Services for "free" - reportable?

[Deborah]

My client is a newspaper and Gives contract advertising for fee to a local business. They have also hired this business to do work for them. I believe the value of the free advertising is reportable income to the local business on a 1099 Misc Box 7 and plan to add this to the amount of money actually paid to the business. But I can't find the "law" on this. Looking for feedback - the amounts are $680.89 paid for services and $542.33 in free advertising.
Thanks.

[Deborah]

correction

gives for "free" (not fee) - sorry for the typo
The advertising is totally FREE to the vendor

[Burke]

You can edit your message by going to "edit" just below the text once you have posted.

[erchess]

Barter

Deborah use whatever quick look-up or deeper research tool you have to read all you want about "barter". Barter is simply the swapping of goods or services for goods or services instead of for money and it's always taxable. For example instead of paying someone money for watching my pets while I am away I might do the person's tax return (in which case I would have business income) or mow their grass (in which case I would have non business income since I am not in the lawn care business).

[Deborah]

no exchange - not a barter - just free advertising

Thank you for your reply. This was not a barter - there was no exchange - the newspaper paid "John" for services and gave "John" "free" advertising. The newspaper did not receive anything in return. The barter rules specifically state there must be an exchange contract and mention possible reporting on 1099-Misc. What I can't find in the instructions for 1099-Misc is a reference for this type of transaction and before I send "John" a 1099 I want to be sure this is the correct way to report his "free advertising."

[Zee]

Thank you for your reply. This was not a barter - there was no exchange - the newspaper paid "John" for services and gave "John" "free" advertising. The newspaper did not receive anything in return. The barter rules specifically state there must be an exchange contract and mention possible reporting on 1099-Misc. What I can't find in the instructions for 1099-Misc is a reference for this type of transaction and before I send "John" a 1099 I want to be sure this is the correct way to report his "free advertising."

This is an interesting question. For example, after the manufacturer and seller rebates I received a free, or no cost QB 2009 from Staples. According to my understanding, the cost basis of assets is reduced by manufacturer and seller rebates. As such, I'll record the asset at zero cost. I don't plan on recording the $100 FMV as income.

The newspaper's future benefit may be your client's advertising business and this seems to be more of a "free trial" than an exchange of services. That assumes your client's service billings were arms-length and not discounted to reflect the advertising cost. I don't think I'd reflect the "free trial" as income. If I did, I'd record the FMV as Advertising Expense and the FMV as income and it would "wash".

[ChEAr$]

free is just that

Thank you for your reply. This was not a barter - there was no exchange - the newspaper paid "John" for services and gave "John" "free" advertising. The newspaper did not receive anything in return. The barter rules specifically state there must be an exchange contract and mention possible reporting on 1099-Misc. What I can't find in the instructions for 1099-Misc is a reference for this type of transaction and before I send "John" a 1099 I want to be sure this is the correct way to report his "free advertising."

if you get my drift. Even IF a 1099 came from newspaper to the business, the business
would have an offsetting advertising expense resulting in zero sum game.

IRS isn't going to worry about this, nor would I. Nor should you.

[Deborah]

if free was free - barters would not be reportable

My client has hired this person as an employee - has "gifted" him continuous free advertising for his own business - and has hired his business to do work for her business which she has paid for. I am quite sure it is all reportable. If anyone can help me verify the "free advertising" issue with an IRS regulation - that it is reportable on a 1099-Misc. I would appreciate the assistance.
Thank you.

[erchess]

My Opinion

I don't think the IRS or a Court would buy the notion that the advertising was a free gift. I think the assumption would be that your client got or was hoping to get something in return. Depending on what the something is, you could increase the guy's reportable wages or the reported payments to his business by the amount that would normally have been charged for the advertising.

I also think you could get away with treating it as a free sample if the individual did not work for the paper.

[Zee]

My client has hired this person as an employee - has "gifted" him continuous free advertising for his own business - and has hired his business to do work for her business which she has paid for. I am quite sure it is all reportable. If anyone can help me verify the "free advertising" issue with an IRS regulation - that it is reportable on a 1099-Misc. I would appreciate the assistance.
Thank you.

It would be helpful to get all the facts in your initial post. Hiring a business to do service work and providing one time free advertising (which I assumed in my initial response) as an incentive to advertise in the future is very different than hiring an employee. If your client is an employee of the newspaper, and also has a business receiving continuous free advertising that's very different.

The FMV of the free advertising provided to your client's business is taxable income. The newspaper should be providing a 1099 Misc. If not, the income should still be reported on the return. It sure doesn't sound like there are "no strings attached" to me. Why else would the newspaper provide free continuous advertising?

[Deborah]

why free advertising?

for a friend ...............

[Deborah]

still don't have a "rule"

Back to the original post - I requested a reference or rule to back up sending a 1099 - that was the main point of my question. That is what I was looking for -

[Zee]

Back to the original post - I requested a reference or rule to back up sending a 1099 - that was the main point of my question. That is what I was looking for -

Deborah, I don't mean to be rude. But, if that's all you need why don't you simply look at the instructions for a Form 1099? I don't know what other kind of citation you need. If a 1099 is issued it would be from the newspaper, not your client...not your problem. Your client should report the income whether he receives a 1099, or not.

However, you've indicated your client is employee of the newspaper and if the free advertising for his business is part of his employment agreement (formal or informal...which it must be in the situation you describe), the amount should be added to his W2 from the newspaper and subject to employment and other taxes. If it isn't, he should request the newspaper to issue a revised W2 or report the amount on his tax return as Misc income subject to SE tax with an explanation.

[erchess]

I don't even know what to tell you to search for. I agree that it is not barter. You might search on the IRS Website or in your research tools for "Instructions for F 1099 misc".

[Deborah]

to Zee

It would be helpful if you would read my posts more clearly instead of criticizing me.
The newspaper is my client - my request for was an answer I had not found in my research.
You suggestion of the 1099 instructions is bogus - it is not there -
The best information I have found is in the instructions to reporting income on a Sch C - but it is still not the same scenario.