensation
Barter can be a great way to provide bonuses or other types of compensation without putting a strain on cash flow. You can provide compensation by awarding restaurant certificates or trips to resorts. Barter compensation, like cash, is subject to personal taxes. If you use barter to compensate a contractor, include it on his or her Form 1099; if the recipient is a regular employee, declare it on his or her W-2 and withhold all appropriate taxes.
What Does the IRS Think about Barter?
Some business people believe that the IRS takes a dim view of barter transactions. As a result, they may assume that using barter subjects them to possible audits or to other legal scrutiny. The truth is that a company using barter is no more likely to get audited than any other business. IRS rules concerning barter are well established. It is understood that barter is a perfectly legitimate business transaction.
Between 1979 and 1983, the IRS ran a project to examine the barter business. During that time, barter exchange networks were audited, along with a sample of their clients returns. The study disclosed that businesses that used barter had a better than average record of tax compliance.
Today, a company that barters has the same chance of being audited as any other organization. Treat barter just as you would any other business activity. Keep good records, work with a reputable barter exchange network and consult a qualified CPA if you have any questions or problems.
Have a great week!