Not every business transaction involves cash, and small businesses often find it beneficial to barter for goods and services instead of paying for them. Small business owners generally find that by bartering, they can get what they want below the market rate and save cash reserves for other purposes. If this is the case with your business, you have to be aware that the IRS considers the fair market value of what you receive in bartering to be taxable income. In a barter system where businesses trade services, both parties must report taxable income.

This rule also applies when services are exchanged for property. For example, if a construction company performs a remodel for a retail business in exchange for unsold inventory, the builder must report income equal to the fair market value of the inventory.

To facilitate bartered exchanges, many business owners join barter clubs that use a system of “credit units,” awarded when members provide goods and services. Members can redeem credits for goods and services from other members. But, as a member of a barter club, you’ve got to know that you are generally taxed on the value of credit units at the time you acquire them, rather than when you redeem them.

Thus, if you earn 2,000 credits in one year and each unit is redeemable for $1 in goods and services, you must report $2,000 of income in that year. The good news is, you don’t pay additional tax when you redeem the units, whether it’s that year, the next year, or the year after.

Sloppy reporting on your barter club participation can get you into tax trouble. The club requires you to provide your Social Security number or employer identification number, as well as to certify that you aren’t subject to backup withholding. All of this means the club is reporting your participation to the IRS, so you had better do likewise, or prepare to face the consequences. In some instances, you might be able to decline the certification, but the club will withhold tax from your bartering income at a 24 percent rate, which is excessive and to some extent defeats the purpose of your participation in the barter system.

By January 31 of each year, the barter club must send you a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which reports the value of cash, property, services, and credits that you received from the previous year. This is for your information, but the form also goes to the IRS. If you participate in bartering without membership in a club, you won’t receive or file Form 1099-B. But you’ll probably have to file a form 1099-MISC.

Bartering is a great way to preserve company resources while obtaining goods and services you need to maintain, expand or upgrade operations. You can even barter with customers who might be cash-strapped but have professional services or assets to offer. The bottom line is that you can only maximize the benefits of your participation in a barter program if you play by the rules. That means adherence to state and federal tax laws as they pertain to bartering.