Barter trade is the oldest form of commerce that is still relevant and common today, especially between small business owners, who are reminded by the IRS that any fair market value of property or services that are received through bartering is subject to income taxes. Even though there is no exchange of cash in barter trade, it is an IRS requirement that the fair market value of the services and goods exchanged be reported to the IRS by both parties as income.

Small business owners are advised to take heed of the following four major facts about bartering lest they find themselves in trouble with the taxman.

1. Batter Exchange: There is no difference between the barter exchange transactions and marketplace buying and selling of goods and services. Regardless of the platform that this transaction takes place, be it over the internet or in a physical location like an office, it is a requirement that Form 1099-B is distributed yearly for each barter exchange for any profits from the bartering transaction to the members or clients as well as the IRS

2. Barter Dollars: For tax reporting, barter dollars are treated in the same fashion as real dollars. Anyone who runs any direct barter must report the products’ or services’ fair market value received on their tax return.

3. Battering Liabilities: There are several liabilities that might result from bartering, like self-employment tax, income tax, excise tax or employment taxes. The income from barter transactions is taxable in the performed year. Just like other transactions, bartering may result in some normal income or profits, capital gains or losses and even get a nondeductible personal loss. You must understand how each of the outcomes affects your taxes in the end.

4. Reporting: There is a variation on the rules for reporting barter transactions depending on the form of bartering that takes place. Normally, such business incomes are reported on Schedule C, Profit or Loss from Business of Form 1040. Depending on the nature of the business, there are other forms that apply to specific business types like Form 1065 for Partnerships. For Small Business Corporations, fill Form 1120-S. Form 1120 should be filled for transactions done by Corporations.

It is always better and safe to be on the right side of the law, especially if you run a business. It is therefore, important to ensure total compliance with IRS requirements and staying informed on your taxes. You can review the IRS website for more information about bartering and taxes.