NFIB

Bartering Can Save You Money Out of Pocket, But Be Wary
04/ 15/ 2002


Bartering is an age-old way to exchange products and services, and thereby save you having to pay cash. This can be extremely beneficial for new companies, but there are certain aspects of bartering that need to be watched carefully in order not to break tax laws. In today's Workshop, Jeffrey Moses discusses benefits and drawbacks.

Rather than pay cash, many companies have made arrangements to barter (or exchange) services for products, or vice versa. For instance, a new graphic design firm might consider exchanging a set dollar value of graphic design services with a printer in exchange for the actual printing costs of a new brochure. This would save the new company an outlay of funds, and would offer the printing company a good value on graphic services.

A barter arrangement usually works best for service-based companies, which make money providing their services on a per-hour basis. The exchange of products, however, may not be as cost-effective because of the inherent cost of purchasing the products.

Bartering is especially advantageous for receiving marketing and promotional services, printing, supplies(from local retail operations), and business consulting. You might consider proposing bartering even for professional services such as legal and accounting.

A new service-based company can benefit from offering a bartering situation to many different suppliers. Not everyone you contact will be interested, but those who are will, in effect, become some of your first customers. You should provide the same level of excellence to barter customers as to paying customers, because even barter customers will begin the word-of-mouth advertising that ultimately will be so important to your company's growth.

Remember, a barter transaction must be valued and reported just like a cash transaction for tax purposes. It's true that state or local tax officials may have difficulty finding and tracing some barter transactions, but that doesn't relieve you of the legal obligation to report the exact cash value of such transactions. Not reporting them can result in penalties, just as severe as not reporting any cash-based transaction. When your business is involved in any form of barter, consult with your tax adviser to make sure that each transaction is reported accurately in your tax records.

Be wary of joining organizations that are based on setting up ongoing bartering between companies. This may be a red flag to the IRS, which may track members of such organizations because many companies use barter as a way to avoid recording taxable revenue.

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