Property received for a service that I would like to depreciate

[smammy88]

I perform a service (product review) for which I receive a sample of the product in exchange for the service. I receive a 1099-NEC where the amount paid is the total FMV of the products sent to me.  According to what I have researched, these items, which are received as a "barter" in exchange for a service and can be depreciated, which makes sense because as soon as they are opened, used, tested etc for the review, their FMV drops considerably, so within the same year as they are put into service for the purpose of review.   I end up with many items that are not worth anywhere close to original FMV, and some are even worthless. 

I cannot determine where I would record this depreciation though. 

Obviously the easiest is a section 179 deduction, but the rules for that state it must be purchased.  That is where I get stuck.  IRS Topic 703 says "In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services."  Note, "services."  So it sounds like paying in services is a cost. 

However, IRS publication 946 says in order to qualify for a 179 deduction the item must be purchased.  It then goes on to say an item is not purchased if the following applies: 

"Property is not considered acquired by purchase in the following situations:

• It is acquired by one component member of a control-led group from another component member of the same group.
• Its basis is determine in whole or in part by its adjusted basis in the hands of the person from whom it was acquired"

These sentences make no sense to me.  So am I purchasing these items with the review service I perform or not?  If not, where/how do I add the depreciation. 

My previous year taxes are done (thank you Turbo Tax) but I am preparing for next year and this is a new business.  I need to get my bookkeeping straight. Thank you! 

[Bsch4477]

You can’t depreciate such personal property. Your income must be reported on Schedule C as self employed. 

[Vanessa A]

No.  Cannot depreciate these items. You are not purchasing these items.  These items are being used in lieu of cash for a service.  

In order to depreciate an item, the following must apply

• It must be property you own.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life.
• It must be expected to last more than 1 year.

Although you do OWN the property, it is not income producing property or used in business.  This would be something like a computer or car or building or tools and machinery that you need in order to operate your business.

  Your description of how it loses so much value as soon as you open it makes it seem as though it does not have a life expectancy of more than a year and it does not have a determinable useful life.  These items will strictly be considered income.

This income will be reported on Schedule C which is part of your overall tax return. This also means you will be subject to SE Tax.  If you did not pay Self Employment (SE) Taxes in 2024, and if you plan to do this again in 2025, it may be a good idea to make  quarterly estimated payments to cover your SE taxes of 15.3% and avoid penalties.

[smammy88]

Thanks so much for your input.  Yes, I am paying estimated tax on this income. 

I did not clarify well - though these items lose value quickly, they are for the most part all expected to last more than a year, and they do have a determinable value, and they are used in the business to produce income, because I must evaluate them to be paid.  

Also, I do not technically fully own the items until 6 months after I receive them.  I am allowed to dispose of them if they prove to be worthless, but cannot give them away or sell them.  Though I may use the in the interim, they are not mine for 6 months. 

What do these lines mean in the IRS publication 946?  I am not totally satisfied that these items were not "purchased" since I do have to pay with my time spent testing, putting items together, and reviewing, especially since IRS Topic 703, Basis of Assets, mentions cost as including services. 

From IRS 946, page 17:

".....your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.
Property is not considered acquired by purchase in the following situations.
1. It is acquired by one component member of a control-led group from another component member of the same group.
2. Its basis is determined .... In whole or in part by its adjusted basis in the hands of the person from whom it was acquired"  

My property is very definitely not a gift or inheritance - I must work for it.  But do one of the other two items apply? I don't know what they mean, and I need to understand those sentences before I will be fully satisifed that my items were not purchased with the cost of my services.  Not trying to be difficult at all, just need to feel like I really understand what the IRS considers a purchase.  Thanks so much! 

[Bsch4477]

The idea is that you received income based on the FMV of the items you received in return for your service as a reviewer. Comparable to an electrician receiving money (instead of tangible goods) for their services. 

[smammy88]

Okay, thank you both for your replies.  Some in this business have mentioned getting some CPA approved deductions, but I think it is likely when they are using the items for a business purpose, like copier paper and toner cartridges etc.  Appreciate your time.