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Q: Tax question concerning bartering ( Answered 5 out of 5 stars,   1 Comment )
Subject: Tax question concerning bartering
Category: Business and Money > Accounting
Asked by: chazc-ga
List Price: $50.00
Posted: 26 Apr 2005 20:17 PDT
Expires: 26 May 2005 20:17 PDT
Question ID: 514729
I am starting a service bartering company for non-business trades. 
For example, someone can trade stick shift driving lessons for cooking
lessons or any other service with any other member.

While researching, I've found that the IRS has special rules for
"barter exchanges" (,,id=113437,00.html).
 It involves record keeping of all trades conducted and filing of that
info.  They also tax clients on their bartering activity.  This will
cause problems for me as I may not have the resources to dedicate to
that level of record keeping and it may cause a problem to clients as
they will be taxed when no money is exchanged.

My questions are:
1-Do I qualify as a barter exchange (considering I only work with
non-business clients?)
2-Will my members be taxed on their trades?
Subject: Re: Tax question concerning bartering
Answered By: taxmama-ga on 27 Apr 2005 16:40 PDT
Rated:5 out of 5 stars
Dear Chazc,

If you want to be a middle-man for other people's barter transactions,
you're a barter exchange. 

You are essentially setting points or some value system for each unit
of personal service being exchanged, right? 

For instance, I provide 5 hours of babysitting and will get credits I can
use towards one haircut. Right?

You are tracking the credits of each member: Earned, used, unused.

So, yup, you'll need to place objective values on each credit and 
issue 1099s at the end of each year. 

And yes, people will probably have to report, as income, the personal
services they receive. But they won't be able to deduct the value of
the services they provide, because they are not in business. 
Kind of a double whammy. 

Now, if what you are trying to accomplish is something really and
truly and entirely an exchange of purely personal services, there may
be one way around this.

That is to outline your entire program and ask IRS to issue a private
letter ruling just for you. 

Here is the procedure:

The fee to IRS will be about $275.00

Here is where to mail it:

Meet with a tax professional who understands the ramifications of
what you're trying to accomplish and have them help you write the 
Private Letter Ruling request. You'll have a better chance of IRS
understanding exactly what you want to accomplish the first time, 
without having to come back and forth to ask you for clarification. 
Please don't go into this business without clearing up the issue
about recordkeeping and about reporting. 

I think if someone writes this up properly - and everything done
really is personal (i.e. no one provides the kinds of services  
for which they normally get paid), IRS might find a way to waive
having you issue a 1099. 

But expect that you will still need to keep records of each person's
total barter activity for each year - just in case anything changes.

Another way to get around this is by handling transactions the way
eBay does. People post what they want to sell - other people just buy
them. eBay just provides the space in which to do it. 

So if you simply set up a space where people can barter directly with
each other, and you only charge for the ad space, all you'll be doing
is selling ads. You won't be directly involved with the barter transaction.

Think about ways to structure your idea where you are not in the middle, 
where you're just a place for them to meet. 

Good luck. It IS an interesting idea. 

Best wishes,

Your TaxMama-ga

For more information about real-life barter issues

Request for Answer Clarification by chazc-ga on 27 Apr 2005 18:16 PDT
Thank you for our answer, it was very comprehensive, but I need
further clarification.  I have to divulge certain information to you
personally in order not to give up my business plan to all potential
competitors who view Google Answers.  I will send an email to you via
the form on your website under the same name "chazc-ga".  Please
respond to it.  Thank you.

Clarification of Answer by taxmama-ga on 27 Apr 2005 19:04 PDT
Hi Chazc,

OK, I understand. 

From what you say you're doing, yes, you'll be all right. 

All the transactions are definitely between the two parties,
themselves. You're not involved at all, except to provide the space. 

You should have no problem - and won't need to worry about
tracking or 1099s under the conditions you describe. 

Go for it!

Best wishes

chazc-ga rated this answer:5 out of 5 stars and gave an additional tip of: $10.00
She gave a comprehensive answer, more than I expected and also quickly
followed up with the clarification.

Subject: Re: Tax question concerning bartering
From: cornerjudge-ga on 27 Apr 2005 15:43 PDT
Bartering is a real messy tax area, very subjective & prone to audit.
Business or non-business trading partners are treated equally under
the IRS so it won't matter.  Basically the fair market value of the
two exchanged services is considered income to both sides with costs
of performing the services deductible.  The person who performs the
service should receive a 1099 if value of that service exceeded $600. 
You are sort of asking a two prong question (1) as proving an outlet
for folks to barter would you be taxed & that question is yes.  If you
received income or profited in services you had taxable income.  (2)
If you merely exchange with folks, trading services yes the value of
the traded services is taxable.  It makes no difference if the
commodity was a service (i.e. dentists provide services but are taxed
on income earned) or a product.  The cash exchanged for product or
services is taxable.  25+ H&R Block experience here talking - best to
avoid barters, its very prone to problems for fed/state.  Stick to
straight products sales like we do

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