Did you know there is a method to acquire goods and services for your business without depleting your company’s cash reserves? Increasingly, businesses are adopting the barter system to complement their traditional purchasing activities. Bartering involves exchanging goods and services between parties instead of using cash.
How Bartering Works
In a straightforward bartering arrangement, two parties exchange items of similar value. For instance, imagine your business owns a building adjacent to a telephone company. An Internet service provider might be interested in installing its servers in an unused part of your basement. Instead of paying rent, the provider could offer you a high-speed Internet connection and a website in return.
Tax Implications of Barter
Before engaging in barter, it is crucial to understand the tax consequences associated with these transactions. Although bartering may seem like a simple exchange of goods or services with no tax impact, the IRS has specific regulations. The fair market value of goods or services received in a bartering transaction must be recognized as taxable income. Conversely, the fair market value of the goods or services provided in exchange can be deducted.
Record-Keeping Requirements
It is essential to maintain records of bartering transactions just as you would for ordinary transactions. Proper documentation is necessary to comply with sales tax laws. The timing of deductions and income recognition may differ; for example, you might receive equipment immediately but only depreciate it over several years.
Barter Exchange Services
The rise in bartering has led to the establishment of companies that facilitate these transactions. These companies operate similarly to banks, where clients register and earn “trade” credits in an account. These credits can be used for future transactions. Typically, a one-time registration fee is charged, along with a transaction fee based on its dollar value.
Get in Touch
If you have questions about bartering or its implications for your business, please do not hesitate to contact us. PWCPA PC are here to help with your bartering inquiries.