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Business Barter Can Bite!
Barter is trading services or product in lieu of cash. Barter of products or services between businesses (e.g. subcontractors) is taxable. Barter income is based on the value of services or product received (of IRC Section 61(a)). It is reported on the tax return (IRC§ 61(a)(1)). Mr. Welemin learned this painful lesson in US Tax Court Case 2017-54.
Mr. Welemin was a handyman andrented a home held by the Winberg Family Trust. During 2012, Welemin had trouble making his monthly rent. To prevent eviction, Welemin made an informal barter arrangement with the property manager. Welemin would do repairs and maintenance on his landlord’s property. The fair market value of his services would be subtracted from his rent owed. At year end, the landlord gave Welemin a 1099 Misc for the value of services received (barter income/free rent).
The IRS billed Welemin for the unreported 1099 Misc income. Welemin brought suit in US Tax Court to dispute the bill, but his case failed. The Court found:
Confirmation of the work in lieu of rent arrangement. “Barter income” is included in gross [taxable] income under IRC Section 61(a).
No change to 1099 income reported to IRS (on landlord’s 1099 Misc) Keeping accurate expense records would have helped Welemin’s case)
Failure to report 1099 income was careless, and the IRS 20% penalty should apply. The Take Away:
Trading work instead of cash is barter.
Value of services traded in lieu of cash is taxable income.
If you’ve received a 1099 MISC Form report it on your tax return.
If you’ve traded services in lieu of cash keep GOOD expense records! For more detailed discussion on Barter Income, see US Tax Court Case above and IRS Tax Topic 420 http://ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11337 https://www.irs.gov/taxtopics/tc420.html