Bartering is great! You can get work done, not pay for it, and the IRS doesn't have to know about it, right?
Wrong. The IRS has known about bartering and written guidelines and instructions long before bartering became popular. The IRS treats a transaction the same whether or not money is involved.
Let's say that a shopkeeper gives a plumber a $150.00 power tool in exchange for repairing the store drain pipe system. Several things happen:
1. On the shopkeeper's side:
   1. The shopkeeper shows a sale of $150.00 on his daily sales report for that day.
   2. The shopkeeper shows a $150.00 Maintenance and Repair expense.
2. On the plumber's side:
   1. The plumber shows income of $150.00 for the transaction.
   2. The plumber shows purchase of Equipment for $150.00.
Why not just not report any of this since it "cancels out"?
There are several reasons:
1. You are not allowed to leave out cash transactions that "cancel out." So, why would you be allowed to leave out these transactions that "cancel out"?
2. Local taxing agencies want reports showing your total gross sales for the year. For example, occupational licenses are based on total gross sales. Sales taxes are based on total gross sales. These agencies would not like it if they thought you were "leaving out" bartering income.
3. If you ever want to sell the business, you want to show the full and correct sales.
4. If you really want to understand your business, your accounting should include everything.
Now let's make the example more complicated. The plumber comes back a month later and says he needs another piece of equipment and asks the shopkeeper if he is willing to barter a $200.00 drill for any plumbing work he happens to need at that time. The shopkeeper says he needs only a little work at the shop but has a big problem with his home plumbing. The plumber mentions that the small job at the shop is a $50.00 job and the one at the shopkeeper's home is $150.00. The shopkeeper and plumber agree. Here's what happens:
1. On the shopkeeper's side:
   1. The shopkeeper shows a sale of $200.00.
   2. The shopkeeper shows an expense of $50.00 Maintenance & Repair.
   3. Then the shopkeeper shows Drawing of $150.00.
   4. This time it is not a "cancel out" transaction.
2. On the plumber's side:
   1. The plumber shows income of $200.00.
   2. The plumber shows purchase of Equipment for $200.00.
There are inherent problems with bartering.
1. Usually when entering into a bartering arrangement, each party secretly believes that he is taking advantage of the other. In the above examples the plumber is probably thinking something like I'm getting $350.00 worth of equipment in this deal. If I charged him my regular price, I'd only charge him $250.00. I'm coming out $100.00 on this deal! The shopkeeper is probably thinking something like I'm getting $350.00 worth of plumbing done. Since I'm charging him full retail for the equipment, it only costs me $275.00. I made $75.00 on this plumber!
2. If one party is providing a real service of value with the several hours of work he must spend in his side of the barter, unless he is having trouble finding customers, why not spend the same time earning real money?
3. Is the work or product guaranteed? What if you had to provide a cancelled check to prove the date purchased?
4. There can be technical issues. Does the shopkeeper above pay the sales tax on the $150.00 and the $200.00 from his own pocket, or does he report that the sales were $136.71 and $183.48 and that he collected $13.29 and $16.52 sales tax?
5. If bartering were a reliable economic tool, why is it not the most common form of transactions today?
However, there are special cases where bartering is a legitimate solution to a problem.
1. The worthwhile gamble. An attorney has a client who is starting up a business which has the potential for making a huge profit with a very unique idea. The problem is, the incorporators do not have much money to start their business. The attorney agrees to do $5,000.00 worth of legal work to incorporate the business and secure patents for their invention. In exchange for the $5,000.00, the attorney receives 10% of the stock of the company. If the company "makes it big," he wins. If the company "goes bust," at least it was interesting and he learned some things along the way.
2. Unique service or equipment. Carpenter A needs an unusual and very expensive router bit (a type of power tool accessory) for a small job. He cannot do the job without the bit. The bit is more expensive than the amount he can charge for the job and he will probably never use this bit ever again. Carpenter B has such a bit and has not used it for over ten years. These two happen to meet in the tool section at Home Depot. Carpenter B has purchased more lumber than he can fit on his truck. After talking a while, they make an agreement. If Carpenter A will make two trips in his truck to help bring the lumber to Carpenter B's job site, then B will give A the bit. For 45 minutes of work, A can get the bit to finish a $1,500.00. For virtually nothing, B gets his lumber delivered. Both are enthusiastic about the barter and neither feels that he has taken advantage of the other.
Copyright © - 2007 Dutch Hawkins Mandeville, LA USA - All Rights Reserved
May 4. 2007.