 Income tax 2021-2022, business income part two. Get ready to get refunds to the max, dive into income tax 2021-2022. Most of this information can be found in Publication 334, tax guide for small business 2021, income tax formula, looking at line one income, although we would have another schedule, basically an income statement, income and expenses, expenses basically being deductions that net then, flowing in to line one income on the formula and page one of the 1040 tax return, we see here where we would have the schedule C, bottom line flowing through to the schedule one, flowing through to the first page form 1040 line number eight. Then we have the schedule C, the profit and loss, basically the income statement, we're focused on the top line, the income line at this point, continuing on with that line. So now we have bartering for property or services. So note, when we think about income, most people think about providing goods or services and receiving some form of cash payment, some form of money, some form of currency. And you might then think, well, in order not to include income because for taxes, income is bad, then maybe I'll just make a trade, I will make a barter with someone else, some other business and then I'll be getting something, they'll be getting something and because there's no cash involved, especially if I'm on a cash basis, we might think, then I don't have to record the income. But the IRS of course says, well, we don't like that, that's not the way things should work here. Even if you have a barter situation, you should be recording the income on the income line, it would be the general rule. So bartering is an exchange of property or services you must include in your gross receipts at the time it receives the fair market value of property or services you received in exchange for something else. So we have to include basically the revenue and you can imagine it of course, kind of similar to if you had cash in the transaction. So obviously if you traded services with someone else who gave you their services, then you can imagine a transaction where you gave them your services, they gave you money, then they gave you services and you gave the money back to them and we're just kind of taking the cash out of the middle kind of exchange on that transaction and just having a barter transaction. Of course, the issue there then is what's gonna be the value that you have to record if you have to record the income for the barter and clearly that would be, whatever the price of the thing that you're receiving typically is might be an indication or the thing that you are giving in order to receive it would be the ways that you might value the barter transaction or trade. 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 the fair market value unless value can be shown to be otherwise. So you would think you would agree on basically the value of the goods and services for the exchange and if it was an arms length transaction, meaning you're not related parties, it's still gonna be a market exchange. So you would expect that price to be fair considering two people agreed to be involved in the transaction. So example one, you are a self-employed lawyer. You perform legal services for a client, a small corporation and payment for your services. You receive shares of stock in the corporation. You must include the fair market value of the shares in income. So if they give you stock, they didn't give you money, they gave you stock, you still have to include it basically in income. It reminds me of, I don't know if I saw that movie Daredevil, I think it was the TV show which is the blind superhero that is a lawyer to and he kept on doing work for clients that paid him with like fish or something like that. See, you still have to record, I guess, the fish that you received as income, although it might not be that high of any case. Moving on, example number two, stop talking about Daredevil. This isn't a comic book. Okay, example number two, you are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. You must include the fair rental value of the apartment in your grocery seats. Your landlord must include the fair value of the work of art in his or her rental income. So sometimes it's easier to kind of break these down and imagine like there's cash involved in the transaction just to get a better grasp of the transactions that are taking place. Because remember, with each of these transactions, you got an income side and you have an expense side. The expense side might be tax beneficial. It could be a deduction, but it's not gonna wipe out the income. So for example, if we're the artist in this transaction, you are an artist and created a work of art to compensate the landlord for the rent-free use. So you can imagine if you implemented cash into that transaction, then you'd say, okay, I'm an artist. I sold my art to the landlord. If I was to receive cash, then obviously that money would be income to me for my business income. And then I can imagine taking that cash, turning it around and just paying it back to the landlord for the rent. And in that case, I might have a deduction on my side, because I might use my apartment in order to generate my art. So I might have like a home use deduction, for example, but it wouldn't be wiping out the income. So it's not like I don't report anything. I might have income and then at least partially a deduction if I use like a home office use. If it was just personal use, then I wouldn't have a deduction because it was personal instead of business related if I don't make my art in the place. So on the other side, if you're thinking about the landlord in this situation, you are an artist and create work of art. So the landlord, you can imagine, would be purchasing the work of art. And if there was cash involved in the transaction, you can imagine them paying for the work of art. Now, the work of art might be personal, in which case they wouldn't get a business deduction, but maybe they put it in the office and it's part of office furniture, for example, then maybe in that instance, you get some form of deduction. You might have to depreciate it or something like that, but maybe the landlord would get some kind of deduction and then so they can imagine them paying you the money, getting the deduction and then you're paying it back to the landlord for the rent, which of course would be income to the landlord. So once again, the landlord could have income and some kind of deduction in this bartering transaction. If we just remove the cash, that was just for us to imagine the transactions, we might have then on both sides, income and then possibly some deductible kind of expense side of things, but it doesn't wipe out the whole transaction. The transaction doesn't disappear because it's a barter. That's the general idea. So example three, you are a self-employed accountant. Both you and a house painter are members of a barter club and organization each year gives its members a directory of members and the services each member provides. So now you've got, this is kind of like what websites do at this point in time where you have the middle platform that's kind of connecting two people that want to have a barter exchange. So members get in touch with other members directly and barter for the value of the services to be performed. So in return for accounting services, you provided for the house painter's business, the house painter painted your home. You must include a gross receipt, the fair market value of the services you received from the house painter. So same situation, similar kind of situation here where you still got to include the value of what you received. The house painter must include the fair market value of your accounting services and his or her gross receipts. So once again, you might think about this with cash involved as kind of like the intermediary, like two transactions taking place and two sides on each transaction to really break these down to understand them a little better. Example four, you are a member of a barter club that uses a credit units to credit or debit members accounts for goods or services provided or received. As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. So this is another way that the platform is being set up to set up kind of a barter situation, tying together two people that might have that are looking for needs that could match them up and using a different kind of system to do that. You must include the value of the credit units you receive in your gross receipts for the tax year in which the units are credited to your account. Notice that the credit units are kind of being used like kind of like a form of cash, a virtual kind of cash in this system. So the dollar value of units received for services by an employee of the club who can use the units in the same manner as other members must be included in the employee's gross income for the tax year in which received it is wages subject to social security and Medicare taxes, FICA, FUTA taxes and income tax withholding, C-Publication 15, Circular E, Employer's Tax Guide. So, you know, you got these social security and Medicare that could come into play there too. Example number five, you operate a plumbing business and use the cash method of accounting. You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Each member has access to a directory that lists the members of the club and the services available. Members contact each other directly and request services to be performed. So again, you can imagine all of these barter kind of things coming up in part to try to be a barter maybe to make a more, you know, a better tax kind of scenario would be at least part of, you know, you would think the incentive to set some of these kind of things up if you have a system where you have cash already in the field. This is where taxes often distort many, many things. Markets get distorted by taxes. So you are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. You must include the fair market value of any services you receive from the club members in your grocery seats when you receive them, even if you have not provided any services to club members. So information returns, if you are involved in a bartering transaction, you may have to file either of the following forms. You got the form 1099B proceeds from broker and barter exchange transactions, form 1099 miscellaneous information for information about these forms. You can see the general instructions for certain information returns. So they're gonna try to implement these reporting forms. So remember the reporting forms are usually issued to the person that might be getting a deduction because the payer is the one that they have leverage over. And so then they might require these information returns to be issued by the payer.