The word "barter" has traditionally invoked nostalgic and folksy stories of neighbors helping to fix roofs in exchange for a hot meal. While this type of personal trade of services certainly still occurs, the formal practice of bartering is popular among businesses, as well. The Ormita Commerce Network, a recognized global trade franchise, estimates that approximately 70% of all Fortune 500 companies barter on a regular basis, totaling billions in official non-cash exchanges each year.

Whether you're an individual with a talent to share or a small business with a service to lend, the IRS wants to know about it; here are the basics to know about reporting your bartering activities on your annual tax forms.

What's a Barter?
Simply put, bartering is an exchange of goods or services that have equal value; cash may or may not be added to the exchange to even out the trade. Both individuals and companies can barter, and you may decide to do the trade independently, or through one of several reputable barter and exchange companies. These types of programs allow you to purchase or trade for credits – a sort of alternate currency – which can then be redeemed for the products and services of your choosing.

Is Bartering Taxable?
It sure is. According to Scott Estill, a former senior IRS trial attorney and the author of "Tax This! An Insider's Guide To Standing Up To The IRS," casual exchanges between non-commercial parties for similar services is usually not taxable. Offering to cut a neighbor's grass while they are on vacation in exchange for the same, for example, won't trigger a tax consequence (the key to this that you are both non-business parties, and the value is nearly identical.). When businesses venture into the same waters, especially with products and services that they would normally profit from, the obligation to cut the IRS into the action can occur.

How is Bartering Reported?
The IRS gives you all the information a good tax-paying citizen needs to know with the IRS Publication 525, but it essentially states this:

Barter exchanges, both online and in person, need to be reported on Form 1099-B, unless they occur through a barter exchange with less than 100 transactions during the year, are done with an exempt foreign person (as defined by the IRS), and involve property or services less than $1.

A further reading of the materials brings up several scenarios where reporting would need to be done on your typical forms for reporting income (for example, Schedule C, if you are self-employed.). Scott explains it this way: Basically, barter income takes the place of cash, so however the cash would have been reported will also control how the barter income will be recorded. So, if the extra income would need to be reported as earned income or capital gain income, it would be reported as such.

SEE: Earn Tax-Free Income

How Is the Value Determined?
Both parties involved in the transaction will need to determine the value of the exchange. Usually, fair market value is used, and it is defined as a "value that a willing buyer under no duress would pay and a willing seller under no duress would sell for the property or service(s) involved in the barter transaction," says Scott. Remember that the values need to be equal for a true barter exchange.

Are All Barters Taxable?
As mentioned before, many barter situations may not be taxable (the lawn mowing scenario, for example), especially if you are acting independently of a business. When goods, in particular, are exchanged, it may not be considered bartering at all. If two parties trade computers of equal value, for example, this may not be taxable – especially if neither party is in the business of selling computers.

The Bottom Line
Despite the potential for triggering income tax, bartering is still a sound option for many businesses. As the economy remains sluggish, companies may find these types of exchanges to be a great way to move inventory and rid themselves of the bloat that may have occurred during the past few years. Anyone interested in making a significant number of barter exchanges, however, is advised to seek the advice of a tax professional.

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