Bartering for products and services can be very beneficial. Barter exchanges (trades among persons or organizations other than informal exchanges on a noncommercial basis) have a positive impact on cash flow — businesses do not need to spend cash to acquire the goods or services needed by a business (preservation of capital). Bartering also is a way to get rid of excess inventory.
However, as with any other transaction, barter is taxable. Any exchange of goods or services without money is treated as a barter transaction. Swaps, trades or exchanges are taxable transactions. The fair market value of goods and services exchanged must be included in the taxable income of both parties.
Fair Market Value
When using barter as a method to get rid of excess inventory or remnant goods or services, both suppliers involved in the trade have to agree to the value of the services or products, and that value will be accepted as fair market value. Even if the two companies are trading for remnant products and services, you will likely receive a product or service of equal value.
Barter Exchange Organizations
Trading through barter exchange organizations (third-party organizations that pool many businesses and reduce all services rendered to a dollar value that can be earned and spent with other members in the exchange system) is an effective marketing tool for finding new customers. Transactions involving corporate members or clients of a barter exchange may be reported on an aggregate basis. The exchange company files the 1099. Those who do not go through a barter exchange but trade services must file Form 1099-MISC, if the value of the service in the course of business is at least $600 for the year. For more information on barter transactions, visit www.irs.gov/taxtopics/tc420.html.
Barbara Weltman is an attorney, author (with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business), and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com, and host of Build Your Business radio. Follow her on Twitter: @BarbaraWeltman.