Bartering and Trading – Mean It, Book It

If you do the math, bartering and trading may not save you any more money than, at most, negotiating a good price for a product or service. So what’s the big deal about bartering? I have clients I trade with and we could just as easily exchange checks. The bookkeeping can be easier for the novice bookkeeper that way.

My outlook on trading is this: I agree to be your client/customer and you agree to be mine.

If I become your customer because you have agreed to be mine, and we do not trade but instead exchange cash, whoever pays for their service first may be left in the lurch. What if either of us does not hold up our end of the agreement. I may have just used and paid for your services and would not have if we had not agreed to ‘trade’. By keeping the cash off the table, we are showing each other a commitment to be each others customer. It is my responsibility to take my pay by using your product/service.

The GO! Guide to Trades:
1. Get it in Writing
Make sure you lay out a clear definition of the trade in writing. Are you trading dollar for dollar, hour for hour or project for project? Be specific. I send a confirmation email after each trade discussion to ensure there is no miscommunication. Ask your fellow trader to reply to the email to confirm the agreement. I have written consulting agreements with all my clients. If I enter into a trade agreement with a new client, I add the information about the trade to the rates area of the agreement. You may even want to put a time limit on the trade to ensure the trade does not drag out for years (unless that was the plan.)

2. Send invoices or Sales Receipts
To ensure each of you have a way to track the trade status, provide your client with an invoice or sales receipt noting that it was paid via Trade. Whether you are trading dollar for dollar or hour for hour, this ensures that both parties know what they have received and what they owe.

3. Don’t Do It Unless its Worth Something to You
Frankly trades, when documented accurately, do not save you any administrative time. In fact, they may take a bit more time to track. Do not trade unless the product/service you are trading for is truly worth something to you. If you do not value the product/service you will be getting, you may feel like you did not get a good deal. Trades are not worth the hard feelings that may result.

4. You Made It, Live With It
If you have a trade go sideways and did not feel like you got the value out that you put in, learn from it. It is not worth the conflict and negative impact on your company’s reputation to try renegotiating once both parties have agreed in writing.

5. Think Before You Trade
Tell the person it sounds interesting but you need a couple days to think about it. Take the time to think through what you think they are offering is worth to you. If you would not normally use the product/service, tell them that you would love to have them as a client but do not need what they have to offer right now.

6. Keep the Cash Flowing
Make sure you do not trade yourself into bankruptcy. You need to pay taxes on the income from trades. Business to business trades work great. I provide $100 of services and get $100 in marketing in exchange. If you are taking trades for personal use, its just like an Owner/Member Draw. There is no business expense to offset the trade income so you will pay taxes on the trade.

7. Some People are Freaked Out by Moola
There are a number of people out there that would rather live in a barter society for any number of reasons. I trade with folks that just do not want to deal with the cash. They perceive added value by not having to write the check/make the deposit. If you trade with someone like this, you may need to be the one in charge of tracking both sides of the trade.

Four Things to Know About Bartering from the IRS

In today’s economy, small business owners sometimes save money through bartering to get products or services they need. The IRS wants to remind small business owners that the fair market value of property or services received through barter is taxable income.

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties.

Here are four facts on bartering :

1. Organized barter exchanges
A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

2. Barter income
Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.

3. Tax implications of bartering
Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

4. How to report
The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.

For more information, visit the IRS Bartering Tax Center.

Happy Trading!