Bartering – Is it the Right Choice for Your Business?

In one of the online discussion groups we follow, the topic “du jour” was bartering, or exchanging of goods and/or services between parties without the need for cash. Some of the group members were quite enthralled with the benefits of bartering, while others seemed less inclined to participate. Because of my background as an accountant, I wanted to understand the debits and credits of the transaction and how the IRS viewed the issue before I could form an opinion. I was surprised to find that the IRS website has a section just for bartering: http://www.irs.gov/taxtopics/tc420.html. According to the IRS, “Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter - barter for another’s products or services - you will have to report the fair market value of the products or services you received on your tax return.” As in any cash business transaction, income must be reported and a 1099-Misc must be issued at year end if the value of services received from an exchange is over $600 and the entity is not a corporation. In addition, you will be required to report barter income on your sales tax return and it may be subject to excise tax. rnThat seems straightforward and easy. If you exchange business services with another business, then both the income and expense are recorded on your books at fair market value, and the other business does the same. As an example: a bookkeeper trades with one of her clients, a gardening service, for lawn care at her place of business. The bookkeeper and gardener exchange invoices at the end of each month for services rendered that month and record the transactions on their corresponding books as an increase in business income, offset by an increase in business expense. While we may consider this a swap, each has still recorded income and, if applicable, will issue the other a 1099-Misc at year end.rnBut what happens if the bookkeeper trades services with her massage therapist? For the bookkeeper, only one side of the transaction is business. She would record an increase in income, and because accounting requires two sides to every transaction, she would also record a personal non-business related expense on her books. For the massage therapist, both sides of the transaction are business. Refer to http://www.irs.gov/businesses/small/article/0,,id=215975,00.html for an in-depth discussion with examples of 2-sided and 1-sided trades. rnKeep in mind that the IRS definition of barter income is “the fair market value of property or services received”, not given. That is an important distinction. If the gardener values her services at $200 and the bookkeeper values her services at $300, then the bookkeeper records income of $200, or the value of the goods and services received, while the gardener records income of $300. Both companies offset the income with corresponding business expenses. Often times, the bartering process involves the negotiation of time to off-set this inequality, which takes time in and of itself and may make bartering more about negotiating than about cash flow. Another option is to become a member of a barter exchange.rnUnlike one-on-one bartering, exchange members do not barter directly with one another. Instead, when a barter exchange member sells a product or service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. Barter exchanges are required to file Form 1099-B for all transactions and members are required to report income in the year received. For more information see: http://merchantsbarter.com/.rnThe most important point to keep in mind is that bartering is considered income in the year the service is performed and is subject to all taxing requirements. It is also important to discuss the subject with your tax preparer beforehand to be sure that you both agree to and understand all IRS reporting requirements. Whether you choose to engage in bartering is a personal business choice. Just remember it takes time to negotiate, and time to do the record keeping. You may very well find that the benefits outweigh the cost of time and frees up cash flow in tight months. At least it’s worth considering.