I ran into an artist recently who told me she was getting audited. I was shocked! I didn’t think artists made enough to get audited. I thought that people who get audited by the IRS are likely to be people whose tax returns send up a red flag down at the IRS office. But I’ve learned that some people get selected for audits just by an unlucky draw. An ex-IRS agent told me that the IRS pulls one out of every 167 (or so) taxpayers out of a hat for a random audit. And, according to my artist friend (we’ll call her Henrietta), she was one of those unlucky few. Henrietta asked the IRS agent at the audit what she had done to warrant being audited; the agent told her that her report actually looked fine – her numbers were conservative for her profession and there were no red flags. Thankfully, Henrietta had done her taxes properly and did not have a negative result from the audit.
However, Henrietta told me that she would have been in for it had she answered yes to the auditor’s question “Do you barter?” The reason is that you must report what you were given in exchange for your artwork as income. The IRS defines bartering as an exchange of goods or services without exchanging money. Generally, you report this income on Schedule C or C-EZ, Profit or Loss from Business Form 1040. To determine the amount of income to report, the IRS says to use the fair market value of the product or service. Both parties must report the income, so it is extremely helpful to determine the value of your artwork so that you can inform the other party. After both parties determine the value of the product or service, that value will be accepted as fair market value unless the value can be shown to be otherwise. Income from bartering is taxable in the year in which you receive the product or service. You can learn more about reporting bartering income on your federal taxes at the IRS website, http://www.irs.gov/.
Here is an example of bartering offered by way of an example on the IRS website: an artist gives a work of art he created to the owner of an apartment building in exchange for 6 months rent-free use of an apartment. The artist must report as income on Schedule C or Schedule C–EZ (Form 1040) the fair rental value of the apartment and the owner of the apartment building must report as rental income on Schedule E (Form 1040) the fair market value of the artwork.
Other bartering (some refer to it as trade) examples include an artist giving a piece of artwork to a web designer for designing them a new and fancy website, and a video artist trading a piece on DVD with an architect who will design a new studio for the video artist. In each case, both parties need to report that income on their taxes.
Is bartering a good idea? Well, that’s another story. It can be a great opportunity or it can be a nightmare. The key things to remember are: be open, honest and clear about what you want to receive and what you are going to give; set time limits for when this exchange will be fulfilled; make sure that the trade is fair (for example, each party gets something worth $1,000, otherwise one party may feel they got the raw end of the deal). If an artist has a contract or ongoing relationship with a gallery, bartering or trade may not be an option. Finally, always remember that you can decline a bartering offer. Many artists are asked to trade because someone wants their artwork but they’re not willing to pay what it’s worth. Artists deserve the same respect and compensation as any other working professional, so if the trade doesn’t seem fair to you, just say no.