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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

When Farmers Barter

Feb 11, 2014

 

We had a reader ask the following question:

"If you barter a vehicle for grain do you just put that grain with your other grain sales as there was no 1099 b form?"

Many farmers barter goods and services during the year and in many cases, the barter transaction is not reflected accurately on the tax return. In the case of the reader, they would report the fmv value of the grain given in exchange for the vehicle as additional grain sales and it would be added in with their cash sales. This same value would then be reflected as part of their fixed asset purchases. In this case, they could then take Section 179, 50% bonus depreciation (if a new vehicle) or depreciate over the applicable life.

Here are some other examples of bartering and how they should be treated:

  • Two farmers perform various services for each other. One farmer does the spring planting. The other farmer does spraying. At the end of the year, they add up the costs associated with the planting which they estimate at $35,000 and the cost of spraying at $30,000. They decide to net the difference the farmer who did the spraying writes a check to the other farmer for $5,000 and deducts this amount on his tax return. The farmer who received the check reports $5,000 as custom work on his schedule F. Technically, each farmer should report the gross amount as custom work income on each of their return and then report the work done by the other as custom hire or machine work on the expense section. In almost all cases, the bottom line effect would be the same for each, therefore, just reporting the net payment made is very common and should not change the bottom line.
  • Now let's assume one of the farmers grows beef and instead of selling the beef to his farmer friend, the farmer performs services on his farm worth the beef provided. In this case, since the beef will be consumed by the farmer for his personal consumption, he should report the work performed as income, but will not have a deduction to offset. The farmer that provided the beef will have an equal amount of income and expense to report, therefore, there should be no bottom line effect.
  • Now let's assume a farmer does some construction work for his farmer neighbor who is building a house that he will rent out to others. In this case, the farmer performs construction services of $15,000 and the neighbor does spring planting worth the same amount. Here the farmer who did the work could report it on Schedule C (most likely on Schedule F) and have an offsetting deduction for the planting costs. The farmer building the house would now increase his construction costs by $15,000, however, these can only be depreciated over 27.5 years and he will still need to report the income on his Schedule F.

As you can see, there are many forms of bartering that farmers perform and I am sure that I have not listed all of the various methods. Some of these barter transactions are properly reported, however, my educated guess is that much higher percentage is not.

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