A New York singer agrees to give singing lessons to an attorney in exchange for tax return preparation. The federal income tax law treats the agreement as the performance of singing lessons by the artist for a fee equal to the fair market value of the tax return preparation services. The fair market value of the lessons is taxable to the tax preparer, and the fair market value of the tax return preparation is taxable to the singer.
Bartering means trading one product or service for another. Usually there is no exchange of cash. With bartering being a form of payment, New Yorkers should be aware that when they barter, they are making taxable transactions with potential income and sales tax consequences. A barter exchange is generally required to be reported on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions; Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.
When a New Yorker receives goods or services in exchange for services, the fair market value of the goods or services received by the person is included in gross income. The fair market value of services that someone receives in a barter transaction is the price usually charged by the party performing the services. The value of those services is included in the performer’s gross income when performed.
Income from bartering is taxable in the year it is performed. The party performing services gets to deduct the costs of the services from the income. For example, if an artist exchanges a painting for spa services, the cost of canvas, paints, paper and other supplies may be deducted from the value of spa services as business expenses.
The barter of goods or services may subject a New Yorker to state and local sales tax. Sales tax liability for barter exchanges is calculated on the value of the goods or services given in trade. In New York, if an artist trades a painting with a fair market value of $700 to an car mechanic in exchange for car repairs valued at $700, the painter is treated as a buyer of the car repairs and owes sales tax on the receipt of the car repairs based on the value of the painting provided to the mechanic as payment. The painter is treated as having sold the painting and, as the seller, needs to collect sales tax from the mechanic based on the value of the car repairs received from the mechanic.
For income tax reporting advice, contact an experienced tax attorney.