Barter for Business – How to Exchange Services while Growing Your Company

Most business owners are familiar with the concept of barter. A painter, for example, might provide his or her services to a law firm in exchange for legal help.

But in many situations, barter takes place through a barter “exchange.” These exchanges, in fact, are now a worldwide phenomenon. According to the International Reciprocal Trade Association, in 2011 some 400,000 businesses around the world traded about $12 billion worth of goods and services on barter exchanges.

How it works

A barter exchange acts as the middleman between its members, who earn barter credit when they provide goods or services to another exchange member. Members can then use the barter credit for goods or services from other businesses in the exchange.

An architect, for example, uses the services of a printer obtained through the exchange. The printer then takes the barter credit earned and purchases a contract for cleaning services, enabling the cleaner to use barter credit to hire a caterer for its annual employee party, and so on, and so on.

Along with its role as a middleman, the exchange tracks the barter credit that its members earn and use. For this, the exchange usually receives a monthly fee or a small percentage of the value of each transaction.

Save cash, boost business

Before you rush to sign up with a barter exchange, keep in mind that barter makes the most sense for businesses that have unused capacity or extra inventory. By putting these assets to work, they earn barter credit that can be used to purchase a range of products or services without cutting into their bottom line.

Barter also can help businesses generate new customers, at least some of whom will likely pay cash. Here’s how this scenario might play out: A disk jockey exchanges his or her services for advertising in a local newspaper. A few readers who see the ad then contact the DJ and become clients.

What’s more, in a barter exchange, a business earns the retail value (in barter credit) of the goods or services it provides, while incurring only variable costs. For instance, while a hotel that makes some of its rooms available via barter will have the expense of cleaning the room, its other expenses — say, for utilities or a mortgage on the property — probably won’t be affected. Yet it will receive barter credit for the retail value of the room.

Cashless exchanges are still taxed

Although barter, by definition, doesn’t involve cash, the IRS still considers barter credit to be income. Each year, barter exchanges issue Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, to their members and the IRS, detailing just how much each business has earned from its barter transactions. Those businesses then pay taxes on the value of the barter dollars earned.

If a business barters directly with another business rather than going through an exchange, it probably won’t receive a Form 1099-B. Even so, the IRS expects both parties to account for the transaction, which it considers a sale transaction, when they calculate their tax obligations.

While the law is well settled with respect to reporting income from barter transactions, there’s some ambiguity about deductions related to such transactions. For example, suppose you barter $1,000 of your professional time for a website for your business. Had you written a check to the Web designer, the expense would be deductible. If you take the position that a barter transaction is the same as a cash transaction minus the cash, you’d conclude that paying for the Web design service via barter would have the same tax consequence as paying for services in cash and thus the $1,000 would be deductible.

Unfortunately, the IRS seems to be of two minds: There have been IRS pronouncements that support this position and others that seem to go against it. Until this issue is settled, you may want to barter only for goods or services whose costs wouldn’t be deductible even if you paid for them with cash.

Is barter right for you?

Barter can help numerous types of businesses conserve cash and generate business. But keep in mind that you’ll need to carefully document the transaction and consult your tax advisor for guidance.

© 2012