Bay Bucks members understand the value of using a local currency to exchange goods and services. But what about taxes? The IRS has determined that barter transactions are taxable as income. One unit of Bay Bucks (BB) is equivalent to one dollar; therefore, any receipt of Bay Bucks is taxable the same way as cash. Bay Bucks are classified as a “trade dollar,” recognizable as income and correspondingly as an expense when applicable. At the end of the year Bay Bucks will issue a 1099-B, Proceeds From Broker and Barter Exchange Transactions, for the amount of Bay Bucks (BB) a member receives, including any commissions deducted. This form, any other record of barter transactions, and how any Bay Bucks were used should be given to your accountant. Below I have outlined general points to consider when planning and preparing taxes.
What to do with the 1099-B, Proceeds From Broker and Barter Exchange Transactions
Whether or not a 1099-B is issued, a taxpayer must report the fair market value of goods and services received from barter transactions. Bay Bucks income is received for business transactions and therefore should generally be reported as income, subject to self-employment tax. For a sole proprietor, this income will likely be reported on tax form Schedule C. For other types of business entities, Bay Bucks received will also be reported as income on the relevant form. A member should report at least what is on the 1099-B, regardless of any Bay Bucks used. Any other barter transactions outside of Bay Bucks or not included on the 1099-B are also required to be reported.
How to report commissions associated with income from barter transactions
The total amount of Bay Bucks that the customer pays (total amount transacted), before any commission, should be reported as income. This point may be confusing because business owners sometimes think of income as the amount actually received. For example, I might charge 500 BB for tax and accounting services, but only receive 475 BB after a 25 BB commission. I would report $500 as income and the $25 as expense. If the tax preparer reports only $475 as income there may be matching issues with the tax forms and a dreaded (but likely easily resolved) IRS love letter may come in the mail.
How to report Bay Bucks used for business goods and services
“I used all my Bay Bucks at the end of the year, I don’t need to report anything right?” If only taxes were so easy. All income and expenses need to be reported for the amount transacted. If Bay Bucks are used for business expenses, the amount used will be reported as an expense. Any commissions on the expense are also considered an expense. If I were to pay 500 BB for website design work, I may also have a corresponding 35 BB commission. I would then report a total of $535 of total expense on my tax return.
How to report Bay Bucks used for personal business goods and services
While nearly all the Bay Bucks vendors receive will be taxed as income, not all Bay Bucks used will qualify as a business expense. Let’s say that instead of website design work, I spend 500 BB on a deep tissue non-medical massage package. The 500 BB paid, along with any commissions, would be a personal cost to me. This cost does not represent a business expense and cannot be deducted against business income. If the massage was medical in nature, I would then need to determine if there is an appropriate deduction to be taken on my individual or business tax return.
Bay Bucks and Sales tax
Goods subject to sales tax with cash transactions are also subject to sales tax with Bay Bucks transactions. The Bay Bucks member selling an item subject to sales tax should also charge the customer sales tax. You can collect sales tax in cash or in Bay Bucks. For cash collection, arrange with the buyer to pay you directly in cash. For Bay Bucks collection, you can add the sales tax to your price in Bay Bucks. Any sales tax paid in BB from customers must be remitted to the California Board of Equalization (BOE) in dollars, as if the sale was a cash sale. Let’s say a member sells a jacket for 100 BB subject to sales tax of 9.5%. The seller must remember to collect 100 BB for the jacket and 9.5 BB in sales tax. The seller will then remit the sales tax in cash, $9.5, to the BOE whenever they are required to file. Most vendors collect sales tax in cash. If the seller fails to collect the sales tax in cash or dollars, the seller is still responsible for remitting sales tax to the California BOE.
Deducting Bay Bucks donated to a qualified charity
Donating Bay Bucks to a qualified charity may be a charitable deduction, depending on the individual tax circumstances. Charitable donations of BB will likely appear on the individual tax return of the member as an itemized deduction (Form Schedule A). In select circumstances, the deduction may appear on a corporate tax return. Berkeley Youth Alternatives, St Cyprian's Episcopal Church, Sustainable Economies Law Center, and Transition San Lorenzo Valley are local charities currently accepting donations of Bay Bucks.
This article is designed to give a practical and brief overview of reporting basic Bay Bucks transactions. Because tax reporting is individual and specific in nature, this article is for informational purposes only and is not intended to be construed as legal, accounting, or other professional advice. John Gillingham, CPA is a Bay Bucks member and is happy to answer any of your tax questions. He can be reached at: John@GillinghamCPA.com