You may trade services from your farrier for lessons for his daughter. Your favorite restaurant may provide goodies for your barn's Christmas party in exchange for the owner's occasional use of your indoor arena. But that's not actually income for you (and for the fellow barterer), is it?
There are two aspects of that question. Is it income to you for tax purposes and is it income to you for "business" purposes? First, the tax aspect: To quote the IRS: "Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company. Income from bartering is taxable in the year it is performed."
An example of an even swap would be two hours of riding lessons (regularly priced at $50/hr) in exchange for having 5 horses clipped for winter (regularly priced at $20/horse). For tax purposes, you have $100 of income from your lessons and the person doing the clipping has $100 of income for clipping your horses. Cash might be included in a barter situation if you provided one hour of riding lessons but only had one horse to be clipped. The person doing the clipping might also pay you $30 in cash.
Income from bartering should be tracked separately from regular income. Any business expenses incurred in performance of the bartered transaction are deductible - e.g. the cost of ring fees for the lessons for your farrier's daughter if they are not held at your facility. The IRS offers guidelines on record keeping for barter transactions at the IRS Website.
Be sure to use a reasonable value for the property or services received in a barter transaction to include in your income. If you exchange a $2000 filly for 6 months board (in a barn where board is usually $500/month), there is a $1000 gross profit on the transaction because goods worth $2000 were exchanged for services worth $3000.
An especially tricky barter situation occurs if you are bartering and giving and/or receiving services that could be construed as employment. For example, you exchange barn help for a reduction in the cost of board. The IRS may consider this relationship to be employment on your part. In addition to reporting the barter income, you would also be responsible for the employer portion of Social Security and Medicare taxes.
Depending on the nature of the work, at the very least, the person doing the work might be considered an independent contractor by the IRS. If you provided $600 or more of some form of compensation to the worker, you would be responsible for providing them and the IRS with a Form 1099 at year end.
There can also be sales tax issues if the product/service that you barter is considered taxable in your state.
Second, the business aspect: if you are receiving vet services in trade for lessons for your vet's daughter and the daughter loses interest in horses, you now have to pay for your veterinary services. For future planning, you need to know how much you "spent" on vet services previously.
For some services, such as lessons, the cost is easy to quantify. You may charge $50/hr for a lesson. Your vet bill is $200 so you owe your vet four lessons. But what about something like exchanging handyman services for rough board? What may seem like a good deal when you have several stalls available and plenty of work to be done, might not be economically advantageous when you have someone willing to pay top dollar to rent your last stall.
If cash is in short supply or you are giving/receiving a commodity that is scarce, bartering can be a wonderful opportunity. But be aware that it is not as simple a transaction as it may seem.
See the IRS Bartering Center for more information.
Equine Accounting: Donating a horse to a Charitable Organization
Local now and alwaysAt one time I was among those who crossed the border to find a better deal. I stopped doing that several years ago when realized wasn't saving anything. Money or time. Today I am less likely to bother due to increased border security since 9 11. More wasted time waiting in long lines at the border.I am not one of those isolationists who is dead set against free trade ever.
Equine Accounting: Home, Sweet Home (Office Deduction)
If you use a portion of your home for business purposes, you may be able to take a home office deduction if you meet certain requirements. In order to claim a business deduction, you must use part of your home for one of the following two reasons: 1. Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with clients in the normal course of your business. To meet the test for exclusive use, you must use use a specific area of your home only for your trade or business. And you must have no other fixed location where you conduct substantial administrative or management activities of your trade or business. For example, if you conduct part of your business from an office located in your barn, you could not also claim home office expenses for the same business activity. And you must use this space regularly, rather than incidentally or occasionally.
2. On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
The use of the office must be for “substantial managerial or administrative activities” such as billing customers, keeping books and records and scheduling appointments. The business activity associated with the home office need not be your main activity but the home office must be the principal place of business for your sideline activity. For example, an attorney working full time may judge at horse shows on weekends. If the home office is not used for purposes other than those associated with being a judge, the expenses associated with the home office should be deductible for tax purposes. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Usage is commonly allocated based on the percentage of square footage allocated for business use but any other reasonable method would be acceptable.
Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer. If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land.
HOWEVER (you knew there had to be a downside), if you sell your house, any depreciation taken on a home office after May 6, 1997 must be recaptured at the rate of 25 percent (for taxpayers in tax brackets over this amount). You cannot use the home sale exclusion to offset this tax. You cannot avoid the recapture by not reporting depreciation. Recapture applies to depreciation both claimed and claimable. If you want to avoid the depreciation recapture, you must choose to sidestep the deduction entirely by disqualifying the home office (by NOT using the space entirely for business). You will miss out on the depreciation expense but can still deduct related costs such as office maintenance.
For more information, see IRS Publication 587.
2. On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
The use of the office must be for “substantial managerial or administrative activities” such as billing customers, keeping books and records and scheduling appointments. The business activity associated with the home office need not be your main activity but the home office must be the principal place of business for your sideline activity. For example, an attorney working full time may judge at horse shows on weekends. If the home office is not used for purposes other than those associated with being a judge, the expenses associated with the home office should be deductible for tax purposes. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Usage is commonly allocated based on the percentage of square footage allocated for business use but any other reasonable method would be acceptable.
Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer. If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land.
HOWEVER (you knew there had to be a downside), if you sell your house, any depreciation taken on a home office after May 6, 1997 must be recaptured at the rate of 25 percent (for taxpayers in tax brackets over this amount). You cannot use the home sale exclusion to offset this tax. You cannot avoid the recapture by not reporting depreciation. Recapture applies to depreciation both claimed and claimable. If you want to avoid the depreciation recapture, you must choose to sidestep the deduction entirely by disqualifying the home office (by NOT using the space entirely for business). You will miss out on the depreciation expense but can still deduct related costs such as office maintenance.
For more information, see IRS Publication 587.
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