Is There Value in Bartering?
A few prospective customers have suggested we do a barter arrangement whereby we trade services with each other and no cash actually changes hands. I have two questions about these deals. First, how would I track them from an accounting perspective? Second, is there any real advantage to bartering?
--Justin Shelley, owner of Master Computing Denton, Texas
Bartering may seem simple and risk free, but it actually can be quite tricky and could lead to trouble if you don't understand and follow the rules. I told Justin Shelley he was smart to seek advice before entering into such a deal.
Small companies, if they barter at all, often trade for goods or services they don't really need. A consulting firm like Justin's, for example, might agree to offer its expertise to a restaurant in exchange for meals, even if the firm's people wouldn't normally dine there. Or maybe a copier business would trade its services to a marketing firm in return for promotional items it would never have bought in the first place. The point is, in many instances, the trade is a waste of resources. That's a particular concern for a young company like Justin's, which lives or dies on cash flow and has a finite amount of employees' time to sell.
Of even greater concern is the possibility that barter will create problems with state and federal tax authorities. As far as tax collectors are concerned, a trade is simply a sale without cash changing hands. If the value is significant, you may owe a sales tax, depending on where you're located. In any event, you're required to factor the deal into your calculation of your tax liability. And don't make the mistake of assuming that nobody will find out about it if you don't report it. If the other party keeps records and is audited, you could wind up owing the government substantial interest and penalties.
That said, there are circumstances under which barter does make sense. You may have old inventory you can't sell but can trade to another company for products or services that your business could put to good use. Or perhaps you're in a service business, have limited cash, and are in need of something essential to your success--such as printing, advertising, or media time. There's nothing wrong with bartering for those items, as long as you keep good records and account for the trades properly. Just be sure that you really do need whatever you're getting in return and are not simply bartering because you're afraid of saying no to a current or prospective customer.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.