Tax Issues with Trading Stock for Services

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Recently, I was asked how to pay an independent contractor with stock in a company, not have it be taxed by the independent contractor and get a tax deduction by the company.

The short answer is that you can’t. If you’re willing to think a little outside the box, though, you can achieve at least some of that goal.

First, though, let’s talk about the practice of giving away parts of a company or venture to someone who is doing work.

My first question is, “Why?” If you truly believe in you company and what it can be, you also believe it will be worth a lot more in the future. Why do you want to give that away? If you don’t have the cash to pay for the services, is there a better way to raise the funds? One of the biggest regrets I’ve heard successful business owners express is that they wish they’d never had partners, especially non-working partners. They often don’t understand or appreciate the day-to-day work involved and decision-making needs hat go on. A non-working partner can be like the ultimate Monday morning quarterback. They can analyze and criticize every decision you make and you don’t even get the advantage of having someone who is contributing to the growth of the business. Instead, you share profits forever and if things turn down, you have fiduciary responsibility to your shareholders before yourself. Minority rights are a big thing, especially in some states.

But let’s say you need to give a piece of the action away in order to attract the specific skillset and talent you need for your company. In that case, I’m still reluctant to give away part of the business. How about instead giving a profit percentage, but without ownerships? If the real value is in the future, when the business sells or goes public, give them some of kind of guaranteed percentage?

In the cases above, the payments you make will be tax deductible for the business. Otherwise, when you give equity, there is no possible tax deduction. Also, the percentage of the company or stock that is received by an independent contractor will be taxable to the contractor. But the agreement to pay a future profit is not taxable to the contractor until they actually received the money.

It’s not always possible to get exactly what you want, but if you have enough time to plan and are open to doing things in a slightly different way, you can almost always find a solution to get you at least of some of what you want.

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