The purpose of this article is to discuss the tax treatment of barter, and its relationship to sales incentive and travel awards, in particular. Barter is considered to be equivalent to a cash dollar for most purposes relative to taxation. This has been established by case law rulings regarding the valuation of barter for income tax purposes. Neil K. Baker vs. Commissioner, 88 TC 71 (1987). Therefore, barter income is generally considered equivalent to cash income for income tax purposes.
When a corporation awards a travel incentive to an employee, the receipt of that travel incentive is taxed to the employee as compensation for services. If an employee receives, for example, a $10,000.00 travel award, the $10,000.00 constitutes taxable income to the employee. If the corporation pays for the $10,000.00 travel incentive, with a corporate check for $10,000.00, or if the corporation utilizes $10,000.00 worth of goods or services and barters for the travel incentive, it would still constitute a taxable travel award to the employee. From the corporate side a barter of goods or services would constitute corporate income with a corresponding deduction for the travel award as payment of compensation to the employee.
From an employee’s perspective, receipt of a $10,000.00, (or lesser amount,) travel benefit is still the receipt of a $10,000.00 travel benefit whether the employer pays for such award via cash or trade. An aggressive employer may be able to provide their employees a discount from the retail value of a barter transaction. A properly drafted trade discount plan may be structured by qualified tax counsel. Exchange Enterprises of Salt Lake, Inc. v. Commissioner, 87 TCM 414 (1987). This would allow a full deduction of the travel award’s value to the company, but only partial taxation to the employee. The company should not forget that withholding tax is due on all compensation paid to employees, including travel incentives or other taxable fringe benefits. The withholding tax occurs notwithstanding the company’s usage of barter or cash to pay for the incentive compensation.
What about Barter? Is it a tax outlaw or the forgotten child of a proud parent? No it is not. Bartering is again becoming more pervasive. It is found in almost every aspect of the business world. Major Airlines, hotel chains, broadcast media and other large corporations are bartering for goods and services. The taxes are no more difficult than if an employer paid cash for an award, and with proper planning they may even save the company and employee some taxes.
