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When And If To Barter For Services
Posted By: michael on 7/7/2006 9:10 AM (CST) 1500 Points
I'm finding myself is a different situation. I am regularly...more so now than in the past....approached by business owners asking me about bartering for their services. I'm well aware of the tax ramifications and have no problem staying within those guidelines and reporting services as income.

The questions is really IF I should consider this at all. My father did this a lot when I was growing up ( oh so many moons ago) but I remember that the mortgage couldn't be paid by barter. Which means there's a point when you say, no more barter.

OR do you never start that process at all? Right now I have a definite need as one company I've used for years is no longer able to meet my needs. They aren't growing, or desiring to grow, to a level where they could meet my current, or likely future, needs.

I've facilitated barter agreements for others in the past and they've worked out, but I really need some feedback from everyone here.

Hope I'm making sense.

Michael

Posted by: narthur Member Response
7/7/2006 10:53 AM (CST)
Michael:

Having seen a company litterally pay it's employees in barter certificates rather than paychecks and then watched them go out of business within three months, you are wise to be cautious.

My approach has always been simple (and very successful.) I would only barter with a company who wanted to trade with a product or service for which I had need in the business and would willingly pay cash for otherwise.

I would only barter to the amount that equaled that amount of cash.

For tax purposes and perceived 'equality' in the trade I would also use the 'retail' or highest rate of the product or service on both sides. Keeps the transactions 'publically' justifiable and made for good accounting.

Beyond this, I won't barter. Treat it like a real transaction, not 'funny money' and you'll stay safe.

If you'd like more detail, see my profile for contact info.

Best, Neil
 
Posted by: rbauman* Member Response
7/7/2006 1:21 PM (CST)
I agree that you are wise to carefully consider whether you want to enter into barter relationships. If the product or service you receive is something that you have use for, then there may be a value in entering into a bartering relationship with that specific customer. On the other hand, if you receive items that do not have a value for you, the result may be to shift your business from whatever your company presently does into a company that is a clearinghouse for bartered goods and services. You really need to decide what your business is and what it is not.
 
Posted by: michael Author Response
7/7/2006 1:42 PM (CST)
Neil & Ron,
Thanks for your comments. For clarification this would only be for services I need. I have no desire to be paid in-kind with items/services I cannot or will not use. Cash is still king. Just trying to decide if there is EVER a reason to do this.

As I said before, I've helped others get a win-win thru a barter agreement, but this is different.

Michael
 
Posted by: MANSING Member Response
7/7/2006 3:33 PM (CST)
Hi Michael,


Difficult to answer! It is all depend on the situations and long term relationship for your company. Simply I know is barter trade is common among people with no access to a cash economy, in societies where no monetary system exists, or in economies suffering from a very unstable currency or shortage of currency.

First thing I will ask: Do you have a excess capacity of a product or service? If you have how it will profitable for your company? Ask your self question start with why do I need to do this? Where it will take me and my company? How can solve the problem if it turns against me? You need to think SMART – specific, measurable, achievable, realistic and time management - objectives for your company.

Some people barter because they're on a budget, some are business owners who want to gain more customers and others barter for the sheer enjoyment. In this case you need to listen that little voice (no, not voices) inside of your head and cancel or accept the deal politely.

They may be open to many possibilities but if you don't ask, you'll never know. Besides, what's the worst they can say? Don't get discouraged if they decline. After all successful people don't wait around for things to happen, they make it happen.

I have collected one example, might be this will give you idea to take right decision.

Examples of Bartering

If you own a business and trade $500 worth of goods in an even trade, the $500 worth of goods/services you supply counts as a sale and the $500 worth of goods/services you receive counts as an expense. That's it.

There is no tax benefit. The benefit is that your expense has your profit built in and this is probably a customer you would have not done business with through normal channels. Treat it just like a cash transaction when doing your bookkeeping.

If you're from a country that has a Goods & Services Tax, that amount is collected from the other party and remitted when doing your taxes.

If a person has a $500 bike and they trade it for a $500 computer, again the transaction is treated as cash. If you sold the bike in the local paper for $500, would you claim it on your taxes? No. The bike was purchased new for $800 and applicable sales taxes were paid at that time. The bike was also purchased with "after tax" dollars.

I hope this will help!

Regards,

M Bhor
 
Posted by: michael Author Response
7/7/2006 3:55 PM (CST)
Mansing, thanks for your comments and let me add another angle to this.

Let's suppose I need a lawyer's services (I don't) and he will do $1000 in service for me. In exchange, I do his marketing for him and he gains 10 clients from my program. What's the value of 10 new legal clients? Since I can't really restrict the number of clients he can get from my efforts his ROI is better than mine.

Michael
 
Posted by: cread Member Response
7/7/2006 4:38 PM (CST)
Micheal:

I don't know where your located but if you are is the US ignore Mansing's comments about tax reporting he is incorrect for US taxpayers.

Charles (CPA)
 
Posted by: stevea Member Response
7/7/2006 7:33 PM (CST)
Dear Micheal

I think that the general tenure of the discussion – erring towards caution is wise, but is in itself potentially too cautious.

The merits of the situation should be determined by the hard benefits which can be written out in a profit and loss, coupled with those which you can accrue from the business case, spread over a period of time, all taken in conjunction with a deeper understanding of the financial and taxation implications than are being discussed at the moment (apart from Cread’s two liner!). More on the latter part later!

The example you gave of a lawyer bartering his services for your marketing skills is a good example where it can rapidly become inequitable and you have no contractual redress.

Of course, monetary contracts can prove inequitable, simply because the respective skills in negotiation of the different parties are unequal. Have you ever named your price for a job and been initially delighted that the other guy says yes, only to realise later that he did so with such alacrity because you pitched far too low and he was expecting to pay more? There’s noting you can do to change the agreement post-haste!

Depending on the tax jurisdiction you work under, the economics of barter are little different from those of cash, except that a good accountant can legally maximize the benefits to both parties, or if not to both (This is business, after all), to you. After all – what is cash but a government backed system of barter based on the promise to pay?

Thy absence of a cash transaction can also benefit you by not having to impact your bank balance or your credit limit, but as it is a two way process, this is essentially self cancelling. The benefit may be transient, so without other collateral benefits, is it worth it? After all, if there is turnover on your account, coupled with profit, the cash flow element will contribute to your overall long-term credit rating.

Then there is risk. Payment once cleared is yours, unless the money’s have been derived from fraud or theft. A service bartered in kind, may never arrive and title to goods may not be vested with you if others can show a claim.

Mansing’s general philosophy towards barter is useful as an intellectual and practical exercise but it is also, in my mind, flawed in UK law. The value of a barter transaction for cash purposes is complex, but is essentially the depreciated value of the asset or service in question on the contra-traders balance sheet. If the two match, in the eyes of the Inland Revenue and if there has not been an unreasonable change in the value of an asset for the purpose of matching a contra-transaction, the deal is good and can be tax neutral.

A service delivered, is what it says on the invoice – there’s no stock to audit it against. Unless the discrepancy between the descriptions on the invoice is outrageously different to the service provided, there are no implications on the tax front. For example, business car hire is a valid tax deductible expense. Borrowing a client’s Ferrari is not tax deductible to the client. If on the other hand, they hire it to you, in return for you providing them with marketing services to promote their exotic car club; it becomes a taxable business expense to them and you get a nice car for a few weeks. The bargain is actually probably for pleasure, but the transaction is, for tax purposes, for business transport. That’s a bit of an extreme example, but it’s just one I happened to know happens.

I’m told that the same accountant who told me of this managed to acquire a £22,000 Bentley in exchange for a £12,000 fee he was due, “crystallising” a hefty tax loss for his client (That’s accountant speak for “Profit”) in the process, and somehow leaving the entire transaction tax neutral and the client in profit. But that’s probably why he’s a successful and highly paid accountant with more clients than he can handle.

Perhaps if you want to look seriously at barter deals, that’s what you really need, rather than advice from fellow marketers. That guy’s clients tell me that despite his fees, he’s never actually cost them a thing. Not even a night’s sleep!

Steve Alker
Unimax Solutions
 
Posted by: michael Author Response
7/7/2006 9:38 PM (CST)
Charles,
I am in the US and yes, I am well aware of the tax laws concerning barter agreements. Probably should have pointed that out in the beginning.

Steve,
You're almost making the same 2 points I make myself in that an effective marketing program pays looong dividends. Where as a simple business service may not...as in a lawyer reviewing a corporate lease for example.

I'm wondering if the discussion should center on HOW to determine the value in a barter agreement.....maybe another question with more points based on what decision I make.

Michael
 
Posted by: darcy.moen Member Response
7/8/2006 1:13 AM (CST)
Barter can be a great tool for leverage, for you, for the supplier, and for a third party that needs what you have, or can deliver.

Lets say you can barter your ad writing services to a radio station that pays you in air time. You get 30 hours of airtime (mixed coverage)...but you have no need for airtime. Why not trade it to a car dealer that pays big bucks for the radio time, and gives you the use of a new car for six months in trade. Everyone wins! You needed work, the radio station needed copywriting, and the car dealer needed the airtime.

One of the best reasons for barter has already been raised...preserving your cash flow. Lets say you needed a new car, but didn't have the funds, or didn't want to borrow the money...using the same scenario as above, the radio station needs copywriting. You may not need the cash, or the ask the radio station for payment in airtime instead of cash. Hear me out here. You may know that a car dealer client needs more airtime, and is willing to place a premium on you delivering great copy with increased coverage with your bartered airtime. You could trade the airtime you have, for more cash, or for the use of a car for a set period of time. You preserve your cash for other needs, get a gig, and please all customers.

Of course, you could always sell what is bartered, raising cash.

You know the tax implications, but, I'd also bet you know how to horse trade well enough that you could leverage these transactions in your favor, and make a profit. There is a dude out there living the barter dream, and documenting it. Check out http://oneredpaperclip.blogspot.com/ He has bartered one red paper clip to just just short of his goal....a house. A house for a paperclip? Is it possible? Find out on July 12th on his website!

When is it a good time to barter? When you need to, when you want to, and when its good for you and the other parties involved. You are a bright guy, you KNOW when to barter...trust your instincts!

Darcy Moen
Customer Loyalty Network
 
Posted by: stevea Member Response
7/8/2006 2:48 AM (CST)
Dear Michael

How to determine the value of the barter ---? Well as a free market economist and member of the Adam Smith Institute, I’ve got to say that if you commoditise it, you can leave it to the markets!

Darcy’s comments on multi-way bartering reminded me of some recent articles about barter exchanges which have leveraged the connectivity of the internet to provide a marketplace, if not a market for people to barter goods and services. The first ones are now raising their heads in the UK and Exeter University, one of our newer Concrete Campus’s has published quite a comprehensive guide to the mechanics of barter under the aegis of someone from their economics department – try:

http://www.exeter.ac.uk/~RDavies/arian/barter.html

Sites such as www.texasbarter.com have been around for a while and the International reciprocal Trade Association appears to be based in Florida. See:

http://www.irta.com/Page.asp?Script=1

As an interesting historical footnote, in the UK there has also been in existence the ancient system of trading by “Tally” or “Tally Stick” often a runic device, which used to be confined to rural communities where access to banking or hard cash was historically difficult. This had continued as part of the underground or black economy until the mid 1980’s when the Revenue decided to legitimise it. In effect, they acknowledged that it cost more to police and enforce the system than they could ever retrieve and as a consequence, a number of communities operate village wide and inter village networks which operate at very marginal levels of taxation. The benefits to the individuals concerned are pragmatic and they are not confined to an un-moneyed artisan class, with solicitors, dentists and no doubt marketing practitioners all taking part!

One last point prompted by Darcy. When negotiating on price, it is almost inevitably in the seller’s interest to concede additions to the package – extended service, additional features etc rather than to concede a discount. I’m sure that you are aware of the many reasons for this.

Could barter become part of the negotiation mix? If you reach a sticking point over the cash terms for a product or service, you could always start to explore the marginal difference which prevents a successful deal in terms of a bartering of services? I wouldn’t like to force myself into this, but I can see situations where it could work.

I can’t get a client to agree to the price for a CRM project and I don’t intend to drop my price, so at the moment I might offer an additional half day of training, knowing that the value to the client is felt to be £400, but the incremental cost to me is low, plus my effort – I couldn’t do much with the rest of that day in any case.

What if I suggested that he gave me the use of his client base by way of an email to all his contacts, telling them that we’d just done a sales forecasting system and recommending us by way of a referral?

Cost to him, nil+ a bit of effort. Value to me, I don’t know, but it’s worth the risk. What’s the value to him? Some nominal reduction in the cash cost of the CRM system in return for him letting me use his client base and endorsing its use.

Now you’ve got me thinking!


Steve Alker
Unimax Solutions
 
Posted by: narthur Accepted Answer
7/9/2006 10:48 AM (CST)
(An aside: I love how KHE exchanges stir up lots of smart debate. I wish I had more time to participate.)

Darcy's point raises the question of what business are you in? It would be easy to be in the 'barter networking' business trying to engineer multiple relationships by yourself.

I am also not surprised at Stevea's mention of Internet barter groups development...seems like a natural progression of the concept. But back in the day, I found that a non-internet barter group was more hassle than value, even with someone else running the group.

The message here? Be careful that the barter process (especially complicated with service relationships and many of you have mentioned) doesn't consume your valuable and limited business growth time.

Neil
 
Posted by: stevea Member Response
7/9/2006 3:40 PM (CST)
Taking a percentage commission as a “Barter Broker” would take some imagination, unless you are to re-join the cash economy.

What do you do with 10% of a television and 10% of a bicycle?

Ahh! A bartered spare parts business!

Regards


Steve Alker
Unimax Solutions
 
Posted by: DR Hitch* Accepted Answer
7/10/2006 10:44 AM (CST)
Michael,

Your own comment ".....let me add another angle to this. Let's suppose I need a lawyer's services (I don't) and he will do $1000 in service for me. In exchange, I do his marketing for him and he gains 10 clients from my program. What's the value of 10 new legal clients?"

That would be a POOR example of bartering. You are providing him with an up-front fixed "value" of marketing services but you're leaving money on the table in terms of his potential future revenue. On the other hand, you get a one-shot-deal of legal services. Sure, both of you can stipuate a per-hour or fixed rate, but it's more than a noe-time transaction tat bothers me.

lastly, you can set a business strategy that "no more than X% of my imputed cash floow will go through bartered services".....
 
Posted by: michael Author Response
7/10/2006 10:58 AM (CST)
Douglas, Excellent point. In the case of a lawyer, I would have to be more in exchange for a retainer than for a specific project.

Steve, I get regular calls from a group called National Trade Assn or something like that. Don't want to go there as I don't need business THAT badly.

Neil, you're correct. I'm in the marketing business but I have a background that would allow me to do many things including taxes for SOHOs (sorry charles) but just because I CAN doesn't mean I should. In the same way, I do work for a few MLM people (who are doing very well, thank you) but I would never become an MLMer even if I could use my own techniques.

From that standpoint, I'm sure I could set up my own barter network, but I'd rather help another barter network get more customers. See where my love is?

Michael
 
Posted by: telemoxie Accepted Answer
7/11/2006 6:12 AM (CST)
Michael: To me, cash is king. I would consider a barter arrangement if it could get me experience in an attractive new market, if it would help me develop new marketing tools or techniques, which could build my credentials and lead to more profitable clients in the future.
 
Posted by: Jo Masterson Member Response
7/11/2006 6:38 PM (CST)
I really like the business to business barter company ITEX. (they have been in business 20+ years) This professional barter group helps manage the barter process, allowing you to find things you need/want. www.itex.com

I have been a member for years and use it for professional services, marketing, and personal trips...

There are about 30,000 businesses and it is in the US and Canada. Like all barter, it takes some effort, but the results have been worth it to me.

Good Luck,
Jo
 
Posted by: cread Member Response
7/12/2006 4:58 PM (CST)
Michael:

Please feel free to do taxes for SOHO, many want to barter.

I am on this forum to learn more about marketing for my Payroll Companies and how to attract marketing professionals to help me succeed.

I do chime in when I see obvious tax/accounting misinformation, almost as a public service. I am a CPA with over 30 years in the field. I am not sure they are all well received.

I read and follow dozens or threads without ever making a comment, I guess I am mainly a lurker.

Charles
 
Posted by: michael Author Response
7/12/2006 7:16 PM (CST)
Charles,

Only joking.

Michael
 


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