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Bartering Deals are Common in the RV World, But Full of Tax Risk

Bartering Deals are Common in the RV World, But Full of Tax Risk

By: Martin M. Shenkman, CPA, MBA, JD

 

Stealth Taxes May Get You

   

Paychecks reported on a W-2 are taxable, so is a consulting fee you’re paid if you’re not an employee that is reported to the IRS on a Form 1099. Everyone who has ever worked knows that. But what about an economic benefit or exchange when you barter your services for property or services of someone else? What if you’re a retired construction worker and you camp at an upscale RV park for a month while you rebuild decks, benches and other improvements. You exchange 3 hours a day of labor/construction time for the free use of the park for the month you’re there. No cash changes hands. Can Uncle Sam still put his hand in your pocket? Maybe.

   

In The IRS’s Own Words

   

The following discussion will introduce the tax concept of bartering and how the IRS views it. Some of the language in the discussion following is adapted from IRS publication Number 525 “Miscellaneous Income” which you can find on the www.irs.gov website for free. This was done so that you get a feel for this important topic using some of the language and examples the IRS uses in its publications to guide the public. The examples and discussions have been modified to better reflect situations RV’ers might face, planning ideas and cautions have been added. In future articles, we’ll dig much deeper into this topic and provide you some gruesome details from some court cases that have evaluated these issues. We’ll also comment on some of the advertisements and articles that are common on the internet, ‘cause the IRS can read those too!

   

What is Bartering

   

Bartering is an exchange of property or services.

   

How Can the IRS Tax “Bartering?”

   

How can the IRS tax “income” from bartering? You didn’t get any cash.

 

You must include in your taxable income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. Does that sound complicated? Try this example out.

   

Example: What’s it Worth

   

Joe, a retired construction worker, has been doing handyman jobs and billing $25/hour for his services. He’s had business cards printed up and taken an advertisement in the local Penny Saver give-a-way newspaper distributed around his home town. Last year, after extensive research into the economics of full-timing (sorry Coleen, some folks like the planning!). Joe and his wife Louise head off into the sunset in their trusty RV. Joe’s plan is pretty simple: They’ll find RV parks and private campgrounds that need repair or light construction work done and Joe will provide services for a combination of pay-free rental. They figure if they can cover only 3 months a year in this manner their pension and savings will hold out just fine. Joe’s first “arrangement” is with an upscale RV park that charges $40/day for full hookups. Joe agrees to work 2 hours a day providing repair services for the two months the park believes they’ll need his help. If Joe billed his time at the rates he charged customers before he hit the road fill time, 2 hours a day is worth $50/day. If the RV park billed Joe and Louise for the full hookup at their normal fee the value of Joe’s labor would be $40/day. There is real economic value being exchanged.  The fact that Joe and the RV park cut out the cash part of the transaction should not change the end result. The RV park could pay Joe $50/day for services and Joe could pay the park $40/day for hookups. Sounds like they both cut a deal.

   

Planning Tip: If you work and reside in an RV park off season, the value of a campsite may be modest or negligible. But it will be safer to document that up front, then when the IRS comes knocking.

   

Examples Adapted from your Friends at the IRS

   

Let’s take a look at some examples from IRS publication 525 “tweaked” a bit to the RV world.

   

Example Services for Stock.  You are a retired teacher and writer, and have done free-lancing since you’ve become a full-timer. You perform writing services for a chain of RV parks which are organized as a small corporation. You write all their advertisements, all the content for their website, brochures to be distributed to prospective visitors/customers, and so on. Since the RV park corporation is struggling a bit from the recession, you come to an agreement that instead of them paying you, because they’re short on cash, they give you shares of stock as payment for your services. You figure the RV business will be great for the long run as baby boomers move to RV’ing and the dividends will help your cash flow in the future. Uncle Sam says that you must include the fair market value of the shares of stock in your income on Schedule C or Schedule C-EZ (Form 1040) in the year you receive them.

   

Example Services for Services. You are a self-employed accountant and attorney and think that a lug nut is when your wife makes you carry one of those huge bag of peanuts home from WalMart. You and a retired truck driver, Larry, who rebuilds RV’s for fun, are both members of a barter club. Members get in touch with each other directly through various internet sites and bargain for the value of the services to be performed. In return for the accounting services you provide Larry (helping him get out of hot water with the IRS), Larry rewires the old lighting system in your travel trailer. You must report as your income, on Schedule C or Schedule C-EZ (Form 1040), the fair market value of the electrical services you received. Larry must include, in income, the fair market value of the accounting services you provided to him.

   

Example Barter Club Credit Units. You are self-employed and a member of a barter club. The club uses credit units as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account when you receive goods or services from other members. This can be a great way to get stuff done in retirement to preserve cash, and especially during a recession when everyone is a bit pinched. But, don’t leave your Uncle out of the plan! According to IRS Publication Number 525, you must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.

   

Example Free Rent for Property. You’re a full-time creative and talented artist. An RV park offers you 6 months rent-free use of a site with full hook ups (including internet, cable and so on), if you will create a new logo and design for their park. They plan on using your art on their website, on T-shirts they’ll sell in the on site store, and in their advertising. You create a series of sketches until the RV park owner and you decide on a theme and subject for the design. You spend the next month perfecting the picture, colors scheme, etc. and then give all the rights in the work of art you created to the RV park. The RV park must report the fair market value of the artwork as income on Schedule E, Form 1040, (if it is operated as a sole proprietorship). You, the artist, must report the fair rental value of the camping site as income on Schedule C or Schedule C-EZ on your Form 1040.

   

Where Do You Report Bartering Income?

     
  • Generally, you report the income the IRS views you as having earned on Schedule C or Schedule C-EZ of your personal income tax return, Form 1040.
 
  • If the barter involves an exchange of something other than services, such as crafts, you may have to use another form or schedule instead.
 
  • Form 1099-B from barter exchange. If you exchanged property or services through a barter exchange, Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions”, or a similar statement from the barter exchange should be sent to you. It should show the value of cash, property, services, credits, or scrip you received from exchanges during the tax year. The IRS is also required to be sent a copy of Form 1099-B.
   

Barter Exchanges and Withholding

   

The good part of a barter deal is there is no cash. The tough part about a barter deal is that there is no cash.If you have to pay tax on the value of the barter deal you have to come up with the cash. Unlike wages, there is no withholding so the tax is generally your responsibility.

   

However, “backup withholding” will apply in certain circumstances to ensure that income tax is collected on this income. If a barter exchange is involved, it must withhold 28% of the income as income tax, 28%, if you don’t give the barter exchange your Social Security number (or an Employer Identification Number, if you use that instead).  Also, if the IRS notifies the barter exchange that you gave it an incorrect identification number, they have to withhold.

   

If you join a barter exchange, you must certify, under penalties of perjury, that your taxpayer identification number is correct and that you are not subject to backup withholding. If you do not make this certification, backup withholding may begin immediately. The barter exchange is required to give you a Form W-9, “Request for Taxpayer Identification Number and Certification”, or a similar form, for you to fill out, sign and make this certification. The barter exchange will withhold tax only up to the amount of any cash paid to you or deposited in your account and any scrip or credit issued to you and converted to cash.

   

If tax is withheld from your barter income, the barter exchange will report the amount of tax withheld on Form 1099-B, or similar statement.

   

To Report or Not To Report

   

The Shakespearean question is: "Do you report barter transactions?" Well, if you’re required to (i.e., if income results, based on the above analysis) and you don’t report the transactions (or perhaps you don’t report anything from the business) the time period during which the IRS can audit you (called the “statute of limitations” in tax jargon) never ends. Also, if you are audited for past years, interest and penalties can accumulate at a dizzying rate to the point they exceed the tax you owe.

   

Planning Consideration

   

When you plan and negotiate a barter transaction, there is always some latitude in trying to determine how to value either side of the transaction. If, instead of taking the ostrich approach of ignoring it and hoping the IRS doesn’t nail you, you affirmatively plan the transaction, you might be able to document a much lower value than the IRS might assert if they find the transaction after the fact. Joe, in the above example, is getting the use of a $50 site, or so it would seem. Perhaps, even though the sites in that particular RV park are rented at $50/day, Joe’s site is an inferior site with no view of the lake and no cable TV hook-up and as a result might only be worth $25/day. That will be harder, if not impossible to prove to the IRS if Joe and the RV park try to hide the transaction and don’t document anything. If instead, they signed a simple agreement, paid Joe, and Joe paid for the site, and tax was withheld, the tax results could prove better, cheaper and less aggravating for all.

   

Avoiding Tax on Camping Sites and Hookups: Sites Provided for the “Convenience of the Employer”

   

Is there a way around this ugly tax result? For some arrangements, possibly. However, you need to plan the paperwork and deal in advance to bolster this position. Meals or lodging (including utilities) furnished to an employee and his family (spouse and dependents) is nontaxable to the employee if certain requirements are met.

     
  • The meals and lodging must be provided (furnished) by or on behalf of the employer for the convenience of the employer. So if an RV park provides you with lodging because employees must, for valid business reasons, remain on-premises until their shifts end or during odd hours, this might suffice. If an RV park wants you there during emergencies, or to man the front desk for a night shift, or to do certain maintenance when the other campers are not using the facilities, this might suffice. But the RV park should make some effort to document these requirements and their business purposes in a set of rules for work/campers, and in whatever agreement you sign with them.  In developing the language to use, the RV park should read and consider Treasury Regulation Section 1.119-1(a)(2).
 
  • For lodging (which should reasonably include an camp site and hook-ups), you as the employee must be required to accept the lodging as a condition of your employment. The RV park rules and regulations, and agreement you sign should specifically say that you must reside (camp) on the RV park grounds as a requirement to properly perform his duties. The RV park should consider the language in Treasury Regulation Section 1.119-1(b). Your presence on the RV park grounds, as an employee,  must be required from a business standpoint.
 
  • There is a third test, but it’s a "piece of cake" for RV workers. The “lodging” must be on the business premises of the employer. If you’re given a campsite in the park, you meet this test.
   

The value (not the cost) of a “lodging” (presumably a campsite and hookups, but other facilities would count too) that fails to meet these tests, generally, is considered "income" to the employee.

   

Perhaps the RV park’s rules for work-campers could recite (modified to fit the situation) various rules like:

   
  • Although the primary tasks for Employee shall be [describe jobs agreed to] all work-campers are required to make themselves available 24 hours a day in the event of an emergency.
 
  • During the period of employment, and although RV Park and Employee have agreed on target hours for Employee to work it is acknowledged and agreed that RV Park shall have the right to require Employee to cover any shift for which another employee is sick or unavailable. Employee shall be paid additional compensation of [insert here] for covering such shifts. Because of the importance of this coverage requirement Employee must lodge on the RV Park premises during the entire tenure of the Employment.
 
  • Employee is requested to spend as much non-scheduled work time on the RV Park facilities in order to mingle with other guests and help create the atmosphere of the RV Park.
 
  • Because of the above essential business purposes RV Park requires, and Employee agrees, to reside on the RV Park campgrounds during the entire tenure of the Employment agreement.
   

Now, the above is just the pre-game warm up. RV Parks should have their accountants or business lawyers draft appropriate agreements that work for their specific situation.

   

While it may be easy for an RV park to update or create work/camper rules and regulations and update the agreement it has you and others sign, other issues remain.

     
  • Are you an employee? (Note that for clergy, they may be considered employees for income tax purposes even if they are not treated as employees for payroll tax purposes).
 
  • The example with the artist earlier in this article probably will be a tougher call work from a Section 119 housing exclusion perspective. It’s more difficult to argue that the artist needs to reside in the RV park to design, then it is to argue someone with rotating night shifts or late hour requirements, needs to be on site.
   

Caution: If you think merely having the RV park "add some lingo" to the agreement you sign slam dunks the tax issue, hold our horses. Look at what the folks in Washington added to this tax law: “In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.” That doesn’t mean don’t add the language, it means self-serving provisions in an RV park’s rules and regulations and contract won’t, alone, cut the mustard. IRC Sec. 119(b)(1).

     

Conclusion

   

Taxation of barter transactions comes as a surprise to many people. With so many transactions being discussed on the internet, and the government desperately in need of tax dollars to pay for the growing deficits, expect more audits of barter transactions. But, there are planning options. Consider the Section 119 exclusion. Plan your arrangements in a manner that makes the value of what you are getting if it is taxable, clear.

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