Bootstrapping your business? Scratching for cash? Barter, either through a barter exchange or in person, may be a way to bring vital goods and services into your startup. Remember, however, that even though it may not involve money, this is a business deal, and it will have tax, accounting and contractual implications.
Bartering is not tax-free. As far as the IRS is concerned, barter transactions are the same as any other. Even if you are just trading catering services for website design, you must include the fair market value of goods and services received in your gross income for that year. In individual transactions, you would report it on Form 1040, Schedule C. If you are using a barter exchange, you should receive a Form 1099-B to file with your return. The IRS offers a complete discussion of the tax implications of barter transactions in Publication 525. With bartering, as with any other business transactions, you should keep good and complete records.
As a very basic principle, remember that, for accounting purposes, a barter exchange involves two events. You sold something, and you bought something, (just not for money). The value of what you sold is its fair market value, which is generally not too difficult to determine in a business setting. Treat it as you would any other sale. The IRS treats barter as income received whether you use accrual-basis or cash-basis accounting.
If the item you received is for the business, record it just as you would if you had paid cash for copier paper. If the item you received is for personal use, record it as if you took cash in salary or as a draw.
An agreement to trade something for something else is a contract, even if it is only oral. You should assume that it is legally enforceable. As with any business deal, but especially the large ticket ones, it is a good idea to:
- Get it in writing, including your mutual understanding of the value of the goods or services being traded. If one party knows the stones in the tiara are zircons, but the other believes they are diamonds, you know that a lawsuit will follow. If the deal is too good to be true, there is a serious misunderstanding. Have both parties sign the memorandum.
- If you are still negotiating, make sure that your written communications with the other party describe what you have not yet agreed upon as well as what you have agreed to. If you reconsider, let the other person know before he or she does anything in reliance on the agreement.
- Don’t make a habit of cancelling deals. But if you must cancel, do it in writing and ask the other side to sign a short, simple acknowledgement of the cancellation.
Bartering may be a good way to get your business started. Many business advisors recommend it for office space, furniture, business advice and host of other products or services. If you treat it as a business transaction and practice careful record keeping, you may avoid tax, accounting and legal complications.