Tonight I went with to the Mile High Business Alliance event at the Tattered Cover on how to stimulate the local economy. One idea that was mentioned was bartering goods and services. While this sounds like a great idea, and in some instances is, there are drawbacks. I am going to highlight two of them in this post. The first is the tax ramifications of bartering. The second is the legal problems with bartering.
Tax wise, companies that barter many times fail to take into account that they must claim any services that they receive on their taxes as income. For instance, if I barter legal services for landscaping, I must report the fair-market value of the landscaping as income and the landscaper must report the fair-market value of my legal services as income. If you barter for services that you don’t really need, and wouldn’t have if you had known they were treated as taxable income, barters can have a surprise when taxes come around.
Legally, companies protect themselves with contacts. If two companies barter their services, either they spend time, and money, on writing a contract to protect themselves, or they open themselves up to lawsuits if a disagreement arises. In a typical situation, the customer knows what they are receiving and how much it costs. I know that buying a cup of coffee is $2.50. People buying my services learn upfront what it costs. However, if I barter my services, I may think that I am going to form a company for someone in return for them landscaping my yard. However, in their mind, the landscaping may entail pruning the bushes and planting some flowers as they value my services at $100. I may think that they are going to do the above plus put in a sprinkler system, a pond, and two new trees. If we don’t have an agreement in written, we can have a problem when I do the legal services for company X and then they don’t do what I thought they were going to do. If we had a contact to begin with it would have helped alleviate this problem, but to write up the contract will take time that may make the deal more expensive than just paying cash to begin with.
I’d love to know your thoughts on returning to a barter system or if you have used it how it has worked for you.