Betty is a house painter and owns Trim Beautiful Painting Company. Last month she painted the lake cottage of Anne, a local attorney who performed some litigation work for Betty to help in some delinquent bill collection. The painting, valued at $1,000, was done in exchange for the litigation work. Neither party charged fees. What should be the tax consequences of these events?
I.Anne reports $1,000 of income when the painting is completed.
II.No cash was received. Therefore, neither party reports income.
III.Neither individual reports income because there is no reporting of the event to the IRS.
IV.Both parties report income because there is no exclusion for barter transactions..

Question

Betty is a house painter and owns Trim Beautiful Painting Company. Last month she painted the lake cottage of Anne, a local attorney who performed some litigation work for Betty to help in some delinquent bill collection. The painting, valued at $1,000, was done in exchange for the litigation work. Neither party charged fees. What should be the tax consequences of these events?
I.Anne reports $1,000 of income when the painting is completed.
II.No cash was received. Therefore, neither party reports income.
III.Neither individual reports income because there is no reporting of the event to the IRS.
IV.Both parties report income because there is no exclusion for barter transactions..
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Quizplus · Accepted Answer

In the United States, the IRS requires individuals and businesses to report barter transactions as income. Both parties in a barter transaction must report the fair market value of the goods or services received as income. Therefore, both Betty and Anne should report $1,000 of income, as there is no exclusion for barter transactions in the tax code.

Betty Is a House Painter and Owns Trim Beautiful Painting