Before joining an exchange, check out the other members, adds Conforti, who also heads up finance for Beneva. "Make sure you would do business with them whether it was on (barter) trade or not." The businesses also should treat cash and barter customers the same. That means no boosting prices just for barter customers. In fact, most exchanges prohibit this, Zimmelman says.
When It Makes Sense
Barter is a viable strategy for CFOs to consider when their companies have excess capacity, and it is particularly useful for businesses that have "vanishing assets," says Ron Unger, director with the International Barter Exchange in Sarasota, Fla. Examples include hotels with vacant rooms and restaurants with empty seats; if the rooms or seats aren't filled, the opportunity to earn money from them evaporates forever. In contrast, many manufactured products can be stored in inventory and sold at a later date.
What's more, accommodating barter customers typically increases only a business' variable costs. For example, a restaurant's food costs will, of course, increase when it serves a barter client. However, its staffing, utility and other costs probably won't be affected. "I can add this (barter) business without having any tremendous incremental cost," LaBaw says.
While almost any business can use barter at some point, it tends to be less advantageous for businesses with tight margins. They often find it harder to cover the exchange's fee.
In addition, most businesses will want to keep their barter transactions to about 5% or 10% of their revenue stream. Sound Telecom limits its barter volume to about 3% of sales, Morgan Diamond says. "Barter is an excellent vehicle," she says. "But, you can take a greenback and spend it anywhere."
Keeping the Books
When it comes to recordkeeping, a barter account is similar to any checking account, Diamond says. "The deposits roll in, and the barter drafts clear." Income from barter transaction should be included in your overall income numbers. Business purchases made with barter dollars can be deducted.
One note: Barter sales can't be deferred from one year to the next, even if the product or service hasn't been delivered. "You must include in your income the value of the (barter) credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year," according to IRS Publication 525. The IRS web page, "Bartering Income," offers additional instructions on recording barter income.
Annually, barter exchanges are required to send IRS Form 1099-B to both their members and the IRS. This form, Proceeds from Broker and Barter Exchange Transactions, lists the value of the item(s) traded. "The valuation of the item (traded) has to be done in a reasonable way," says Abe Schneier, senior technical manager on the tax staff of the American Institute of CPAs. Typically, that means using fair market value, he adds.
For businesses with excess capacity, barter can be a viable complement to their cash business. "It allows us to conserve cash, but to buy things we need anyway," LaBaw says.
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