Show Me No Money
Bartering is a gray area of the
economy; if you do it, here's
how Uncle Sam views it…
Website work in exchange for coaching sessions. Ski passes for snowplowing services. Photo sessions for pool time. Welcome to northern Michigan's underground economy.
"It's just worked for me – it's been amazing, actually," says Debby Werthmann, a Traverse City executive and life coach who has bartered her services since she began her business in 2005.
She's traded coaching sessions for everything from chiropractic work to website designing.
"The trigger is, I need something and I don't want to pay for it. That's it in a nutshell," said Werthmann.
Although it might seem natural to keep bartering off the books, the Internal Revenue Service does recognize bartering and its more formalized kin, the barter exchange.
"From a tax standpoint, it's just like a cash transaction," said Christopher L. Morse, CPA/PFS, CGMA, MST and principal at Rehman. "Really, the way it works is that you get no tax benefits from the arrangement."
The IRS Publication 525 has a section that addresses straight bartering, such as the house painter that barters painting services for snow plowing services, for example. The fair market value of goods and services received would be reported as income on Form 1040, Schedule C.
Reporting requirements are more stringent for barter exchanges, however, which is any organization with members who contract with each other to jointly trade or barter property or services.
"They definitely have reporting requirements," Morse said. "Barter exchanges are required to file Form 1099-B for all transactions, unless they meet certain exceptions."
Barter exchanges are rare, however. Morse said in his experience, he has "never run across one, but they might be more prominent in large metropolitan areas."
Unless tax laws bar it, bartering will likely continue to operate as a gray economy in northern Michigan, Morse said.
Pearl Brown, owner of Old Mission Multigrain Bakery and Café, has a barter agreement with Gayle and Joe Gallagher, owners of Stone Cottage Fine Foods. The Gallaghers help out at the bakery and café about once a month, and in exchange they are granted use of the business' certified kitchen, which they use to make products such as their wine jellies.
"We can't afford to hire anybody because we're a new business," said Brown. "A friendship has formed that we know will last a lifetime. With the economy the way it is, I am sure more and more people are doing it."
In fact, she's seen it happen at the downtown farmers market.
"A lot of the farmer vendors barter on the side. Who wants to go home with 20 pounds of cucumbers when you can go home with all sorts of things?" she said, adding that even her 11-year-old daughter Heidi gets in on the action. "At the end, she trades for wonderful greens, strawberries. She runs around with our bread. It's been so much fun for her. She's learned to make deals." BN
Want to give
bartering a try?
Debby Werthmann, a Traverse City executive
and life coach, offers this advice:
– Respect each other's time and expertise.
– Treat each other as if you are both paying clients.
– Keep total barters to fewer than five.
– Check in from time to time to make sure the arrangement is still working for each person.
Bartering is Not Always Free:
Tax Tips for Barterers
Bartering is the exchange of goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Barterers must include in gross income in the year of receipt the fair market value of goods and services received in exchange for goods or services provided.
Generally, this income is reported on Form 1040, Schedule C.
A barter exchange or barter club is any organization with members or clients or persons who contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.
Barter exchanges are required to file Form 1099-B for all transactions unless they meet certain exceptions. Refer to Barter Exchanges in Publication 525, Taxable and Nontaxable Income, and the Form 1099-B Instructions for additional information on this subject.