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Sorry for asking what feels like a common question, but I can't find a straight answer to this question even though I've done a good bit of Googling on this topic.

Last year my wife ran a website which had both sidebar advertisers and paid review articles of goods and services. With some of these articles, she would be given a "free" service and in exchange she'd right an article reviewing her experience or give the company a "free" advertisement on her side or leader bar.

From all accounts that I've read, these transactions are considered barter transactions, the received goods and services should be counted as "income" and are thus, taxable. However, since she bartered the exchange shouldn't there also be an associated "expense" of giving the customer an article or advertisement on the site? Articles and sidebars aren't free.

For example, if she received a free meal from a restaurant valued at $50, but wrote an article for which she would have typically charged $50, she may have received $50 in bartered goods, but shouldn't she some how account the provision of writing the article as a $50 expense? She doesn't write articles for free, so she's out of $50 in her pocket. If she was to have actually paid for the meal for herself, the whole experience would have been a net-wash in income vs. expenses.

Furthermore, on some occasions she would accept barter offers that were a little bit of a loss. For instance, she might have offered a $100 sidebar add for $75 worth of goods because she wanted the goods, but the customer was only willing to barter. In that case, the barter was a net loss of $25 because the value of the service she gave was worth more than the value of the services received and should could have easily found another advertiser willing to pay the $100 fee.

If you barter for services, are you out of luck and have to treat the received barter transaction as strictly income and can't account for the intrinsic expense of giving the customer a "free" advertisement?

How do you properly account for this and account for what is, essentially, the loss of income?

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One way to simplify the analysis of barter is to think about a barter transaction as if it involved cash which changed hands twice - and the picture will be significantly simpler.

Take for example your wife who "received a free meal from a restaurant valued at $50, but wrote an article for which she would have typically charged $50".

Make believe she wrote the article and actually received $50 in cash. Right there, she has $50 in taxable income, with no directly related expenses. She then takes the $50, goes to a restaurant and eats a $50 meal for which she pays in cash. Most likely the cost of the meal isn't deductible - in which case the bottom line is she has one article out in the world, a meal in her stomach, no cash - and a net $50 taxable income.

If by chance the meal is actually a business expense, only 50% of the cost is deductible, and in that case the outcome is the same - except that her taxable income is only $25.

If you apply that logic to each barter transaction, you'll see it's not as complicated as it looks.

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    Note that treating barters this way is not optional - the IRS considers the 50$ income, and expects you to pay taxes on it, even if you don't bother to make your accounting this way. – Aganju Jan 7 at 3:21
  • Ok, so in that case, within my accounting system, I need to make two transactions for the value of the two sides of the transaction. A $50 expense for the meal (classified as business food) and $50 income. Correct? The accounting software (QuickBooks, in my case) should properly handle the taxes when I post them to TurboTax. This is all legal and correct? – RLH Jan 7 at 13:53
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    @rlh - If the meal is an allowable expense, then the answer is yes. – Jack Fleeting Jan 7 at 14:06

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