How to Barter Without Getting Audited

The act of trading goods and services may be as old as time, but it is spiking in popularity as of late.

“Bartering is getting really big right now because people don’t have cash,” says Terrence Rice, CPA.

So let's say you are a dentist and your dog needs walking. You trade services, don’t exchange money, and the deal is done, no strings attached, right?

Wrong.

“Not reporting your barter income can easily lead to an audit by the IRS,” says Rice.

Here’s how to avoid an audit:

Document everything

Barter agreements work the same way as cash agreements, Rice explains, and need to be documented in kind.

“Report your barter income on your tax return and label it ‘barter revenue,’” he recommends. “Full disclosure is always best. Your barter income is taxable. Make sure to report what you would have received in cash.”

For example, if I bartered $100 worth of my CPA services for $100 worth of window washing for his office, he would need to report $100 to the IRS because that is the amount he would have been paid if the transaction wasn’t a barter.

“Report your barter income on your revenue line,” he advises.

Make it legal

In addition to reporting barter income on your tax return, Rice advises business owners to create legal documents for each barter transaction.

“Create a document that explains the barter agreement and then make sure both parties sign that document,” he says.

Hire an outside firm

Fortunately, there is help for small business owners who don’t know whom to barter with and/or want to avoid a dreaded call from the IRS. Companies such as ITEX help to initiate what is called ‘modern barter exchanges.

While direct barters can often be accidental and result in uneven exchanges ($200 of dentist work for $50 of window cleaning), modern barter companies help eliminate discrepancies and keep transactions legit with the IRS.

Other modern barter exchange companies include IMS, Barter Network and BizXchange.

Get informed

Perhaps the best way to protect your company from a barter-induced audit is to know the facts.

Great resources include the IRS Tax Requirements for Barter Exchanges, National Association of Trade Exchanges and International Reciprocal Trade Association.