BGBC Partners, LLP Tax Update: Bartering – A Cash Flow Aid?
Bartering. It is more than likely that you have heard this term before. I would also bet that you have bartered at least one time in your life. Think back to elementary school when you switched sandwiches with another student just to add variety to your life.
The same principle can be applied in everyday business and that is the topic of this week’s Tax Update.
Let’s say you need some electrical repairs made at your store and you know an electrician that typically buys groceries from you. Why not offer the electrician some groceries in exchange for his electrical work? You get the repairs you need and the electrician gets his groceries. Both parties avoid a cash outlay.
Consequently, bartering is a way for businesses experiencing a decrease in cash flow to conserve cash. Additionally, trading your goods or services for other goods or services can provide your business with sales, marketing, or other financial benefits when conducted properly.
What you may not realize, however, is that bartering is a taxable event for both parties. The reason is that there is still an exchange of products or services for something of value, even though no cash is exchanged.
Since each party benefits from the transaction, each must recognize the income and expense for the services or products exchanged. The amount of income and expense recognized is equal to the fair market value (FMV) of the services or products exchanged. It is important to note that the FMV must be the value used for the goods and services in the normal course of business, not discounted for the other party’s inability to pay. In this case, the grocery store would record income for the groceries as the FMV of the electrical service provided and relieve the groceries exchanged from inventory to costs of goods sold.
You must also consider reporting requirements, such as issuing a Form 1099. From the example above, if the electrical work performed and value of groceries exchanged have a FMV greater than the reporting threshold of $600, both businesses must issue Form 1099-MISC to the other.
Finally, if this concept interests you, you may consider joining a bartering exchange to facilitate your bartering transactions. Bartering exchanges allow members to receive 'credits' as they sell items and then use the credits to buy products and services from other members. They also are required to report members' annual bartering proceeds to the IRS and to the members themselves by issuing a Form 1099-B. For purposes of income tax reporting, trading dollars or credits are identical to real dollars.
Engaging in bartering transactions in your business can be a creative and beneficial approach to help manage your cash-flow. Just remember to consult your tax advisor to ensure that you are properly reporting the transaction for tax purposes as well as meeting any Form 1099 filing requirements.
