Gretel/Snag/Farm work (in-kind payment)

[Black Bart]

Gretel - when you asked about the in-kind farm work payment the other day, you mentioned that the cows received as a substitute for cash wages had no basis and I think Snag also said the same thing in another post. Is that right? I can't quite get my mind around that or can't understand it. If the guy was paid $200 in cash and bought cows with it himself, then he would have $200 basis, so if he gets paid by another person with merchandise (cows in this case) worth $200 instead of cash, then wouldn't he have that $200 basis in the cows? Or, am I not getting it?

I understand that IRS regards a person's labor as nothing, but in this case someone else pays him with livestock that would have cost him $200 to buy, then would they not be depreciable at $200? Would appreciate your thoughts. Thanks.

[Gretel]

Bart, he only would have basis if the non-cash wages were indeed included in his wages, most likely box 1 only but this depends on the circumstances.

If the best I can get is that the employer does not follow these rules I will assign zero basis to the cows. I know this is not right but close enough for me with the little income this client has.

[Snaggletooth]

Basis is Amount Expended

Cattle (unless under some ambitious accrual method) have no basis if they were born and raised on the farm. There is
no basis in money because nothing was paid.

"Swapping out" or "trading" also has no basis other than the amount of cash that has occurred. No cash transaction means
no basis.

Readers of this might fashion an elaborate plan to add $200 to basis by offsetting this amount in line 7 (Wages). I won't
comment on this as I anticipate others will discuss this. In terms of refund, there might be such an advantage to reporting
this way (such as EIC) but I wouldn't dare do this unless there is a consistent practice of doing so. Farmers swap labor
for other stuff all the time.

[Gretel]

In terms of refund, there might be such an advantage to reporting
this way (such as EIC) but I wouldn't dare do this unless there is a consistent practice of doing so. Farmers swap labor
for other stuff all the time.

Snag, this has nothing to do with optional or daring. There are reporting rules coming from the IRS. I wished there weren't though.

[Snaggletooth]

Real World Behavior

Yes, there are regulations, and the non-disclosure of non-existent cash breaks the rules. They go even further when they rule that barter is self-employment income. There is even "gross-up" to cover what might have been SS and Medicare on recharacterization of wages.

Having said that, now place yourself in front of a farmer, who wants you to prepare his taxes. He will build a border fence with a
neighbor if the neighbor will provide the fence posts. Or his neighbor will give him a calf if his neighbor can hang tobacco in his
barn for 90 days in the fall. Or maybe the ultimate labor-for-labor swap -- he will help his neighbor get hay to the barn if his
neighbor will help HIM get hay to the barn.

The stuff happens all the time. How do you extract such a conversation from the farmer? If he does, how do you place a value on the services rendered? One thing is almost certain, the farmer will go to another preparer next year. The regulations say we're not supposed
to care, but how accurate is that?

Yes there are regulations, but what do you do. Like the old song says, "Nothin' comes from nothin'. "

[Gretel]

Yep, I know. However, I believe it's a little different if you have a value because 99 of 100 calves were sold and one given to an employee as wages. I certainly would argue against SE tax, that is a grey area anyway. Everything needs to be within reason but I am not risking a preparer penalty for an issue that is pretty straight forward.

It's also different if you get half the hay for leasing your land. Maybe you use the hay for your personal horses than it's not a swap that does not have any tax consequences.

[taxea]

labor has a value if the service is being done for another person and not for yourself. I say this is a barter and the value of the cattle is equal to the value of the labor.