Barter Agreement Contract: Everything You Need to Know
A barter agreement contract is an agreement in which goods or services are exchanged in lieu of cash and they often require different contract conditions.3 min read
2. Barter Agreement Template
3. How to Create a Barter Agreement
4. Paying Taxes on Barter
Updated October 30, 2020:
A barter agreement contract is an agreement in which goods or services are exchanged in lieu of cash. Barter agreements often require different contract conditions and stipulations.
Barter Agreement Basics
Not every contract agreement includes compensation via money. In some cases, an agreement involves the exchange of goods or services. A barter agreement is a contract that sets out the expected terms and conditions of the transaction, including what is being traded and who it is being traded among. A barter agreement can include the following conditions:
- Service conditions: Service conditions usually include detailed tasks, services, and the amount of time expected to complete the transaction.
- Goods conditions: Goods conditions usually include a detailed account of the quantity and quality of goods being traded.
Having a barter agreement contract that is signed by both parties can protect everyone involved in the transaction. A signed contract ensures everyone holds up to the conditions listed. A barter contract can also act as a legally binding document in the event of legal disputes.
Barter Agreement Template
Using barter agreement templates can make the contract process easier. A typical barter agreement template includes the following:
- Effective agreement date.
- Full and legal names of both parties.
- Details surrounding the goods or services involved in the barter agreement.
- Date or time frame and the location of the exchange.
- Terms and conditions section that includes information such as the method used in determining the fair market value price, a claim that goods bartered are legal, and an agreement that the goods are in good condition. This section usually includes terms, indemnification, and agreement sections.
- Monetary value for reporting tax purposes.
- Breach of contract terms.
How to Create a Barter Agreement
Sometimes it might be necessary to create a customized barter agreement. It can be useful to work with an attorney when creating a barter agreement to ensure it includes all the necessary terms and conditions.
Take the following steps to create a barter agreement contract:
- Calculate the monetary value of the goods or services involved.
- Begin negotiations with the other contract party to draft the specific terms of the barter agreement.
- Draft a contract that includes the agreed upon details of the barter. Include purpose, contact information, expected timelines, compensation that clearly states that money will not be traded, and any signing requirements.
Paying Taxes on Barter
The Internal Revenue Service (IRS) does consider the barter transaction of goods and services to be taxable income. If the transaction was not of equal benefit, the advantageous party might owe taxes on the difference in value received. Paying tax is often required in the following barter agreement situations:
- When someone barters for a good or service he or she would usually pay money for.
- When someone receives barter for at or near market rate.
- When someone actively works in the business of a service that he or she is using to barter.
- When someone receives an item in barter that would otherwise be seen as income if paid in cash instead.
It is not always a simple process to determine the taxable value of an item. The IRS requires that bartered items must be taxed at their fair market value of the property or services. Additionally, although the income reported is based on the monetary value of goods or services, the owed taxes are in the form of cash.
Fair market value refers to the monetary amount that most people are willing to pay for the good or service. There are many things that can complicate the fair market value, including:
- Pricing that is based on generosity or community involvement.
- When a barter does not involve two items of equal value.
- When fair market value does not match the goods or services traded.
It is possible to deduct any related expenses when reporting barter income on a tax statement. However, too many deductions regarding barter agreement contracts can be overwhelming and complex. If you are in the business of barter trades, it is best to work with an accountant that is familiar with barter agreements.
Barter agreement contracts are a great way to create an official document laying out the specific requirements of a goods or services trade. If you need help with barter agreement contracts, you can post your legal job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.