ASK THE EDD LAWYER- IMPORTANT THINGS YOU SHOULD KNOW IF YOU BARTER GOODS OR SERVICES
By Robert S. Schriebman
Bartering for goods and services is probably the oldest way of doing business. After all, what did people do before there was currency? In my career I have been offered many interesting exchanges for legal services. I fondly remember the rancher with big tax problems who offered me virtually a lifetime a supply of chickens! I turned him down because my wife cooks chicken almost every evening.
In the 1980s, I was the tax attorney for a major barter exchange and was constantly fighting with the IRS over tax issues relating to the taxability of the company and its members. In bartering transactions there is rarely an exchange of cash. Our clients were mainly small businesses who engaged in barter to obtain products and services they needed. As an example, a young lawyer might agree to draft a will in exchange for dental services.
In the early days of barter it was very difficult for me as tax counsel to convince our membership that many of their transactions, especially an exchange of services for goods, were taxable transactions. It was relatively easy for the owner of goods to determine his cost of merchandise and to factor into the value of the services received. On the other hand, the person who rendered services in exchange for goods had no cost basis in property to deduct from the value of goods received. He felt that his services were worth the price of the goods received and, therefore, he had no taxable event – not true.
In early March 2014, the IRS published “IRS Tax Tip 2014-26” dealing with certain bartering issues. Here is what the IRS Tax Tip had to say:
1. The position of the IRS is that barter exchange occurs in an organized marketplace. Some transactions operate out of a formal business office, others take place face-to-face, and still others are done over the internet. All barter exchanges are required to issue IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. You may obtain a copy of this form on the internet by going to www.IRS.gov.
2. Sometimes people belong to barter exchange organizations where they are given stamps or “barter dollars” that are exchanged between the memberships. Often one party to the exchange would receive “barter dollars” in exchange for goods or services. He may hold onto these barter dollars and use them in a future barter transaction. As far as the IRS is concerned “barter dollars” are real dollars for tax purposes and must be reported as taxable income on a tax return. Just because these “barter dollars” and stamps are not “legal tender” does not mean that they have no value for IRS purposes. Both parties must report as income the fair market value of the goods and services received.
3. Your bartering transaction is taxable and reportable in the year it occurs. The IRS is going to be on the lookout for possible income tax deficiencies as well as self employment taxes, payroll taxes, and excise taxes on your bartering income.
4. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.