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How to Barter Responsibly…

In Accounting & Finances, Business, Culture, Taxes on March 8, 2012 by Sufen Wang Tagged: , , , , , , ,

“I will gladly pay you Tuesday for a hamburger today!”
  
That classic Wimpy phrase was not just about hamburgers, it’s about bartering – one of the oldest business transactions in human history. Well, in Wimpy’s case, it was probably more like an “I.O.U.” than an actual bartering exchanging hands.  Yes, before coins and dollars were invented, folks survived by trading stuff. Bartering is back in full swing now that the country is going through some hard times, so it’s time to dust off your haggling skills.
 
The official definition of bartering is “the trading of one product or service for another.” If you offer your friend three cookies in exchange for a sandwich, you have just bartered. Of course, it gets more complicated than this in the business world, and small business owners can save a lot of money by bartering for the products and services they need.
 
In general, bartering involves no exchange of cash, but that doesn’t mean you’re off the hook with the IRS. The fair market value of property or services received through barter is taxable income. Since it takes two to barter, both parties must report this income for the year in which the transaction is performed. How you report your transactions depends on which form of bartering takes place. In most cases, you’ll use Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.
 
You might still imagine bartering to be like a crowded swap meet, with people yelling and pushing you. Actually, the internet has allowed bartering to get a lot fancier than that and now there are even things like organized barter exchanges. A barter exchange organizes a marketplace where members buy and sell products and services among themselves. If you choose to use such a marketplace, every year you’ll have to fill out Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.
 
You, yourself, might find that you really like bartering – if you start to do it a lot, congratulations, you may have started what the IRS calls a “barter business.” Once you’re established enough, you can even deduct business expenses. Or you might have a regular business and are simply using barter transactions to help your sales; then you’ll have to include those sales in your business income.
 
If you really want to be a savvy barterer, here’s a tip: never barter outside of your industry.  When you mix two different types of businesses, one party of the bartering partners will always feel short-changed. That’s why a uniform currency was invented in the first place. So, stick with the same business if you want to barter – otherwise, just pay for each other’s services and be done with it!
 
The IRS provides a Bartering Tax Center for all of your bartering needs. And no, you don’t need to trade anything to read it!
 
On the Money,
Sufen Wang
Wang Solutions
 

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