How to Account for Barter Accounts in Business
Barter can occur as a direct, one-one-one trade of goods and services between individuals and businesses, or as an indirect trade of goods for barter credit or script issued on a third-party basis through a barter exchange company. Businesses that engage in barter must keep accurate accounts of their barter income, because the U.S. Internal Revenue Service treats it the same as money.
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Instructions
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Track barter income
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Set up a separate barter account for non-cash transactions.
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Record the income of the goods or services received in direct trade by determining their fair market value, as required by the IRS. For indirect barter done through trade exchanges, record the amount of credit or trade dollars received.
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Determine your costs incurred in a trade, either the fair market value of what you gave up in a trade, or the trade dollars spent. Record the costs and identify which are legitimate business expenses. Trading computer services for a plumber to fix the company bathroom may be a business expense. Fixing the business owner's bathroom at home may not be unless it's recorded as part of the owner's salary.
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Include the debits and credits in your barter account when compiling profit and loss reports for your business. You will get a true picture of the state of your business that way, and an early warning if extensive barter income could have an adverse effect on you come tax time.
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Report your barter income to the IRS on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1064 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations. Business expenses paid through barter should also be reported on these forms. A trade exchange will send you Form 1099-B to report your income through the exchange.
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Tips & Warnings
Don't keep your barter off the books. While the IRS doesn't crack down on occasional, casual trades between individuals, businesses run into serious risks if they don't properly record the value of their barter.
