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by Renee Fellows

August 15, 2008— Before the time of EBay and Craig’s List further beyond the time of shopping malls and corner drug stores, man (and woman) would farm food, craft goods and then, placing them carefully in his/her wagon, cart them into town where they would barter and trade for the things they needed. Economic times and the Internet have combined to revive bartering into the latest cost-saving trend in small business commerce. Networks like Tradia and BarterWorks generate millions of trades each year and alleviate the need for cash. Everything from handbags to spa treatments are being used to have company web sites built, taxes prepared, and even national advertising campaigns launched.

It’s not just small potatoes anymore.

Barter is big business according to the International Reciprocal Trade Association (IRTA), one of the leading associations engaged in barter trade. A reported 15 percent of international trade is now conducted on a non-cash basis. In North America and Latin America, some 500 commercial trade exchange companies operated and accounted for $2.3 billion in barter trade in 2004, the organization’s most recent data.

How can your small business jump on the Barter Bandwagon?

Get Networked
That’s right, the days of horse and cart are most likely long gone when it comes to today’s barter networks. All you need is an Internet connection and a listing of what you have to offer and the world awaits.

The Ins and Outs of Trading
For local trades, you can check out Craig’s List.com and click on your geographic region. There you’ll find almost anything you can imagine (and sometimes things you can’t) ready for trading or purchase. If you’re seeking larger trades, you can join a trade network. These often require membership and monthly fees. To learn more check in with the National Association of Trade Exchanges (www.NATE.org) for a listing of member companies.

For the serious trader, third party networks like International Monetary Systems (IMS), International Trade Exchange (ITEX) , Tradia and BarterWorks allow the parties to accrue ‘barter dollars’ or points when a trade is completed. These dollars can then be used to ‘purchase’ other items up for trading on the network. Under the “Tax Equity and Financial Responsibility Act of 1982,” the federal government officially recognizes Trade Exchanges as third-party record keepers. This means that the Trade Exchange records barter transactions and reports client barter income to the IRS via a 1099-B form at the end of each tax year .

Here’s how a typical simple barter agreement might work:

Business woman X posts a need for a new web site on Craig’s List. In exchange, she will provide X number of hours of free photography services. A web developer in need of photography contacts woman X and the deal is made. Each party performs the agreed upon tasks or provides the products and everyone is happy. The crux of this agreement is that both parties must be looking for the precise trade being offered.

In a system of barter dollars things become slightly more complex:

Business Woman X joins a Barter Network at a membership cost of $200 to $600 a year. She also may pay monthly membership costs. Larger businesses may also use a broker to perform the transactions. Trading credits work exactly like cash (and are also recognized by the IRS as ‘dollars’) but must be exchanged for goods or services via the network. Each transaction has costs associated including a 10 to 15% transaction fee that covers both the inbound and outbound transactions.

 What about Uncle Sam?
Bartering and trading profits are considered taxable transactions by the IRS. Reputable sites like ITEX.com provide their members with 1099-B forms in January reporting total sales revenues for the previous tax year.

“The issue becomes more about how you tell your clients to get into the barter business and report their transactions to the IRS,” says Jim Layton, Director of System Support and Development at Fiducial. “The problem is that people think that bartering is not income to them, and it is. If someone says that I’ll fix your car for $300 if you do my taxes. That’s $300 of income for you. We, as accountants and tax advisors must emphasize that trades need to be reported as revenue.”

“The best way to trade is to barter through a barter association,” continues Layton. “Then it’s above board and will be reported appropriately. Remember that bartering is basically a matter of good recordkeeping. So keep good records and you won’t have issues should you be called for a random audit.”

Your paper trail should include:

• Evidence on the general ledger. All barters should be listed for face value under revenue or expense depending on whether you provided or received the goods or services.

• Proper tax documentation. You should receive a 1099-B for any barter sales for the previous years through a barter network or broker.

• Memos. Keep a memo on the transaction for smaller trades or those not conducted through a barter network.

• Simple receipts. Write an invoice or a simple sales receipt stating the item or service you provided, its value, and that there was ‘no charge’ due to a traded transaction of XYZ. The individual you barter with should provide you with a similar ‘receipt.’

Perceived vs. Actual Value
There is a trend in the service industry. If people don’t pay for things, they generally don’t have a high perceived value of them. It’s a psychological issue, yes. If the item is tangible it’s easier to place a reasonable price tag on it. Combating this perception issue is critical to a successful barter agreement.

For example:

Bill was trading oil changes at his Quick Lube with his accountant to do his annual tax return. Bill has fixed costs of product to help rationalize his ‘costs’. His accountant can charge $300 or $3,000 to do the annual taxes, but Bill still has a hard time understanding the cost. “It doesn’t cost him anything to ‘produce my taxes,” he thinks.

That’s where trouble enters in. It’s important for everyone in the barter arrangement to have a full understanding of what is being traded, its value, and what will be included in the ‘deal.’

Ana Lydia Ochoa, owner of Padma Media & Marketing in Los Angeles, CA has used bartering in order to build her two-year-old public relations firm through the latest economic downturn.“ The cycle in public relations is that for the last month of the year most firms do zero business,” says Ochoa. But then the first four months of 2008 also brought in no new clients and Ochoa started worrying. “I knew I had to do something different to get my name out there. I took on a pro bono movie project and from that we received a project from the West Hollywood International Film Festival. We were able to work for them and acquire additional film and movie projects. For us, bartering and trade has opened up new markets,” she continues.

In the past Ochoa also traded consulting work for Chinese medicine treatments by promoting the practitioner’s new book. The trade enabled me to add an exciting new client to my roster and I received the treatment that I needed,” says Ochoa.

Will she barter again? “I think it will depend on the situation,” says Ochoa. “I try to be very selective on the barters I make. If someone like an Esther Ting says I’m launching my book and I need help – then it’s right up my target area and I’m more likely to make the trade.”

Let’s Make a Deal.
You’ve read up on bartering and you think it might be a good idea for your small business, what now? Here’s a few simple steps to help you test the water and see if a full dive into the deep end of the bartering pool is for you.

• Try out a small barter on a local site like Craig’s List. Click on Barter under For Sale. There you will find the listing of items or services for trade.

• Spread your wings with a barter network. The top three barter networks in the U.S. are IMS, ITEX.com, and Tradebank.com. Simply set up an account, pay your membership fees and you’ll be escorted through the process and ready to roll in a matter of hours.

• Purchase a franchise and make money in the process. Some of the big barter exchange networks work on a franchise arrangement. TradeBank and Tradia.net are offering franchise opportunities in local markets. Now you can trade, barter and take a percentage of the sales. “It works much like Olsen’s Mercantile from that famous television series Little House on the Prairie,” says Tradia President and CEO Matthew Humphreys. “We’re just a computerized mercantile, but you can still bring us your wagon wheels, aged inventory, or even tax services and we’ll help you trade it for what you need.”

Humphreys also advises that individuals and business owners should beware before they barter or join a network. “Remember that bartering is a business agreement and should be investigated like one. If you’re not using one of the big trade exchange companies, then do your homework on the person or company offering the product or service. Be sure that they’re reputable and in good financial standing,” he says. “If the deal sounds too good to be true – it probably is.”

What to look for before you trade in a barter exchange network:

• How long has the organization been in business?
• What type of clients do they have?
• What can they do for me? What services will they provide?
• Do they provide financial reporting? If they don’t – RUN, don’t walk to another network.
• Make sure you know what they have to offer before you join the exchange.
• Understand that barter is reportable revenue. “If the network isn’t reporting the exchanges on your behalf,” says Humphreys, “the IRS will go after the network and every subscriber and fine them. That’s a problem that doesn’t need to exist.”

Like any business dealing, remember that it’s your responsibility to ensure you’re receiving what you were promised. Take steps to outline the trade beforehand and be clear on your expectations to help reduce misunderstandings on both sides. To learn more about how bartering should be tracked and accounted in your small business, talk with a Fiducial advisor by calling 866-FIDUCIAL or visit the web site at www.Fiducial.com.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: Howard.Margolis@fiducial.com.

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