Services for "free" - reportable?

[AJsTax]

Deborah

I believe there are several questions that need to be answered. A gift can be given by a business to a client, but only to $25 per year. Any more than that is a non-deductible expense.
If the advertising is given in exchange for a reduced price for the work done by the contractor then there is a barter exchange and the income and expense must be reported by the appropriate taxpayer.
Now you throw in the fact that the individual is also an employee. A company can not give anything of value to an employee of more than de minimis value. There has not been a specific amount set by the IRS as to how much that is. Each company should set up a policy as to how much will be considered to be de minimis employee benefits.This could vary a lot according to the size of the company and how the amount will affect the taxable income of the company. If the value of the advertising is within those guidelines and is available to all employees that qualify then it would be employee benefit and not taxable to the employee and would be a deduction for the newspaper. If the value of the advertising is more than what would reasonably considered de minimis in value then it MUST be added to the w-2 of the employee and proper employer taxes paid on the amount. That would most likely involve correcting the 941, etc. See page 13-27 of The Tax Book for a good explanation of no-additional-cost services given to employees.
My reaction at this point without knowing the exact amounts involved would be that there is no taxable exchange in this case. The amounts would be de minimus in value or no-additional-cost employee benefits.

[Zee]

I'm sorry you don't like the tone of my response, but it's frustrating when a new person here asks questions on a piecemeal basis.

AJ's has provided a more detailed response with the same suggestion I provided you in my previous post. If your client is an employee, the FMV of the advertising should be included in his W2. If not, a 1099 should be issued.

I'm done...you're on your own.

[BHoffman]

Deborah - If you insist on ignoring the excellent advice given to you, it would help if you read the instructions for form 1099-B. Pub. 525 may also be helpful. IRC Sec. 61 may be the cite, or "rule", you are looking for.

Tone is difficult to read in a forum. You might be more clear regarding pertinent information before posting a question, and more patient when people are kind enough to try to help you.

You might go to www.irs.gov and use the search box. You can also go to www.taxalmanac.org and use the search box.

[ChEAr$]

(subject)

I'm sorry you don't like the tone of my response, but it's frustrating when a new person here asks questions on a piecemeal basis.

AJ's has provided a more detailed response with the same suggestion I provided you in my previous post. If your client is an employee, the FMV of the advertising should be included in his W2. If not, a 1099 should be issued.

I'm done...you're on your own.

I think one must separate the two situations. Being an employee but also having
dealings with employer as an advertiser or service provider has nothing to do with being
an employee, so adding something to wages is not the answer.

[AJsTax]

Opinions

I think one must separate the two situations. Being an employee but also having
dealings with employer as an advertiser or service provider has nothing to do with being
an employee, so adding something to wages is not the answer.

I believe this is a very good example of a situation where three different, experienced preparers can have a different opinion on the correct way to handle a situation. Each one may be accepted by an auditor given the particular facts of the case and the persuasiveness of the person arguing the case.
The bottom line is that the return belongs to the newspaper and they should make the final decision if you can live with it. Document, document, document...and you will have done your job. You should lay out the facts and explain your position on the correct procedure and request (insist) that they have a written policy in place to handle this situation from today forward.

[Bees Knees]

I don’t know why this issue had to turn into such a debate.

The simple solution is to say, how much would this local business charge to do work if the newspaper did not give him “FREE” advertising?

If it is anything other than what the amount the business gets along with the “FREE” advertising, the difference is barter income to the business. In other words, if the advertising is only "FREE" because the business is charging the newspaper a reduced labor rate, then it’s not really free advertising. Another way to look at it is to ask the question, would the business get FREE advertising if the business performed no work for the newspaper? If the answer is no, then we have a barter transaction going on here pure and simple.

The instructions to the 1099 series of forms on page 36 say the following:

Barter Exchanges
A barter exchange is any person or organization with
members or clients that contract with each other (or with the
barter exchange) to jointly trade or barter property or
services. The term does not include arrangements that
provide solely for the informal exchange of similar services
on a noncommercial basis. Persons who do not contract a
barter exchange but who trade services do not file Form
1099-B. However, they may be required to file Form
1099-MISC.

Thus, if the payment of cash to the business for services performed would otherwise be reportable on From 1099-MISC, so would the payment of services exchanged in a barter transaction be reportable on Form 1099-MISC, unless it was a formal barter exchange organization doing it, in which case you use Form 1099-B.

[Zee]

I had planned to refrain from any further responses here, but it might be helpful.

My understanding is the client has told the poster there was no exchange of services in lieu of the free advertising provided for his business. In other words, the newspaper provided the advertising to the business at no charge. Later, the poster indicated the recipient of the free advertising was also an employee of the newspaper and the advertising was to be continuously provided (it was a long-term arrangement) to his business.

The situation creates several questions:

1. Why would a newspaper provide free advertising to anyone on a long-term business?

It doesn't make much sense that a newspaper would forgo advertising revenue on a long-term, continuous basis, to a business without receiving a benefit.

But, let's assume it's true and the free advertising has nothing whatsoever to do with the employment, perhaps the recipient of the free advertising is a relative, or a very good friend. Is it taxable income to the recipient? Maybe not. I suppose it could be treated as a gift. But, my guess is the IRS would take a dim view of this type of practice.

2. Did the newspaper and the employee enter into some sort of agreement that he would be provided free advertising for his business because he is an employee?

If so, this is clearly wages or a taxable fringe benefit...not barter income and should be reflected on the W2.

In summary, the arrangement doesn't pass the "smell" test very well given the information provided. I would ask the client a few more questions. It has been suggested that if it's determined a 1099 is required, it's the newspaper's responsibility of the newspaper to issue the 1099-B, or 1099-Misc (I think either will do) not the preparers or the clients. The client should simply add the FMV to the income of their business return.

[BHoffman]

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.

I like Harlan's first response.

[JG EA]

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.

Everyone posted already about what you can do.

Let me add: It just comes down to the free part. If the job the business did for the newspaper actually would have cost the newspaper $1223.27 and the "free" was taken into account to reduce the charge well then that is barter. If it would have only cost $680.89 anyway and the ad had nothing to do with it well then it had nothing to do with it. Would you send a 1099 anyway? If so then MO is you either send a 1099 for $680.89 or $1223.27 depending on the circumstances.

[BP.]

I'm sorry you don't like the tone of my response, but it's frustrating when a new person here asks questions on a piecemeal basis.

I'm done...you're on your own.

Looks like D's been a member here since Sept '05, as if "newness" to the board even matters.

Let's not scare ourselves or each other off so soon in the season. I, for one, need you guys!

Cheers All!
Barb

[taxea]

AJ has the correct response.....If the advertising is given in exchange for a reduced price for the work done by the contractor then there is a barter exchange and the income and expense must be reported by the appropriate taxpayer.

PS I am very seriously hoping that once we all get busy with the season all the BS that is going back and forth will cease. I have found lately that some posts get so far off the original issue with suppositions that it is hard to remember the original question.
taxea

[DaveO]

I spent years working in print media, mostly yellow pages. "Free" advertising was not uncomman and was used for various reasons. As we used to say then, "What's a little paper and ink among friends?"

[OtisMozzetti]

The word for free advertising is "publicity"

All of my marketing classes talked much about the usefulness of stirring up favorable "publicity" from newpapers and other news media.