Three Ways Using Barter Can Lower Your Taxes!

Trade dollars are far more flexible than at first imagined. You can use them to chisel away at the tax bill, and chip away at your payroll. Here's a look at three ways you can use barter to reduce the revenues of the tax collector.
 
Capital Gains
Consider the business owner who, knowing she would be selling the property in the future, wanted to make improvements on her real estate investment.
 
Because she did not intend to "roll over" the property on a tax-free exchange, she would have a capital gains tax on any amount she received above her basis. But with a creative use of the trade dollars in her account, she was able to avoid any gain on the sale. This was accomplished by increasing her property value with trade dollars spent on improvements.
 
Consequently, when she finally sold the property her tax bill was nearly eliminated with the increased basis. Wisely, she used trade dollars to lower the tax liability, while at the same time making valuable improvements that increased the property’s marketability and value.
 
Employee Costs Versus Contractor Costs
Every business owner knows it is less expensive to use independent contractors than it is to hire employees. Because employees cost the business owner FICA, worker's compensation premiums and other expenses, the cost of employees frequently soars above an average cost of 25% of the actual payroll amount.
 
Independent contractors, on the other hand, cost only the amount of their contract fees, since they are responsible for their own employee taxes.

An independent contractor who belongs to a trade exchange, and who accepts trade dollars for (some) services has created evidence of being in business — much the same as if he or she has a business license or rents his or her own office space.
 
Because the aforementioned are things that business owners do, an independent contractor who does them has shown a strong indication of being a business owner. As opposed to someone who simply performs tasks for another, yet claims to be an independent contactor.
 
Employee Benefits
Business owners who have workers with no chance of being classified as independent contractors can still convert trade dollars into tax savings. By setting up a Cafeteria Plan, under Section 15 of the Internal Revenue Code, one can convert trade dollars to cash in several ways. A Cafeteria Plan is a tax-qualified employee benefit that allows employers to reduce employee wages, in order for the employees to pay their own benefits with "before tax" dollars.
 
The employees get benefits that they would otherwise have to purchase with "after tax" dollars, while the employer gets a reduced payroll and therefore reduced payroll taxes. First, by arranging for the employees to have a Premium Plan under Section 125, the owner withholds dollars from the payroll that are then used to pay premiums for the health plans which the employees select.
 
If the trade exchange has an insurance broker who takes commissions on trade (which usually amounts to one month’s premium per year), the owner is able to pay that premium with trade dollars and conserve the cash from the employees for the month in question.
 
Besides converting the trade premiums to cash, the owner has also reduced payroll taxes! This "double whammy" effect is further enhanced by the fact that employees are happier than otherwise, since they are also saving taxes on the benefits they are paying for under the plan.
 
Second, by setting up programs with trade exchange members in the medical professions, the owner can further reduce payroll taxes through the Cafeteria Plan. And at the same time can convert the trade dollars spent into cash.
 
The trick is to withhold the amount for the Cafeteria Plan from payroll that the employee expects to spend each year on unreimbursed medical expenses — such as deductibles or co-payments, or for dental expenses where there is no dental plan. If the business owner then pays the costs of the dentists, chiropractors or the medical doctors with trade dollars, the firm has converted significant amounts of trade into cash.
 
As an example, some employers provide that the Cafeteria Plan covers annual physicals for employees, then provides the on-site physician for the exam. Since they then pay the doctor with trade dollars, the withheld cash from payroll amounts to a very efficient conversion of trade to cash.

As we've seen, a truly efficient use of trade dollars cannot only replace cash expenditures, but it can generate tax or worker’s compensation premium savings as well.