Bartering — is it worth the trouble

Recently Beth posted the following question on the FAQ’s page:

Hi Jim,

I have belonged to a bartering organization for some time. The fees are being raised, and since my business is growing, I am rethinking my need for a bartering group. Jim, can you tell me the pros and cons on taxes for bartering? I always receive a 1099 from the bartering broker, usually between 1,000 and 6,0000 per year. Should I have this barter income come as my business, or my personal income (I have used bartering for personal use and business needs) and I am not sure how this affect my taxable income.

thanks

Beth Caldwell
Pittsburgh Professional Women

Great question Beth! As cash gets tighter, barter activity tends to increase.

The short Answer:

It’s not worth the trouble.

The Long Answer:

Let’s start off by reviewing barter exchanges by taking a look at a short note about this in the September “Small Biz Builder”:

Barter Exchange Defined

“Transactions involving the exchange of property or services instead of cash are called barter exchanges. The fair market value (FMV) of the property or services received in an exchange is taxable income to the recipient.

For example, an auto mechanic repairs a landlord’s car in return for 6 months rent-free use of an apartment. The landlord reports the FMV of the auto repair as rental income and the mechanic reports the fair market rental value of the apartment as self-employment income.

Caution: due to increased bartering activity via the Internet, the IRS has recently signaled its intent to pursue tracking barter exchanges.”

Now for my opinion:

I have never seen any increase in tax efficiency that results from Barter Exchanges. (But tax efficiency isn’t everything, as we will see in later paragraphs.) In fact, bartering may result in a greater likelihood that your accounting may be considered inaccurate by the taxing agencies!

(After all, the IRS has “recently signaled its intent to pursue tracking barter exchanges”. This is because taxing agencies don’t believe that barter income and expense are receiving the proper treatment)

In most cases, we have found that trading goods and services for other goods and services is less efficient than trading trading dollars for goods and services. And this is not only due to the complexity inherent in reporting bartering, but also due to the service fees charged by barter systems.

When Bartering might make sense:

There is, however, a case where barter might make sense: If a Business Owner has extra “stuff” that wouldn’t get used otherwise, offering this “stuff” as payment for a needed service would be a way to increase the business’ financial efficiency.

Here are (2) examples:

Example 1: A hotel that has capacity during a slow time. They have all cost for those rooms even if the room were never reserved. But they can offer the rooms, something they were paying for anyway, as an exchange for another good or service.

Example 2: A caterer has 10 gallons of milk that need to be used in the next (2) days. The caterer can offer to provide some food to a Chamber of Commerce in return for free admision to future events. The caterer saved the loss of their inventory, and also got something in return that the caterer was going to use anyway (Admission to the chamber events).

Your Tax Situation:

As far as what to do with your taxes, we would need to apply the appropriate proportion of income/expense to both business and personal tax returns. I know it’s kind of a pain, but the best thing to do would be to pull out your monthly barter statements for the year, and start adding up the business transactions and adding up the personal transactions. Oh, and by the way, this is an example of the increased complexity that results from bartering transactions.

The business income/expense gets reported on the business return and the personal income/expense would get reported on your personal return. If you want a more technical answer, email me directly and I will go into it with you.

(And if I could make an unrelated observation, your financial life, beyond dealing with barter exchanges, would be better if you didn’t intermingle business and personal transactions!)

For you Beth, largely because you offer a service, I would recommend trading those little green rectangles of paper that we call money for the goods and services that you need.