With the recovery still going at a snail’s pace, it may not be a bad time to think about the advantages of barter for your business.
By Craig Miller
Bartering and the IRS
Although some business owners fear that engaging in barter increases their chances to be audited, I’ve found that the IRS has well-established rules for barter and considers trade to be a normal business practice. The key to staying out of “IRS trouble” is to document everything and declare the goods and services you get in trade as income, and the goods and services you provide as expenses or capital expenditure. You must assess a fair-market value to the goods and services and account for them just like you would for cash transactions.
You’ll find that it’s typically easier to come up with the fair-market value of the product you’re receiving than it is the product you’re delivering. For products you’re receiving, one option is to simply use the trade invoice you receive to establish value.
For products you’re creating and delivering, you may have to verify the price to the IRS. When establishing the value of the product, be sure you take all the factors into consideration. If you only take into account the materials cost, for example, that may only represent about 25 percent of the value. Our company practices cost accounting, which allows us to account for labor byproduct as a load factor of total payroll and all employment-related costs; this load factor is broken into minutes. We also account for total overhead costs, which are calculated by item and based on timings and print and finishing method. All of these costs can be converted into square-foot cost and then worked back into the value of the product. Importantly, our accountant and tax attorney has blessed this method, and I strongly urge you to check with your own accountant/tax attorney when it comes to concerns such as these.
If you own the business and become involved in barter, you might find tempting opportunities to mix your business and personal finances. For example, you trade a vehicle wrap to an HVAC company for a new air conditioner for your home. We have found a satisfactory and legal procedure to accommodate this kind of barter, but your business structure and state laws may be different than ours—talk to your accountant or tax person about a business/personal trade.
Barter can also come in handy, by the way, when it comes to employee/subcontractor compensation or bonuses. Short of cash, there are excellent rewards that everyone seems to enjoy. For example, you might trade for movie or event tickets or gift cards for stores or restaurants. Just keep in mind that barter compensation, like cash, is subject to personal taxes for the recipient. You will need to declare these bonuses on the employees’ W-2s and include it on the subcontractor’s 1099.
The key to incorporating barter into a successful business plan is to integrate it into your sound accounting and business practices. If you embrace barter with enthusiasm, it can become a way to not only even out the ups and downs of sales and production and acquire goods and services at reduced cost, but also expand your business.
Craig Miller is president of Pictographics (www.pictographics.net) in Las Vegas, a large-format-graphics service bureau that excels in digitally dyed textiles, wall coverings, and custom applications.