“The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals.” Adam Smith
Some months ago, I read an article on Manta.com about how bartering could be good for small businesses and entrepreneurs. For those who are not familiar, bartering is simply swapping goods and services for other goods and services. A good example of a bartering example is a plumber offers to fix a leaky faucet (instead of paying cash or credit) to the auto mechanic who tuned up his truck.
Honestly, bartering is a good way to “test” goods and services out without a cash commitment. But being the accountant that I am, I am hesitant to encourage my clients and other people to run out make bartering agreements all over the city. Bartering is not for every business, it has its pros and cons.
Pros of Bartering
· A small business can save cash.
· Test goods and services of another small business.
· Establish a local business in the market.
· Any services or goods received are tax deductible at fair market value.
Cons of Bartering
· Any services or goods given away are considered to be cash payments.
· You will still have to pay sales, income, and self-employment taxes
· Transactions will have to be reported to the IRS and possibly state governments.
· Bartering does not make your business profitable.
The key to doing bartering the "right" way is making sure that the goods or services exchanged are of equal market value. This means that you cannot give a pair of $1500 designer shoes to an auto repair shop for a new bumper.
If you want to barter, please keep in mind that it is considering to be real income to Uncle Sam. The IRS considered bartered services received as ordinary income and bartered services given are included as business expenses in the year performed. So there is a chance that bartering goods and services can create a tax bill at the end of the year. Barter transactions should be reported on Form 1040, Schedule C, Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and answers to tough tax questions posed to Jéneen R. Perkins, Owner of Eclat Enterprises, LLC