Bartering, also known as contra dealing, is one of the most traditional types of transactions. It involves the exchange of services and goods without monetary compensation. Could contra payments be beneficial to your company, and how does this type of transaction factor into contemporary accounting?
What is a barter transaction?
The idea behind a contra payment transaction couldn’t be more straightforward. When two parties trade goods or services of equal value, this is called bartering. No cash is involved in this type of transaction, but it gives businesses the chance to manage stock in a mutually beneficial exchange.
Types of bartering transactions
Individuals, businesses, or nations can engage in a barter exchange. This can involve consumer goods and services or an advertising exchange. Here’s what these different types of transactions might look like in practice:
Bartering with goods
Trading goods is perhaps the immediate image that springs to mind when one thinks of a barter transaction. For example, a farmer trades a bushel of apples for new shoes from a cobbler. Both walk away satisfied with their swap, with no money exchanging hands.
Bartering with services
Another typical exchange is using barter transactions to exchange services. This could be anything from accounting to legal work. As an example, imagine two neighbors. One is an accountant, and the other runs a daycare center from home. The accountant agrees to help the daycare provider with tax preparation in exchange for childcare three afternoons a week. As with a goods barter exchange, no monetary transaction is involved.
Bartering with advertising
For businesses, perhaps the most common form of bartering is through advertising. If both have advertising space, they can agree to a swap where each company provides space for the other to place their ad. This could be an online space, physical billboard, or another form of media.
Barter transaction accounting
Though no cash is involved in a barter exchange transaction, it’s still counted as revenue for tax purposes. This means that bartering must be reported to the IRS as taxable income. The generally accepted accounting principles (GAAP) require businesses to estimate a fair market value of the bartered goods, services, or advertising.
The bartered amount must be compared to historic cash transactions or revenue to work out a fair market value. Estimated barter dollars are treated as monetary dollars and reported as income. This income is taxed in the same fiscal year that the barter took place.
It’s important to note that there are different taxation rules for the three different forms of bartering mentioned above. Barter income is recorded the same way as any other form of income, but it may or may not be considered taxable.
Additional tax implications of bartering
Barter income has implications for your overall tax liability. This includes employment, self-employment, and excise taxes. Barter transactions might result in capital gains or losses or be categorized as a nondeductible personal loss.
There are a few exemptions to this rule.
If your business conducts:
Fewer than 100 transactions per year
Transactions under $1 in value
Transactions with exempt individuals
You wouldn’t need to report these types of barter transactions to the IRS.
When a company reports its barter transactions as income, related business expenses can often be deducted. For example, if you barter legal services to a client in exchange for marketing advice, you could deduct the cost of travel to meet said client.
Managing transactions with a barter exchange
Because barter transaction accounting is subject to a full set of regulations, it’s best to consult with an accountant before reporting to your tax authority. Both parties involved in a barter transaction or contra payment are required to submit forms like the 1099B, reporting the fair market value of goods or services exchanged.
To help coordinate and manage these types of contra payments, a barter exchange can help. It serves as a third-party organization that matches participating members, tracking the value of barter transactions in a bank account. Many provide monthly accounting figures along with year-end financial paperwork for tax reporting purposes.
You’ll find barter exchanges at a local or regional level, with websites for easy online management. The International Reciprocal Trade Association (IRTA) is an excellent place to start. Simply register and set up a Trade Account to search for businesses offering services or products you might find useful. You can expect to be charged a membership fee and transaction percentage fee, but these can then be deducted as business expenses.
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