Small business owners are the most resourceful people I know! Sometimes this resourcefulness can lead to bartering, which often looks like swapping services with another business owner. Bartering can be simple and fair, but what does the IRS say about it? Let me walk you through what the IRS expects from small business owners who barter.

Do I need to report bartering to the IRS?

I talk to business owners all of the time who say, “But no money exchanged hands!” Unfortunately, that doesn’t matter to the IRS. For tax purposes, bartering counts as income, so it must be reported.

What counts as bartering?

Any time 2 people or businesses agree to exchange goods or services without exchanging money, that is bartering. To illustrate what this might look like, let me give you some examples:

• A graphic designer creates a logo for a bakery in exchange for a month of free pastries.
• A plumber repairs a salon’s sinks in exchange for haircuts.
• A business coach gives 6 coaching sessions in exchange for bookkeeping services.

Basically, if both parties involved in the exchange are receiving something of value and giving something of value, then that’s bartering.

How does the IRS collect taxes on money if no money was exchanged?

Since no money is exchanged in bartering, the IRS uses the fair market value of the goods or services being received to calculate the taxes owed. Fair market value just means what you would normally charge a paying customer for those same goods or services.

For example, if you normally charge $800 for a photoshoot, and you barter with a website designer to design a new site for you, and those services would normally be priced at $800, then you both would report $800 of income for those bartered services.

It’s important to understand that even if you “broke even” in the exchange and even if you wouldn’t have spent the money otherwise, the barter still counts as income and still has to be reported.

Who reports income from bartering?

As explained in the example above, both businesses involved in a barter need to report the income. Each business will report the fair market value of the goods or services they received and not what they gave away.

So, back to that photographer and web designer example above, the photographer should report $800 of income from the value of the website design they received and the web designer should report the $800 of income from the value of the photo shoot they received.

Think of it like you each paid each other in full even though you didn’t exchange any cash.

Is there a special tax form I need to fill out for bartering?

Nope, the good news is that there’s no extra form to complete when you barter. You’ll report your income how you normally would for you business entity type:

• If you’re a sole proprietor or own a single-member LLC, then  you’ll report bartering income on your Schedule C.
• If you’re in a partnership or a multi-member LLC, then you’ll report bartering income on your Form 1065.
• If you’ve elected to have S-Corporation status, then you’ll report bartering income on your Form 1120-S.

Will I receive a Form 1099 for a barter transaction?

It depends. If you bartered directly with another business, then you may receive a Form 1099-NEC from them. If you used a barter exchange platform like BizX or ITEX, then the exchange should issue you a Form 1099-B to report the value of the services you received so you can report it with your regular income. 

How do I record bartering in my bookkeeping?

You should record bartering just like you do your normal income and expenses. You’ll record the service you provided as income, and you’ll record the services you received as an expense. 

Don’t forget that if the services you received would normally be deductible (i.e. website design, repairs, marketing), then you take those deductions the same way you would if you’d paid cash.

How does bartering affect my taxes?

Bartering has the same tax impact as paying cash. The only difference is that you may feel the tax impact more because you didn’t actually receive cash. 

This is where I offer some practical advice: Only barter when the service you’re receiving is something that you actually need for your business. Otherwise, you’re creating taxable income without an actual cash benefit.

Should I barter?

Sure! Bartering can be great in these situations:

• You need a service you would have paid for anyway (most important).
• You’re bartering with someone you trust.
• You’ve clearly communicated expectations, including the agreed upon value of the services you’re bartering.
• You keep the documentation and record the transaction properly in your books.

Abridged by Amy

Bartering is a great way to create opportunities and build relationships, and it can be especially helpful early on in your business when cash may be tight. Just remember that bartering still creates taxable income, and the IRS expects you to treat it as income.

If you’re ever unsure about how to record a barter transaction, ask your CPA sooner rather than later. A quick conversation can save you a lot of headache down the road.