As a child, I always found it odd when I’d answer the door and in front of me stood a white-haired man in ripped jeans and a dirt-laden T-shirt holding a carton of straight-from-the-farm eggs. This would happen every few months. Turns out, my dad, a physician, was in a barter agreement with this man, a local farmer. A check-up equaled a dozen eggs, and sometimes a squash or carrot thrown in as an extra special treat.
The act of trading goods and services may be as old as time, but it is spiking in popularity as of late.
“Bartering is getting really big right now because people don’t have cash,” says Carolann Jacobs, president of Vivid Epiphany, a business coaching consultancy based in Plano, Texas.
So let's say you are a dentist and your dog needs walking. You trade services, don’t exchange money, and the deal is done, no strings attached, right?
“Not reporting your barter income can easily lead to an audit by the IRS,” says Roger C. Sims, a CPA in Carrollton, Texas.
Here’s how to avoid an audit:
Barter agreements work the same way as cash agreements, Sims explains, and need to be documented in kind.
“Report your barter income on your tax return and label it ‘barter revenue,’” he recommends. “Full disclosure is always best. Your barter income is taxable. Make sure to report what you would have received in cash.”
For example, if Sims bartered $100 worth of his CPA services for $100 worth of window washing for his office, he would need to report $100 to the IRS because that is the amount he would have been paid if the transaction wasn’t a barter.
“Report your barter income on your revenue line,” he advises.
Make it legal
In addition to reporting barter income on your tax return, Sims advises business owners to create legal documents for each barter transaction.
“Create a document that explains the barter agreement and then make sure both parties sign that document,” he says.
Hire an outside firm
Fortunately, there is help for small business owners who don’t know whom to barter with and/or want to avoid a dreaded call from the IRS. Companies such as ITEX help to initiate what is called ‘modern barter exchanges.’
“Our members do business with each other, but they use ITEX dollars instead of cash,” explains Jeff Weaver, membership development director for ITEX in Dallas. “We collect a transaction fee on their sales and purchases.”
While direct barters can often be accidental and result in uneven exchanges ($200 of dentist work for $50 of window cleaning), modern barter companies help eliminate discrepancies and keep transactions legit with the IRS.
“Someone usually gets the short end of the stick in an informal barter situation,” Weaver says. “We help facilitate the process in an easy way.”
Perhaps the best way to protect your company from a barter-induced audit is to know the facts.