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Did you know there’s a way to get goods and services you need for your business without using up your company’s cash?
A growing number of businesses are using the barter system to supplement their normal purchasing activity. Bartering is a payment method in which goods and services are exchanged between parties in lieu of cash.
In a simple bartering arrangement, two parties trade items of similar value. For example, let’s say your business owns a building located next to a telephone company. An Internet service provider might be interested in putting its servers in an unused portion of your basement and, instead of paying you rent, offers to provide you with a high-speed Internet connection and a website.
Before you consider jumping on the bartering bandwagon, though, it is important to be aware of the tax consequences of these transactions. While your first thought might be that bartering is a simple exchange of goods or services with no tax implications, the tax authorities have other ideas.
The IRS requires that the fair market value of goods or services received in a bartering transaction be recognized as taxable income. However, the business can deduct the fair market value of the business goods or services that were tendered in exchange. A bartering arrangement doesn’t always result in a deduction immediately equal to the income you recognized. For example, you might provide a service and recognize income immediately in exchange for some equipment you’ll end up depreciating over several years.
Records of bartering transactions should be maintained just like ordinary transactions to maintain compliance with sales tax laws.
The growth of bartering has also led to a number of companies that bring parties together and facilitate bartered transactions. Such companies operate much like a bank, whereby clients register with them and earn “trade” credits in an account that can be used against future transactions. The normal fee structure is a one-time registration fee with a fee per transaction based on its dollar value.
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