What Your Accountant Should Know About The Business Of Barter
By Phyllis Malitz
In today�s business world, barter�one of the oldest forms of
trade�has been transformed into a sophisticated way of doing
As a result, trade exchange networks, the clearinghouses for those
wishing to barter, have flourished.
And as more businesses barter, it becomes increasingly important for
CPAs to understand how such transactions work�especially the tax
ramifications�so they can advise their clients or employers. What
are the mechanics of barter in today�s business world? How should
you handle a company�s barter records at tax time? How do you tell
who can benefit most from the practice? Read on.
Businesses are discovering that barter not only has financial
advantages, but it has marketing benefits as well. Barter brings in
new business that could never be acquired in any other way. And, as
a bonus, there are no cash expenditures for this kind of marketing.
To understand how barter works, first consider a �direct� barter
transaction: I perform a service for you and you pay me with your
product or service. This serves each of us well if:
a) each needs what the other is selling,
b) both products are of equal value, and
c) both represent a business expense.
But because it�s usually difficult to get such a match�where the two
businesses need equal amounts of each other�s product�opportunities
for such direct barter transactions are limited.
That�s where a trade exchange network comes in. It can smooth out
transactions that otherwise wouldn�t be possible. The network deals
in units of currency called trade dollars. The goods and services of
one company in the network are exchanged for trade dollars that can
be used to purchase the goods and services of any other company in
The network functions as a recordkeeper, sending each client a
monthly statement and charging a fee�usually 5% to 7%�for each side
of a transaction.
Each member-company in the network is assigned a broker, who
notifies clients of new products and services, and searches out new
ones on request. The larger trade exchange networks have thousands
of clients, making them a viable source for many business needs,
such as office equipment and supplies, printing, advertising,
cleaning and maintenance services, professional services, and travel
Accounting For Barter
The Tax Equity and Fiscal Responsibility Act of 1982 classifies
trade exchange networks as brokerages, so they are required to file
1099-B forms listing the sales of client companies. Just as in the
case of a stock brokerage, the trade exchange sends a copy to each
client for use in tax preparation.
All barter income is on the cash basis. Perhaps the most important
barter accounting concept is that the IRS treats barter transactions
as income received for both accrual-basis and cash-basis clients.
The value of trade dollars received must be included in gross income
for the tax year in which they are credited to the client�s account.
Since tax is due on this income in the year it accrues, companies
that are profitable should avoid having unspent trade dollars at the
end of the fiscal year. This is not a concern during unprofitable
years. As long as barter income does not put the company into a
profit situation, it will not be taxed.
In the event of year-end excess barter credit, a trade exchange can
arrange tax-deductible, charitable contributions using barter...it
can be used as compensation, too. A company can give the bartered
goods or services as a bonus or as part of a compensation
package�without tapping cash. Many companies conduct barter bonus or
sales incentive programs, using everything from restaurant
certificates to resort trips.
Just as business expenses covered through barter are deductible to
the same extent as cash, barter used as compensation is subject to
personal taxes. Barter used as a bonus or compensation for an
independent contractor must be included on the contractor�s 1099 as
non-employee compensation, and all barter compensation for employees
must be taken into account on their W-2s.
Barter compensation is subject to federal and state with-holding,
FICA, FUTA and SUTA. Taxes, of course, must be paid in cash.
Accountants can advise clients to use barter to achieve specific
business goals, including. . .
Cash conservation. Paying for business expenses with trade
dollars leaves more cash available for the payment of strictly cash
Barter lines of credit. Barter can be particularly useful
when a business needs to borrow money to relocate, expand, or launch
a marketing program.
barter line of credit may be easier to get than bank credit because
trade exchange networks look at a company�s capacity to pay back
through demand in the network, rather than through traditional
Many of the products and services associated with moving, remodeling
or marketing are available in trade exchange networks. Interest on
barter lines of credit is paid in trade dollars.
Marketing advantage. Because barter purchases represent lower
out-of-pocket cash costs, trade dollars often can be earned with
little increase in overhead and without advertising or marketing
barter network keeps clients informed of new products and services
available for barter. Some networks hold events such as holiday
shows, where clients have an opportunity to meet each other and
examine each other�s products or services.
further advantage of barter arises directly from the makeup of trade
exchange networks. Because radio, television and print media
companies can run additional advertising spots or ads with little
increase in overhead, they often participate in exchange networks.
This means network clients can finance ad campaigns by paying with
their own products or services.
Help with collection. Businesses can use barter to get value
out of otherwise uncollectible debts. Instead of chasing cash, which
might be nonexistent, the creditor can give the debtor company the
option to pay with its product or service.
That product or service is placed in the trade exchange network and
its value in trade dollars is transferred to the creditor, who can
spend it in the network. A company also can use barter to pay a debt
by offering to transfer credit it has earned to a creditor.
The Best Candidates
Theoretically, any company can barter to its advantage if the
network offers products or services the company requires, and if
there is a demand for the company�s products or services in the
network. Some companies may be particularly well suited to barter,
the best candidates are those with:
High T&E (travel and entertainment) costs. Restaurants,
hotels, stadiums and even some airlines barter, because they have
excess capacity in the form of empty seats and rooms that can be
traded for products and services for which they would normally pay
However, T&E taxes and gratuities must be paid in cash. Conversely,
trade exchange network clients with high T&E expenses can benefit,
because of the number of travel and hospitality choices available.
This includes companies that offer travel incentives to high
Products and services needed by hospitality firms. Companies
that sell or repair furniture, plumbing, air-conditioning and
heating systems, and those that offer cleaning, painting and other
services needed by restaurants and hotels, find their products and
services are in high demand in the network.
Excess inventory or capacity. A company with excess inventory
should consider barter before liquidation, because barter offers the
opportunity to sell at full price.
plumbing wholesaler with 500 faucets might earn trade dollars from a
Caribbean resort that would happily take such an item in quantity in
exchange for vacant rooms that still another client in the network
might use for a company retreat.
Companies with excess capacity are barter candidates because
capacity can be turned into extra business�business that costs the
company only the direct costs of producing their goods and services.
Seasonal fluctuations. For some companies, barter may not be
beneficial at certain times of the year.
furrier, for example, may be too busy in the fall and winter
seasons. But during the slow spring and summer, when inventory still
on hand is moving slowly and cash flow is light, barter business
probably would be welcomed.
A new product or service. Barter can be used in several ways
to lower the risk of introducing a new product or service�in test
marketing, for example�because it costs nothing in promotional
expense other than trade exchange fees.
In addition, the direct cost of promoting a new product can be
offset by trading the product or service for advertising through the
Understanding the uses of barter and which clients can benefit from
it improves accountants� adviser role.
The CPA with clients that have decided to use barter should advise
them to limit barter income to the extent of their ability to spend
the trade dollars they earn. Companies new to barter usually find it
helpful to begin slowly, to get a feel for the ebb and flow of trade
Clients considering barter should be sure the prospective trade
exchange network is a member of IRTA, which sets a high standard of
business and ethical conduct for its members and is composed of more
than 250 companies.
The client should seek a stable network�one that has been in
business a number of years and can offer references from companies
that have used the network for a year or more.
If approached with care, barter can be an important business tool.
Phyllis Malitz, CPA, is the principal of Phyllis Malitz &
Associates, Ltd., a CPA firm with offices in Wilmette and Chicago.
She is a member of the Federal Income Taxation Committee of the
Illinois CPA Society, and the Barter Accounting Standards Work Group
of the International Reciprocal Trade Association.