[Swizec]

Services in kind is a pretty common business practice. You see this a lot at the SMB level especially outside of the US.

Small businesses are cash strapped. So you find someone who needs your services and you need their services. Instead of exchanging cash, you exchange invoices and do the work. You build them, say, a $5000 website, they perform, say, $5000 of landscaping.

At big boy levels this is often structured as “strategic partnership”.

The part that makes it not fraud is that both parties do actually do the work.

[bryanlarsen]

> The part that makes it not fraud is that both parties do actually do the work.

It's far more nuanced than that.

If you do the work but undervalue it, it's likely tax fraud.

If you do the work but overvalue it, it's likely investor fraud.

Even if you fairly value the work it still might be investor fraud. The vendor may have been chosen not by merit, but by its willingness to accept an exchange of services. Saying you have $X in revenue implies you won that revenue by merit.

[scarby2]

This isn't a good take.

> If you do the work but undervalue it, it's likely tax fraud.

A company can value it's services as it chooses. If the work is performed for $1 or $5000 the government doesn't get a say in that.

> you do the work but overvalue it, it's likely investor fraud.

Quite possibly. Assuming this was done with the intention of misrepresenting your revenue and gaining investment.

>The vendor may have been chosen not by merit, but by its willingness to accept an exchange of services. Saying you have $X in revenue implies you won that revenue by merit.

Vendors are chosen all the time because of their willingness to accept specific payment terms and a whole bunch of non-merit pipelines via family, via golf course deals etc.

[elil17]

> A company can value it's services as it chooses. If the work is performed for $1 or $5000 the government doesn't get a say in that.

That's simply not true. You may get a certain amount of leeway, but it has to be reasonable.

[jjav]

> That's simply not true. You may get a certain amount of leeway, but it has to be reasonable.

Where have you seen this?

When I was doing consulting I could charge whatever rate I wanted. Usually around $200 but went up to $500 and down to $25 when doing a favor. Same type of work.

At the enterprise level this is even more common. Nothing has a fixed price and the same service can be sold at wildly different prices to different customers based on endless variables.

[bryanlarsen]

> I could charge whatever rate I wanted.

Sure, if you're charging cash. If you charge $25 and that's all you get, it's worth $25 by definition; being bad at business is allowed.

But if you're charging $25 and you're getting $25 and a favor, that work you're doing is actually worth more than $25 and the IRS expects you to declare the value of that favor as income. If you normally charge $500 but sometimes you charge $25 the IRS might look deeper to see what else you're getting in compensation.

You're highly likely to get away without declaring that favor, and there are certainly legal ways to avoid it too -- gifts, training/education, et cetera, but at it's base level it's income.

[andix]

No, it doesn't have to be "reasonable". Its only illegal if it is used to cover up some other illegal thing.

For example giving huge discounts below cost only to family members, which is more or less like paying them money without paying taxes for it.

[Flundstrom2]

It might be legal in YOUR jurisdiction, but at least in the jurisdiction I'm in, it is not - AFAIK - legal to neither underwrite or overwrite costs on the sole purpose of avoiding tax or grooming the pig.

[andix]

> on the sole purpose of avoiding tax or grooming the pig

Exactly. But it doesn't have to be used in this way.

[thih9]

Note that we’re talking about two companies exchanging services.

When two companies undervalue the services that they offer to each other, they pay lower taxes. This is the illegal part.

[tstenner]

If the expense is tax deductable, it mostly doesn't matter whether you have $10 earnings vs $10 business expenses or $10K.

[cortesoft]

> A company can value it's services as it chooses. If the work is performed for $1 or $5000 the government doesn't get a say in that.

It isn’t that black and white. If you are being paid in cash, you can charge whatever you want, that is true. But if you are exchanging goods or services for other goods or services, the government is going to care how you value that transaction.

[stymaar]

> A company can value it's services as it chooses. If the work is performed for $1 or $5000 the government doesn't get a say in that.

Whether it you think it should or not depends on your personal preferences, but in practice the government does get a say in anything that it deems to be an undue way to reduce your taxes.

Barter would be much more common if it was a legal way of avoiding taxes.

[hattmall]

How would this reduce taxes? If I normally charge 20k for widget Z but only invoice company A 10k because they will see me widget B for 10k and we trade widgets, there is no taxable event. If company A was willing to pay the 20k instead obviously I would rather have that even if it creates 10k taxable income because profit.

Investor fraud is much more likely if neither company actually needs each other's widgets and it's just to pump revenue.

[cjbgkagh]

Tax law is guilty until proven innocent.

Investor fraud is usually brought as a civil case and takes a balance of evidence approach.

Since enforcement is stochastic and rare these practices are pretty common. The freedom to do ‘whatever’ is really dependent on the discretion of the government and investors. Most companies can and do fly under the radar but have to be careful not to piss off the wrong people.

[philipallstar]

Okay but then why are we singling this out as tax fraud, if the justification is just "anything can be"? Why not claim that posting on HN is tax fraud?

[cjbgkagh]

Barter counts as income by many tax jurisdictions, if you don’t declare the fair market value of the exchange you are in violation. Most people don’t declare this and it is rarely ever enforced.

[gamblor956]

Tax fraud is treated the same as other crimes and is subject to the same evidentiary threshold.

[cjbgkagh]

It depends on jurisdiction, the US is unusual, most countries they’ll reassess you and it’s on you to prove them wrong.

I did have to look it up, I didn’t know that the US was different in this way. I did have the California tax authority make a mistake and take money directly out of my account and there didn’t appear to be a way to fight it. It wasn’t enough to be worth hiring a lawyer over so I let it go but it didn’t give me much faith in the governance of California, very Kafkaesque.

[gamblor956]

I'm a tax lawyer...

CA FTB does not take money out of your account unless you have explicitly authorized it to do so and it definitely does not do so automatically. It only pulls specifically authorized amounts when specifically authorized to do so unless you have a garnishment order issued by a court. (I deal with the CA FTB on a daily basis.)

You're also wrong about most other countries as well, with the exception of France.

[Gathering6678]

Tax is a complex issue that differs from one jurisdiction to another, and I am in no way an expert in any of them, but I do believe most tax authorities would require fair value exchanges.

Which means, "If the work is performed for $1 or $5000 the government doesn't get a say in that." --- it absolutely does, in the way of requiring the person getting a "$1 service" to calculate their tax as if they got $5000.

[bloppe]

> If the work is performed for $1 or $5000 the government doesn't get a say in that

What if you're getting paid in landscaping?

[scarby2]

On a corporate level it doesn't really matter as you're only taxed on your profits/losses. If we do a service swap ultimately it's just adding a revenue item with a matching loss, and these are infact quantified.

As an individual interestingly it does matter because services received for free are considered taxable income (but businesses are not taxed on their income).

[danielmarkbruce]

You are just making stuff up, this isn't remotely close to how tax law works.

[gamblor956]

The first paragraph is generally correct. The second is not.

Business are taxed on their net income but many jurisdictions tax businesses on their gross revenue as well (look up GRT and GET).

[kube-system]

There are corporate taxes on revenue in some situations

[danielmarkbruce]

This is pure nonsense. In the US the internal revenue code doesn't allow you to just value services however you choose in what is effectively a barter arrangement.

[andix]

> If you do the work but undervalue it, it's likely tax fraud

Probably not, it's just giving a discount. Nothing wrong with that. Many companies sell goods or services below cost. To gain other benefits like market share, or new customers. Why not do it to get something else essential from another company?

> If you do the work but overvalue it, it's likely investor fraud

It probably depends on the situation. If it's mainly used to inflate sales figures and scam investors, then probably yes. If it's just a "good deal" then probably not.

[thih9]

> Probably not, it's just giving a discount. Nothing wrong with that.

Discounting and undervaluing have differences, one of them is transparency. As you say, many companies offer discounts and don’t hide that. People who commit tax fraud usually aren’t transparent about their “discounts”.

[andix]

Discounts are often not transparent. Have you ever seen a SaaS that lists "Enterprise pricing: contact us"?

It's basically saying they give you as much discount as you need to be able to afford the service. And those discounts are very secret by design.

[DANmode]

This is actually the most charitable interpretation of “Contact Us”.

If I want to sell my SaaS to small primary schools for 90% off, I should be able to do that.

Probably.

Let’s discuss.

[brandensilva]

If that is fraud then company evaluations are fraud too. Case in point SpaceX and it's smorgasbord of other companies rolled into it to save them.

Who protects the consumer when they have been gutted of any power?

[hapless]

SpaceX and Tesla’s not-so-arm’s-length transaction are like, textbook cases for fraud

It amazes me investors or the sec will put up with it

[cyberge99]

They didn’t. Musk had to pay a 1.5MM fine.

[c7b]

Re taxes: Barter exchanges are considered taxable revenue by the IRS and must be reported on a 1099-B form. [0]

[0] https://en.wikipedia.org/wiki/Barter

Re investors: please list at least one credible source supporting this assertion.

[bryanlarsen]

https://www.law.cornell.edu/wex/securities_act_of_1933

Any lie, misleading omission or misleading half-truth is investor fraud.

[DANmode]

> The vendor may have been chosen not by merit, but by its willingness to accept an exchange of services.

If a firm can’t afford services cash, that’s part of the merit of the choice.

This is not compelling.

[mannanj]

And who chooses how to value unique, innovative and visionary work?

[singleshot_]

Article 1 judges in US Tax Court?

[bryanlarsen]

And the judges are likely to be looking for good faith as much or more than technical accuracy in the valuation. So the IRS is not going to bring you in front of the tax judge unless they have evidence of bad faith.

OTOH, most work is not "unique, innovative and visionary" and has a relatively transparent fair market value.

[singleshot_]

Typically how it works is you pay the taxes assessed, then you sue in Tax Court.

[atomicnumber3]

This feels very adjacent to the story about the whole town in debt, and the rich guy leaves a $100 bill on the table, [and so on], in a way that I can't quite put my finger on.

[joenot443]

It's a cool little analogy, one I'd never heard of before

https://www.econlib.org/archives/2012/01/an_answer_to_a.html

> True, at the beginning each resident has a $100 liability. But each also has an offsetting financial asset of $100. At the end, they all have neither. So the $100 bill acts as a clearing mechanism

[throwaway667555]

You can't put your finger on it because money is merely an accumulator and medium of exchange of economic performance. The performance of services in exchange for other services without money is a perfectly valid economic exchange that can and should be booked to revenue of each of the parties, if actually performed.

Loans without any economic performance of services generate circular meaningless cash flows yeah, but that's not the case when services are actually performed.

Loans are promises to pay. Business deals are promises to perform services or deliver goods. The difference is easily lost in the details even for accountants and economists.

[copperx]

That's a bit jumbled. You can gain clarity one level up the abstraction layer. Money is a note that means a debt is owed.

[throwaway667555]

When comparing promises between businesses to pay versus promises between businesses to perform services, it is irrelevant that fiat currency is a federal reserve note rather than, say, bottle caps. Irrelevant.

[adharmad]

The man who saved Pumplesdrop By W. J. Turner

[hirsin]

Not quite. At least the one I found is some trickle down economics myth.

The one op is referencing is more like the dollar is used to pay off the waitstaff, who pay their rent to the landlord, who pay their over due taxes, so that the government can issue a refund to the cafe owner. The dollar ends up back in the hands of the cafe owner, who puts it back down on the table with all the debts paid off.

[Fordec]

Doesn't feel very far off from the money circularly trading hands between Nvidia, Oracle, OpenAI etc.

[jona-f]

Yeah, just a few hundred billion dollars, basically the same...

[osullip]

In Australia these kind of deals are treated like income.

https://www.ato.gov.au/businesses-and-organisations/gst-exci...

I am sure people avoid the tax element this way, but it's not a sustainable way to go.

Let's say I do a website for $5,000 (putting aside that this a dead industry, and my career for the past 20 years) and the landscaper comes to do the work at my house.

If he cuts a powerline, falls down a hole or chops off his hand, we have a big insurance problem. No paperwork, no contract.

I have had friends who did their side of the contra deal and never got the other part of the bargain fulfilled.

Things like 'I'll paint your house if you can help fix up this old car of mine.'

I have turned down these deals in the past. Same as someone asking me to work for free for 'exposure'.

I am not having a go at the comment above as I think the point is valid - small business doing this is fraud, big business do it and it's fine.

Just my advice to anyone thinking it might work for them. Send the invoice, do the work, get paid in money.

[RobotToaster]

I think the fact that it's treated as income is the point.

My company builds your company a website, and "charge" $1,000,000 for it.

Your company mows my company's lawn and "charge" $1,000,000 for it.

Both companies now have $1,000,000 in revenue from this transaction.

[danielmarkbruce]

lol, no, unless you are saying "revenue" as in "revenue under my made up accounting system".

Under ASC 606 you can't just allocate any old number you like. On top of this, no auditor would sign off on what you suggested. The IRS would be looking at you and get you on tax fraud, you'd likely be committing securities fraud, bank fraud, wire fraud and 26 other things I can't think of, assuming you are a business of any size at all.

[mattnewton]

But they also have 1,000,000 of expenses, at least some of which is probably deductible from income.

[osullip]

Yeah, I agree. If all transactions are reported and treated like a sale.

I just have personal experience where the person offering from one side often wants to avoid the tax. In Australia we have 10% GST/VAT. Pay someone and there is 30% payrol tax (even as a sole trader). Then 12% mandatory pension contribution.

So the $5000 website/landscaping turns into 3k cash in hand.

Enticing to avoid this if you can, but I am risk adverse - clients pay me off the back of this. It balances the risk appetite of a business owner who could cut corners, with me sayng not to. If they do, at least I made the risk clear.

But your point is valid and correct. There is nothing wrong with contra deals where it's booked properly.

[singleshot_]

> No paperwork, no contract.

Two adults, a legal subject, sufficiently specified, offer, acceptance, consideration, mutual assent… a contract.

[skeeter2020]

the last thing you should do in this scenario is book that as revenue. Of course I would never do this, but you could keep it off the books.

[ebiester]

It depends if your goal is to sell the company or evade taxes, of course.

[Aurornis]

The key realization is that it increases expenses at an equal rate as the revenue increase.

You get $5000 of revenue but spent $5000 on services.

You also have to pay taxes on that $5000 like other revenue.

So many small businesses will try to just exchange the services more directly in some way, or give steep discounts. (Tip: This doesn’t mean it’s entirely correct for tax/legal/accounting purposes, so don’t do big deals like this without consulting professionals. I’m just saying this is what’s done by some people)

> The part that makes it not fraud is that both parties do actually do the work.

The cheap criticisms of these deals always miss this part: something of value is traded for the dollars by both parties. Companies can’t simply circulate dollars between themselves.

[ahtihn]

> You also have to pay taxes on that $5000 like other revenue.

Businesses do not pay taxes on revenue, they pay taxes on profit.

Other taxes may be applicable though (such as VAT or sales taxes).

[lotsofpulp]

There are jurisdictions in the US where businesses owe tax on revenue.

https://en.wikipedia.org/wiki/Gross_receipts_tax

https://en.wikipedia.org/wiki/Business_and_occupation_tax

[bombcar]

If I spent $5k as a business to realize $5k in revenue the tax is zero (ignoring as you say sales VAT, etc)

The problem comes when the $5k you “traded” also didn’t cover the actual expense to provide the $5k you “earned” - now you have an actual loss even if cash didn’t flow.

[gizmo686]

I could imagine somewhere trying to make that the rule, but I have a hard time imagining that rule being enforceable.

At least for US federal taxes, losses do not need to be tied to revenue. As long as they occur in the same tax year, you can deduct. You can also carryover losses to future years, or pass them through to personal income deductions; but the rules there get more complicated.

[bombcar]

Yeah from a tax standpoint you're fine, but from a "whole business cash-flow" concept you could end up in the hole even though on paper you traded $5k for $5k (accountants might have it booked somewhere as "goodwill" or something to make the books balance).

[lelanthran]

> You also have to pay taxes on that $5000 like other revenue.

What taxes are owed on revenue? Tou pay taxes on profit only.

[glitchc]

Tax laws may vary by jurisdiction. Often the in-kind contributions appear on a different line item from income on the balance sheet and usually go into a different box on the tax form.

[TZubiri]

And the part that would make it fraud (in some contexts, especially publicly traded and international corp struturing for tax purposes) would be overvaluing the services.

[BobbyTables2]

Wouldn’t they still pay taxes on the trade?

Yeah, they’re getting useful things but they aren’t making money.

[emsign]

> The part that makes it not

> fraud is that both parties

> do actually do the work.

Do they though?

[kjkjadksj]

How do employees get paid here?

[oliver236]

and you dont need to pay taxes? how does that work

[f6v]

You net zero if you pay $1 and make $1.

[xp84]

Of course you have to pay taxes!

[cestith]

Not profit taxes, if you made $0 profit. There are other taxes though. Sales and use taxes. Gross receipts taxes some places. Stuff like that, yes, you pay taxes.