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Stock Barter Transaction

Issue

What is the proper tax and accounting treatment when a client receives stock in exchange for services provided?

Analysis

The most important determination is the fair value of the stock. This can most easily be determined by the market price of the shares at the time of the transaction.

Tax Treatment

Source: IRS Publication 334, Chapter 5

If stock is received in exchange for services, this income should be claimed on a Form 1009-MISC and the amount of the income will be the fair value of the shares received.

Accounting Treatment

Source: McGraw-Hill, Intermediate Accounting, Chapter 18

Will be recorded with a debit to Investment in ABC Company in the amount of the fair value of the stock, and a credit to Service Income/Sales in the same amount.

Ex:

Investment in ABC Company$ xxx Service Income $ xxx

Source 1: http://www.irs.gov/publications/p334/ch05.html

Bartering for Property or Services

Bartering is an exchange of property or services. You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise.

Example 1.

You are a self-employed lawyer. You perform legal services for a client, a small corporation. In payment for your services, you receive shares of stock in the corporation. You must include the fair market value of the shares in income.

Information returns. If you are involved in a bartering transaction, you may have to file either of the following forms.

  • Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.
  • Form 1099-MISC, Miscellaneous Income.

Summary:

If stock is received in exchange for services, this income should be claimed on a Form 1009-MISC and the amount of the income will be the fair value of the shares received.

Source 2: http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter18/chbody1/accounting_for_the_issuance_of_shares.htm

Shares Issued for Noncash Consideration

Occasionally, a company might issue its shares for consideration other than cash. It is not uncommon for a new company, yet to establish a reliable cash flow, to pay for promotional and legal services with shares rather than with cash. Similarly, shares might be given in payment for land, or for equipment, or for some other non-cash asset.

Shares should be issued at fair value.

Even without a receipt of cash to establish the fair value of the shares at the time of the exchange, the transaction still should be recorded at fair value. Best evidence of fair value might be:

•A quoted market price for the shares.•A selling price established in a recent issue of shares for cash.•The amount of cash that would have been paid in a cash purchase of the asset or service.•An independent appraisal of the value of the asset received.•Other available evidence.

Whichever evidence of fair value seems more clearly evident should be used.9

Summary:

Stock payment will be recorded at fair value of stock.