Complicated Barter Transaction

[geekgirldany]

I want to make sure I have all of this straight in regards to what is to be done in this situation.

Two brothers and two businesses.
Brother 1 owns a car repair shop pays all the bills supplies, rent, utilities, etc. Brother 2 paints cars.

Brother 1 bought a paint booth through his business. The agreement was that Brother 2 would buy it from Brother 1 by helping him paint the cars brought in to Brother 1 shop. Also included in the agreement was utilities, supplies, and rent that Brother 1 paid on behalf of Brother 2. Again Brother 2 would repay using his paint labor.

This is how I see it:

Brother 2 kept track of all hours he worked painting for Brother 1's business. He then subtracted off the supplies, rent, and a payment for the paint booth (agreed upon monthly amount). What was left over, Brother 1 wrote him a check.
For example, Brother 2 was owed $3,000 for paint work he did for Brother 1. There was rent of $1,000, supplies of $500, and $500 for the paint booth payment. So $3,000 minus $2,000 = $1,000 which Brother 1 wrote him a check.

To me, Brother 2 should be issued a 1099-Misc for the $3,000 (of course it is more than this for the year), then he can deduct the expenses.
Brother 1 paid for all of these expenses but since part was in barter with Brother 2, these expenses will have to be added back as income to Brother 1's business.

Does this sound right?

Whew, they won't be doing it this way for 2015 thankfully.

[Maribeth]

Brother 2 has income of $3000, rent expense of $1000, supplies expense of $500, depreciation on the paint booth, and a payment of $500 on a note payable to his brother. There might also be some interest expense on that note.

Brother 1 has an expense of $3000 for contracted labor, a reduction in rent expense of $1000, a reduction in supplies expense of $500, and a payment to the note receivable of $500. Again, there might be some interest income on that note.

I would issue a 1099 to brother 2 from brother 1 for $3000 in nonemployee compensation.

[David1980]

I like to think of barter as having all happened in cash. Let's say brother 2 did $3,000 worth of painting and brother 1 wrote a check for $3,000 to brother 2. Brother two wrote checks for $1,000 rent expense, $500 supplies expense, $500 note payable to brother 1. If it all happened in cash, how would you report that on the respective returns?

I'm not sure a reduction in expenses for brother 1 is what I would end up doing. I'd probably deduct $3,000 for the painting and then pick up the others as income for brother 1 rather than a reduction in expenses. If brother 1 owned the building outright for example there might not be an expense to reduce for the rent received from brother 2.

[geekgirldany]

Thank you both for commenting. Looks like I am heading in the right direction. Brother 1 did not own the building is renting it.

[Roland Slugg]

I think the easiest way to handle these kinds of things, when everything is taxable or tax deductible, is for the two parties to issue checks to each other, for the same amounts.

[geekgirldany]

I agree but my advice wasn't followed.