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Transcript for Bartering Income

This is Jean Wetzler.

I'm talking with Beth Elfrey about bartering income.

Beth, can you explain what bartering means, and give us an example?

Bartering occurs when you exchange goods or services without exchanging money.

An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

If you engage in barter transactions, you may have tax responsibilities.

In this case, when the plumber and dentist report their income, both parties must include the fair market value of the goods and services they exchanged.

Is this particularly important now?

Yes, it is. In the current economy, bartering is an appealing option.

And now is a great time for those who are bartering to familiarize themselves with the tax requirements.

It's also vital that they maintain good recordkeeping habits.

Keep in mind that income from bartering is taxable in the year it is performed.

Generally, you report this type of business income on 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.

What is a barter exchange?

Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis, through a modern barter exchange company.

A barter exchange is any person or organization with members or clients who contract with each other - or with the barter exchange - to jointly trade or barter property or services.

Do you have any tips or suggestions for reporting bartering income? 

Yes. Treat barter income as you would any other business activity.

You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax.

Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

If you conduct any direct barter - that's bartering for another's products or services - you must report the fair market value of the products or services you received on your tax return.

If you have failed to report this income, correct your return by filing an amended return, such as Form 1040X.

What if you use a barter exchange?

In that case, you should receive a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Barter exchanges have an annual obligation to report your bartering proceeds to the IRS.

The amount in Box 3, "Bartering," shows your proceeds.

This is generally reportable as income, so include it on your tax return.

My advice, in a nutshell, is to keep good records; work with a reputable barter exchange; and consult the IRS or a tax professional if you have questions.

Where can a business find more information on bartering?

Just go to our Web site, IRS.gov, and type the word "barter" in the search box.

Thank you, Beth.

I've been talking with Beth Elfrey of the IRS.

This is Jean Wetzler.

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