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In difficult economic times the oldest form of commerce tends to make a resurgence-bartering. Even before the invention of currency, people would trade goods and services with each other. It is difficult to track the size of the barter market in the US, but an industry has grown up in support of bartering or “reciprocal trade” transactions. There is even an International Reciprocal Trade Association and a trade journal, Barter News. CNN reports that industry officials estimate as many as one million small businesses regularly participate in barter transactions in the US alone.
Barter transactions can be informal between two parties that know each other or there are now established exchanges such as BizXchange to broker reciprocal trade transactions. The IRS requires you to report barter transactions just like any other transaction involving cash or credit and you have to assign a fair value to the goods or services exchanged.
This can still work very well for a small business if you are trading business inventory for products or services to be used for your business. Let’s take an example transaction and walk through how you would record this in Outright.com.
Say Bill sells cameras and Sue runs a website design company. Sue needs a new camera (the Canon EOS Mark II) to shoot HD video for her sites. Bill happens to have one in stock. Bill and Sue agree to trade the camera for Sue designing a new website for Bill’s business. To make this easy say the camera retails for $3,000 which is exactly what Sue charges under her friends and family deal for a website. Bill goes ahead and gives the camera to Sue (he is the trusting sort) while she starts work on the new site.
Bill should login to his business on Outright and go to income where he records a $3,000 sale to his new customer Sue. IRS regulations specify that barter transactions carry the same characteristics as if the goods or services had been paid for with cash. Since Bill is in the business of selling cameras this trade would be ordinary income for him. If Bill had given Sue a used truck that he uses in his business to pick up and deliver cameras he would have recorded this as a sale of capital assets.
When Sue finishes up the new website, Bill now can recognize the expense, so he goes to Outright.com and enters Sue’s name again this time as a vendor and records an expense of $3,000. It is important that Bill categorizes this transaction under “contractors and freelancers”, because at the end of the year he will need to send Sue a 1099; of which, Outright.com will remind him.
Barter transactions fall under the same reporting requirements to the IRS as any other business transaction.
If Bill were my client, I would recommend that he add a note in the description line for both transactions so he will remember that this was a barter. It would also help me as his accountant to make sure when I prepare his tax return next year, that we have properly classified any barter transactions to minimize the income tax for his business.
If you are interested in bartering, I suggest you do some research first. It is always best to document the agreement in writing. There is usually a fee, but using a barter exchange is a good way to insure everyone agrees on the terms before anything changes hands. Exchanges also open up a much broader ranges of goods and services that your business may need.
Bartering is one way to save your cash for important things like rent and business lunches.
