Business Bartering 101

Current Trading Strategies and Tax Implications

Business Bartering 101
July 23, 2014

Most people think of bartering as an activity that takes place mainly at Saturday morning swap meets, or in lunchrooms across the nation where kids desperately try to trade their green beans for somebody's dessert. But there is a lot more to it than that.

Many businesses, ranging from Mom-and-Pop corner shops to Fortune 500 companies, use barter as a means of conserving cash, bringing in new business, and dealing with excess inventory. The International Reciprocal Trade Association, the effective standard setters for bartering, estimated in 2012 that the annual US market for bartering was $12 billion.

Of course, corporate bartering does not take place on parking lots on Saturday mornings – although that is a fun visual to consider. If two companies' goods and services are complementary, they may barter directly, but business bartering often takes place through bartering exchanges.

Bartering exchanges relieve the pressure of trying to find something of equal value to facilitate an exchange (consider the NBA salary cap and why your starting point guard and power forward got traded to another team for a journeyman center with bad knees, a second-round draft pick and a bag of basketballs).

How it works: a business joins the bartering exchange and trades with other members. These transactions are recorded by the exchanges as sales and purchases in units of trade dollars (sometimes called barter dollars) for use within that system. This establishes a credit and debit system that allows unequal sales and purchases to take place independently, and it allows members to accumulate trade dollars for future purchases.

One business is acquiring useful resources without expending cash while the other is getting benefits from unsold inventory– a win-win situation for all involved.

An exchange may simply be a place to facilitate trades for membership fees or transaction fees, or they may be more actively involved in marketing services among their members. The latter is attractive to businesses that have time-dependent or perishable products and/or require filling seats and time slots – from hairdressers to sports teams.

For example, one of these services may offer packages to other businesses through the barter system as a means of attracting more business during slower times or specific events. In turn, the exchange markets those packages to their other customers and receives a cut for their efforts. John Strabley, the CEO of International Monetary Systems, said that their top small business customers are dentists that can offer employer members discounts, thus allowing the employer members to provide dental benefits to their employees.

Unfortunately, a return to the bartering practices of ye olden days does not prevent a visit from ye olde tax collector. The IRS treats trade dollars as if they were legal tender and barter exchanges as if they were banks with the requisite reporting obligations. Exchanges must report bartering income using Form 1099B.

You will have to report your income on your 1040 or Schedule C form. Goods or services must be reported at their fair market value. If you are self-employed, you will need to consider bartering income in your quarterly payments.

Generally, bartering income is not subject to withholding as long as you have supplied a correct Tax ID number to the exchange or bartering partner. Adjust your total withholding accordingly.

Tax advantages are possible in certain circumstances – for example, the cost of producing the bartered goods or service may be deductible business expenses, and taxes may be deferred if the exchanges qualify under the 1031 tax code (assuming receipt of equal or greater value, it may be classified as a capital reinvestment).

Details may be found in the Bartering section of IRS Publication 525, "Taxable and Nontaxable Income,” but it is wise to check with a tax professional on your potential obligations and opportunities before diving into the bartering world.

If you have some corporate "green beans" to get rid of, or if you are looking at methods to secure new business, consider bartering as a way to meet your goals. There are many exchanges to choose from, so do some research to find one with a membership that is complementary to your business needs and available offerings. Perhaps you will get some corporate "dessert" as a result.

Calculate your tax bracket.

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