Credit: ThinkstockIt’s a familiar practice at boarding farms, show stables and lesson barns across the country: A client on a tight budget offers to swap some manner of labor in exchange for board or riding lessons. The offered labor can be anything the stable owner needs—mucking stalls, grooming, braiding at shows, transporting a horse and so on. Swapping goods or services, generally without any money changing hands, is called “barter.” It’s a major contributor to the horse industry’s shadow economy and at first glance appears to be a straightforward win/ win situation for both parties. The stable owner has access to additional labor, the client receives board or lessons, the cashless exchange frees up money that can used for other expenses, and everyone is happy.
What could possibly go wrong?
A lot, actually, according to attorney Kathleen A. Reagan. Potential concerns for stable owners include inaccurate reporting of gross income to the Internal Revenue Service (IRS), a conflict between the barter arrangement and state wage laws, the possible need for worker’s compensation insurance coverage and unexpected landlord-tenant issues.
An active equestrienne whose practice includes equine law, family law, criminal defense and business litigation, Reagan is a member of the faculty at Concord Law School, where she developed an online course in equine law. Earlier this year she took a break from shoveling blizzard-level snow outside her office in Quincy, Massachusetts, to discuss barter and the tangle of often-complicated legal issues associated with a seemingly simple business transaction.
“Barter never is a good idea,” Reagan said. Barter persists despite the potential problems, she explained, in part because the informality of the practice—usually a handshake deal involving no cash and little paper trail—is a good fit with the informality of the horse industry in general. “Barter is ‘self-reinforcing’ because the perceived benefits are so clearly understood by both parties,” she added. “Both sides understand the value of the barter transactions, which can go on for years.”
Unfortunately, the informality that makes barter so popular also can be the source of serious legal complications for a stable owner. “The legal world is not so understanding about the unique nature of barter transactions in the horse industry,” Reagan said. When the informality of a barter transaction clashes with the legal system, the potential risks for a stable owner far outweigh the benefits of the deal.
The Taxman’s Share
There is a tendency for both parties in a barter transaction—a stable owner and a boarding client, for example—to assume that a swap of services with no exchange of money flies safely under the radar. It’s an understandable symptom of the “out of sight, out of mind” syndrome. The assumption probably is true in the beginning, and it might stay true for a period of time, but the IRS has a knack for eventually tracking down business transactions that are subject to federal income tax.
According to IRS guidelines available at www.irs.gov, the parties participating in a barter arrangement “must include in gross income in the year of receipt the fair market value of goods or services received from bartering.” This is legalese for the idea that boarding income can be either cash (whether folding money, a check or credit/debit card) or the value of the boarding services provided in a barter transaction. The barter income generally must be reported on either Form 1040, Schedule C (Profit or Loss from Business) or Form 1040, Schedule C-EZ (Net Profit from Business).
The fact that no cash changed hands in the transaction is irrelevant to the IRS reporting requirement. Consider a stable owner who offers full board to his clients for $600/month. A client who is strapped for cash offers to “work off ” the $600 monthly board bill by cleaning stalls, turning horses out and feeding every day in addition to caring for her own horse. Although no cash changes hands in this classic barter deal, the stable owner still must report to the IRS the fair market value of the service traded—in this case, the monthly board. The client also has reportable income from the transaction, which is the fair market value of her labor.
Failure to report income from all sources can result in substantial penalties. In this context, it’s useful to remember that mobster Al Capone went to prison not for murder or racketeering or a host of other crimes, but for tax evasion.
Whether the barter transaction actually generates additional tax liability for the stable owner might depend on whether the income can be offset by deductible business expenses. The math is beyond the scope of this article, and stable owners should consult with their accountants and attorneys before deciding to barter.
Reagan warned that the situation becomes even more problematic for a stable owner when the barter arrangement includes free or discounted living quarters. It should come as no surprise that the IRS has anticipated a swap like this one. A stable owner becomes a landlord in a barter transaction that includes exchanging rent-free use of an apartment on the farm for labor or other services.
The barter swap generates rental income for the stable owner, which is the fair market value of the services provided by the boarder in exchange for the living quarters; this rental income must be reported to the IRS on Form 1040, Schedule E. (IRS Publication 525, Taxable and Nontaxable Income, provides useful guidance, but is not a substitute for professional advice. The publication is available at www.irs.gov.)
Few business relationships last forever. Removing a troublesome boarder and his horse from the facility might be as simple as notice from the stable owner to vacate the premises. If a barter exchange for rent-free housing is involved, on the other hand, the legal status of the parties has changed from stable owner to landlord, and from boarder to tenant.
“State eviction laws have serious tenant protection provisions,” Reagan said, “and stable owners or managers often fail to follow the statutorily mandated eviction process.”
Eviction processes vary from state to state, but they have one very important thing in common: A landlord wishing to evict a tenant, either with or without cause, must follow the required legal framework to the letter. Missteps for stable owners, who might not even realize that they are landlords in the eyes of the law, include using faulty language in the eviction documents or failing to provide adequate notice to the tenant. These common errors can delay the eviction process by weeks or months, resulting in an untenable situation for everyone.
Finally, the stable owner/landlord might be responsible for proper care of an evicted tenant’s personal property, at least for awhile. “It is very difficult to sort out the legal complications of a barter exchange that includes a live-in deal,” Reagan warned.
When Accidents Happen
It is an unfortunate fact of life that working with horses can be dangerous. No matter how much care is exercised, no matter how many warnings are posted, accidents happen. Injury to a boarder might raise questions about fault on the part of the stable owner or her employees, the application of a state’s equine liability laws and the stable owner’s commercial liability insurance coverage. The situation changes when the stable owner and the boarder are parties to a barter exchange.
“It’s not the barter agreement that causes problems,” Reagan said.
“The problems arise when something goes wrong that the parties to the barter agreement did not anticipate or prepare for in advance.” The problems that arise when a bartering boarder is injured are related to the legal status of the boarder: Is he or she a client simply boarding a horse at the stable, which might bring the stable owner’s commercial liability insurance into play, or is he or she the stable owner’s employee, whose “wages” equal the fair market value of the board bill that he or she is working off through the barter agreement?
If the barter exchange has affected the legal status of the boarder, and there are strong legal arguments that he or she is an employee under the circumstances of such an agreement, the stable owner might be required to provide worker’s compensation insurance.
The other legal obligations inherent in a typical employer-employee relationship also might apply. These include tax withholding at the federal, state and local levels; payment of various employment taxes; providing a W-2 Form; establishing eligibility to work in the United States with an I-9 Form; and compliance with wage and anti-discrimination laws.
What It All Means
While the potential benefits of a barter transaction might seem obvious to the parties, the informality of the arrangement can lead to misunderstandings and serious legal problems.
Stable owners or managers considering a cashless exchange of services with any client should:
• consult an attorney and accountant for advice about the pros and cons of barter before entering into the exchange agreement;
• move beyond the typical “handshake deal” and reduce the details of the barter agreement to writing;
• maintain a complete paper trail throughout the life of the agreement;
• remember that a seemingly simple barter agreement might transform an otherwise reasonable client into a disgruntled employee, an angry tenant or both.
Disclaimer: This article contains general information not intended as legal advice. Readers should consult with an attorney familiar with the laws in their states regarding specific legal questions.
