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Bartering and trading? Each transaction is taxable to both parties
Sometimes, when the right opportunity presents itself, you may be able to pay for goods and services that you need or want by trading goods that you own, or providing a service that you can perform in return. An example of this is if you own a lawn maintenance company and receive legal services from an attorney and pay for those services by providing an agreed upon amount of mowing and maintenance services at the attorney’s home or place of business. In this scenario, the fair market value of the legal services provided is taxable to you as the lawn maintenance company owner. At the same time, the fair market value of the lawn and maintenance services you provide is taxable to the attorney or his firm.
This type of transaction — bartering or trading — can prove to be useful when cash-flow problems would otherwise prevent you from securing needed goods or services. And, while there is no exchange of cash or credit, the fair market value of the goods or services that were exchanged is taxable to both parties and must be claimed as other income on an individual or business income tax return.
Remember, just like payments made with money, if a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are to be reported on Form 1099-MISC.
When considering record-keeping requirements, barter and trade transactions should be treated just like any other financial transaction or exchange. Original cost of goods being bartered or traded, transaction dates, fair market value at the time of the transaction, and other pertinent details should be recorded to assist in the preparation of your income tax return and, in general, held for a period of 3 years in accordance with other documents and receipts used to substantiate income and expenses.
Home-based businesses comprise one of the fastest growing business segments today. People love the idea of being able to be their own boss and work from the comfort of their own home. According to statistics from the U.S. Small Business Administration, 52 percent of all small businesses are considered home-based. There are approximately 14 million home-based business with a new home-based business being launched about every 11 seconds.
The popularity is understandable. No commute to work. No additional cost for office space rental. And the opportunity to be at home with family members.
But, the home-based business can have its disadvantages if not carefully managed. Here are some tips to get you started on the right foot.
1. Do you need a permit or license? Some municipalities and neighborhood associations prohibit home-based businesses. Others require special permits or licenses so make sure you take time to check with the proper authorities.
2. Does your home-owners insurance cover a home-based business? Many homeowners’ policies to not include home-based business coverage. You may need to purchase a rider to protect your business assets.
3. Determine your legal structure. Many home-based businesses are sole proprietorships which require no formal legal documentation. However, depending on the type of business you are in, you may want to consider other possibilities such as an Limited Liability Company (LLC), or a Sub-S status corporation.
4. Establish professional business practices. Set up a bookkeeping system to keep track of business expenses and income. Also, you need a separate business checking account and credit card. Do not mingle personal and business expenses. The IRS tends to audit home-based businesses more frequently, especially if you’re taking the home-office deduction. So keep excellent records of all business activities and transactions.
5. Consider security. It’s a good idea to rent a post office box to use as your business mailing address.
6. Set-up a business-like work environment. You should have a dedicated space for your home-based business work area. Your computer should be used primarily for business only. Using your office equipment and space for children’s games, homework and other personal uses should be minimized. Also, your office area should be void of barking dogs, screaming children and other loud noises if you interact with clients or customers on a regular basis.
7. Set work parameters. Simply because you work at home doesn’t mean you aren’t working. Make it clear to family and friends that you have “work hours” just like everyone else and ask them to respect that.
8. Commit to your success. There are many distractions when you work at home. Make a commitment to yourself that you are serious about your business. Be disciplined about your work effort.
Do you operate a home-based business? What advice can you share to help others succeed?
Tip from THE Small Business Expert
Why are you in business? To make money, right? Yes there may be other reasons, but at the end of the day if you aren’t making money, you’re out of business. But there is more to building a successful business than just generating sales. As a successful business owner you need to understand how to manage your financials. Many entrepreneurs find themselves in difficult financial situations because they don’t understand how to master their money. Here are four keys to help you manage your finances so you can build your small business success.
1. Watch Your Cash Flow. Your business should be generating a number of key financial statements monthly — the profit and loss statement, the balance sheet, the accounts receivable summary, the accounts payable summary and the cash flow statement. Many entrepreneurs find the cash flow statement to be the most meaningful. Why? Well think about it. This statement tracks the movement of monies through your company over a specific period. Knowing how much cash you actually have is important because you could be showing a profit on your P&L statement, and not have enough cash to pay your employees or your monthly bills.
2. Don’t put all your eggs in one basket. You’ve landed a big client who is giving you tons of business. Before you know it, this one customer is consuming most of your bandwidth. Then, unexpectedly, that customer decides to take their business to one of your competitors or worse — goes out of business. Now what? Most likely, you’ll go out of business too. I’ve seen it happen numerous times, including to me in one of my earlier businesses. You can’t put all your eggs in one basket. My recommendation is to never let any customer be more than 30 or 35 percent of your business portfolio.
3. Don’t be the bank. Most businesses today must extend some form of credit to customers. But what happens when that customer doesn’t pay. It’s tough to maintain a relationship with your customer and play collection agency too. Therefore, it’s important to establish clear credit policies in advance. Make sure your customer understands the terms of your agreement and put it in writing. Try to get some money upfront if you can. Then don’t allow a customer to get too far behind in payment. Don’t be shy about reminding them. Keep the communication channel open. And don’t be afraid to stop work if the amount owed to your business builds up.
4. Don’t Undersell Yourself. An understandable and common mistake many small businesses make is underselling their product or service. Everyone wants to get the business so you lower your prices to make your offering attractive. But that’s the wrong approach. People will pay for what they value. And if you’re competing on price, you are nothing more than a commodity. Your brand will suffer and so will your cash flow. Make sure you articulate a strong value proposition and then ask for what you’re worth. One of my clients increased her prices by 50 percent and her business soared. You can do it too.
Tip from THE Small Business Expert
Every day, it seems another security breach makes headline news. Companies such as Apple, Twitter, Facebook, The New York Times — even federal government agencies have fallen victim to cyber-crime this year. Just last week my business credit card company fraud department alerted me my account had been compromised in a cyber-attack.
While big companies make the news headlines, the real targets are small businesses just like yours. According to the 2013 Internet Security Threat Report from Symantec there was a 42 percent increase in targeted attacks in 2012, and 32 percent of all attacks were aimed at businesses with fewer than 250 employees. That’s a three-fold increase from 2011. Yet many small business owners don’t believe their business is big enough to attract the attention of a cyber-criminal. Quite the opposite, small businesses are easy pickins’.
Most businesses today are reliant on the Internet. Technology provides the power to reach global markets, efficiently run operations and manage finances from anywhere at anytime. Yet along with all those benefits there is also significant risk.
You don’t have to be a technology guru to take smart and simple steps to minimize the risk of a cyber-attack on your small business. Here are a few things you can do immediately to protect your small business.
1. Create Strong Passwords. My husband is a disaster when it comes to passwords. He has sticky notes all over his desk and when he can’t find what he needs his back- up plan is to call me. Typically, he uses some variation of the same elements for all his passwords, but he gets confused about what he used where. Yikes!
Don’t use the same password over and over, and don’t use one that is easy to guess. The longer your password the better, because it’s more difficult for a cyber-criminal to hack. The experts recommend a minimum of 12 characters if the site allows.
Make sure you store your passwords safely. Don’t use sticky notes like my husband. If you want to store them manually file them somewhere away from your computer. It’s best to write down a clue rather than the actual password as another protective measure. However, the most secure way to store your passwords is to download a password management program.
2. Log-Off. One of the simplest ways for a cyber-criminal to access your proprietary information is from your computer or mobile device when you forget to log off. Think about how many times you leave your computer or mobile device unattended while you’re still logged-on. A cyber-criminal can easily and quickly access account information, log-ins, even financial information. So before you leave your computer or devices unattended for more than a few minutes, take a few seconds to log-off to protect your information.
3. Update Systems. Cyber-attackers are really smart folks. I wish they’d put their intelligence to work for a good cause rather than criminal activities, but unfortunately that’s not going to happen. What you need to realize is that as soon as you have updated your anti-virus software, web browser and operating systems, the cyber-criminals are already devising new methods to steal your information. To protect your business, you need to make sure you’re regularly updating everything. This should be a priority, not something that falls to the bottom of your “to-do” list.
4. Back-up Regularly. Even when you do everything right, there is still a risk of becoming the victim of a cyber-attack. Make backup copies of all important business data such as financial information, word documents, electronic copies of legal documents, databases and customer account information. If possible set your systems to back-up automatically, and if not make it a process to do it at least once a week.
5. Limit Employee Access. Not everyone on your team needs access to the same information so limit your critical data access to those who truly need it to do their jobs. Require employees to have unique passwords that are changed at least every 90 days. And don’t allow any employee to install a software program without your permission.
The bottom line is — a determined hacker can most likely crack any system, but why make it easy for them. These simple steps can minimize your risk and help you maintain the integrity of your company’s critical information.
Tip from THE Small Business Expert