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Barter — the trade of goods and services without the exchange of money — is the oldest form of commerce. It can be a powerful marketing and financial tool for small law firms that are trying to establish and grow a client base and manage their cash flow more effectively. In a direct barter trade, an attorney or law firm provides an agreed-upon amount of legal work to, say, a cleaning service in exchange for getting the firm’s offices cleaned regularly. Both parties get a needed service without having to pay in cash. While this sounds good in practice, Philip Goldberg, an attorney with the Goldberg Group in Northfield, Ill., cautions that “a lot of times, the person does not have what I want” or vice versa. That’s why Goldberg joined the National Trade Association, a barter exchange in Niles, Ill. When using a barter exchange, it doesn’t matter if the two parties’ needs match. For example, an attorney can earn barter credits by doing legal work for one exchange member and can then spend those credits on the services offered by any other exchange member. For example, if an attorney charges $100 per hour and does five hours of work for an exchange member, that attorney earns $500 worth of barter credits. Some exchanges refer to these as “barter dollars” to reflect the fact that they are equal to cash dollars in value on the exchange. This way, the attorney could do work for a restaurant in order to earn enough credits to pay for an office paint job, the printing of new stationery, or a new desk chair offered by other members of the exchange. For a monthly or annual fee, the barter exchange maintains records of all transactions and members’ credit levels. Some exchanges also impose a fee when a member spends barter credits. This fee is usually a percentage of the transaction amount and must be paid in cash. BETTER MARKETING AND CASH FLOW Louis Martocchio started his two-attorney firm, Martocchio & Oliveira in Southington, Conn., three years ago. One of the first things he did was join two barter exchanges, including Barter Business Unlimited, in order to jump start the new firm’s visibility. In fact, Martocchio views the barter credits he receives as secondary to the marketing potential of his barter connections. “As a small firm, we needed opportunities to find clients we ordinarily would not get,” says Martocchio. Martocchio estimates that he meets with 20 potential barter clients over the course of a year, even though he does not take on all of their cases. However, once he takes on a barter client, the relationship always expands beyond the initial barter transaction. “The return rate on these clients is 100 percent because they either come back as cash clients or refer other cash clients to the firm,” he says. Martocchio is by no means alone. The National Association of Trade Exchanges (NATE) estimates that the approximately 500 retail barter exchanges in North America handle more than $2 billion worth of transactions annually. In a given year, NATE estimates that the average annual trade volume of individual exchanges ranges from $3.5 million to $4.5 million. To find an exchange in your area check with NATE or the International Reciprocal Trade Association. In addition to marketing benefits, barter can also help a firm manage its cash flow because a firm can use barter credits for expenses rather than cash. Goldberg primarily uses his barter credits to buy advertising and to entertain and buy gifts for clients. “If a client gives you a lot of work, you want to say thank you in a meaningful and valuable way without taking a hit,” says Goldberg. Danielle Redmond, a partner with Redmond & Redmond, a three-attorney firm based in Kalamazoo, Mich., often uses the barter credits she earns through Midwest Business Exchange as an employee benefit. During the year-end holidays, she gives barter credits to individual employees as a gift. FIND THE RIGHT EXCHANGE Like any other business relationship, barter requires firms to do some homework. When doing business with a barter exchange, it’s important to look at the types of businesses involved and the level of activity in the exchange. There is no sense in joining an exchange with few potential clients or little barter activity going on. Most exchanges charge members a nominal monthly fee, so it often makes sense to join more than one exchange. For example, David Kerstein, a Chicago-based sole practitioner, belongs to three barter exchanges — Illinois Trade Association, Continental Trade Exchange, and Art of Barter and pays monthly fees of $10 to $20 to each one. He estimates that barter makes up 10 percent to 20 percent of his annual workload and that another 10 percent of his clients come from barter client referrals. He chose those three exchanges to join because their member lists looked promising as a way to gain exposure to new groups of people and businesses. “Sometimes barter attracts businesses that are not the best at what they do,” says Kerstein. “You need to look at someone’s credentials before using them.” Martocchio and Redmond report that some exchange members quote a higher price for customers who are paying with barter credits rather than cash. To avoid this, “I usually don’t tell them I am using barter credits until after they tell me the price,” says Redmond. TAXING ISSUES Even though no money is exchanged in barter transactions, there are still tax implications. “In barter transactions, each party must include the fair market value of the property or services received in income,” says Justine DeVito Tenney, CPA, a partner with the Weiser accounting firm in Lake Success, N.Y. This is the case even if the barter occurs on an informal basis — for example, if a law firm provides 10 hours of legal services worth $2,000 to a stationery store in exchange for $2,000 of office supplies. Even though there would be no taxable income from this transaction (the $2,000 income from the legal services would be offset by the $2,000 expense for the stationery), the firm is still responsible for reporting the income and expense for tax purposes. If a firm barters through a barter exchange, it must report the value of the barter credits as income when it receives those credits, and it can take a deduction when the firm spends those credits. Barter exchanges maintain records with the dollar value of credits and send out appropriate tax forms at year end. If a partner in the firm spends barter credits for personal use, “the firm would still have to record the barter credits as income and the partner would be charged with a draw for the amount of the credits as if he had taken cash out of the firm,” says Tenney. “The barter exchange account is an asset, similar to a bank account, except that legal tender is not involved.” Barter exchanges report members’ transactions to the IRS on Form 1099-B, so it will be clear how much income the firm should recognize. “Not reporting the income is an invitation to the IRS to inquire into your books, since there is a process of automatically matching these forms with income reported,” warns Tenney. In general, barter credits are equal to the monetary value of the work done for a barter client. If a firm does $100 of work, it will earn $100 of barter credits. Finally, if a firm barters for a capital asset, such as a computer, rather than an expendable item, the firm would record the income from the transaction but would not be able to expense the asset. Instead, the asset would have to be depreciated over its useful life. “In this case, the firm would wind up with taxable income in the year it provided the services and received the asset and would be out-of-pocket for the net tax cost,” says Tenney. Joanne Sammer is a New Jersey-based freelance business and financial writer. Contact her at [email protected].

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