The COVID-19 pandemic has created financial situations that neither dentists nor their patients could have envisioned six months ago. Unexpected unemployment, especially for those without dental insurance, has caused dental care to be sidelined. Dental offices that have been closed for months are now faced with the additional expense of increased infection control procedures. Offices want patients to return and patients need care, but they are not sure how they can pay. Bartering is an unconventional solution for both dentist and patient.
To state the obvious, for a practice to remain viable, income must exceed expenditures. Most income for a practice is in the form of cash payments or insurance reimbursement. Payment for services via dental insurance or cash is not an option for some patients. Bartering may be a way for these individuals to obtain needed dental services, and it can also be beneficial for providers.
Bartering means patients and dental care providers exchange goods and services without using money. Before the invention of money, bartering was the original form of trade. Today there are two main types of bartering: direct and indirect. In a direct barter, the goods or services are being exchanged “directly” between parties. Direct bartering is usually done individual to individual or through sites like Craigslist. Since money is not used, a predetermined value is established for the good or service prior to the exchange. For example, a plumber who is a small-business owner may be able to exchange plumbing services for needed dental care. Both the plumber and the dentist receive needed services from the barter.
A barter exchange is an indirect bartering entity. It acts as a third party that directs and oversees barter transactions. Some exchanges conduct business in a brick-and-mortar location, while others operate strictly over the internet. Certain barter exchanges require memberships while others do not. Barter exchanges allow members to trade goods and services with other exchange members for something known as “trade dollars” rather than cash. Although trade dollars are not considered legal tender, the value of a trade dollar is equivalent to one dollar of US currency. These trade dollars are credited to the member’s account and can then be spent on goods or services from within the barter exchange association.
Related: Bartering As A Small Business
When a transaction occurs, trade dollars are debited from the account of the member buying a product or service and credited to the account of the selling member. The barter exchange entity follows the barter transactions and monitors each member’s account. As far as taxes are concerned, trade dollars are equivalent to real dollars. That means the Internal Revenue Service (IRS) considers bartering taxable. On the plus side, items that are considered a necessary outlay for the business can be claimed as a business expense.
The International Reciprocal Trade Association (IRTA) promotes standards for bartering. The IRTA estimates there are about 400 barter exchanges worldwide. More than 400,000 businesses are involved in organized barter. Bartering is an estimated $8.5 billion-per-year industry that is expected to triple during the next decade. According to ITEX Corporation, the largest network of barter exchanges in North America, there are at least 3,000 dental professionals who barter with patients.
In Basic Training III: For Dental Administrative Personnel, the American Dental Association (ADA) supports bartering as an alternate form of payment for dentists. Before entering into a barter, the ADA recommends dentists check with their local statewide trade association or the National Association of Trade Exchanges (NATE) at natebarter.com.
Taxes and bartering income
In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA), initiated by the IRTA, was established. A barter exchange is obligated to report transactions to the IRS. The law requires barter exchanges to submit Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, to the IRS for the annual barter sales made by their customers. It must also distribute a copy to its members.4
There are no inherent tax advantages or disadvantages to bartering. The US government views barter as an acceptable business practice, and trade dollars or credits are treated the same as cash. According to the IRS, when a barter exchange involves something an individual would normally get cash, for it is regarded as taxable income. Both parties associated with the barter must report the fair market price as income in the year it was received. How bartering is reported to the IRS varies depending on which form of bartering takes place. Barterers may owe income taxes, self-employment taxes, employment taxes, or excise taxes on their bartering income.
Additional information can be found in Publication 525, Taxable and Nontaxable Income, under Miscellaneous Income, Bartering. In general, bartering income is reported on Form 1040 Schedule C, Profit or Loss from Business, or Form 1040 Schedule C-EZ, Net Profit from Business. Either party may be able to deduct certain costs incurred in the transaction.
Dental care providers may also be required to make estimated tax payments if they barter. The IRS recommends referring to Topic No. 306 Penalty for Underpayment of Estimated Tax and Form 1040-ES, Estimated Tax for Individuals, for more information. Refer to irs.gov/taxtopics/tc420 for additional material on taxes and bartering.
Benefits of bartering
One of the primary benefits of bartering is to increase the patient base of a dental practice, thereby increasing the amount of preventive and restorative work that can be provided. Not only does it increase patient volume, but it also increases awareness about the practice. The dental office has exposure through the bartering network, as well as satisfied patients who will refer friends and family. Those referrals may or may not be part of the bartering network. They may be able to pay for dental services with cash, or they may have dental insurance. Bartering also provides a competitive edge over practices that only accept fee-for-service clients.
Another reason to barter is to conserve cash. For example, if an office has reached the maximum amount of cash expenditures on the monthly or yearly budget, services or goods can be bartered. Also, if the practice wants to retain a certain amount of cash in reserve, bartering would be a way to purchase goods or services while maintaining a cash reserve.
Certain barter exchanges allow members to borrow trade dollars to finance new projects. Some networks also allow the option to donate surplus trade dollars to charitable organizations, translating into a tax deduction. Trade dollars may also be used to provide employee benefits such as vacation days, health club memberships, restaurant vouchers, and others.
The dental profession is incorporating bartering to bring patients to the practice by exchanging goods and services rather than charging a fee. Bartering appeals to patients who need costly procedures but do not fit into the fee-for-service practice. Although most dental practices offer a traditional financial approach to payment for services rendered (cash or dental insurance), bartering for services is another option to consider. Bartering is a mechanism to increase revenue, preserve cash flow, and market the practice to new clients. Whether a patient is a general contractor, hair stylist, artist, or dog walker, a dental practice can barter goods or services for needed dental care. Whether the national economy is in an upturn or downturn, bartering can always be an option.