Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Pay taxes when the cash comes in

- by Alan Duvall 

Published in Dayton Daily News  August 19, 2007 

“Let me get mine – You get yours.”  Christina Aguilera 

Sometimes the tax world responds to ancient clichés such as “you can’t squeeze blood out of a rock.”  In deference to this real-world parable, Congress introduced the concept of installment sales. 

If an asset is sold for consideration, which includes a note receivable some time in the future, the tax man may allow additional time to pay taxes on the resulting gain. 

In this arena of installment sale reporting, taxpayers must calculate their gain from the entire sale – then allocate a pro-rata portion of such gain to each dollar actually received in a given year (Form 6252). 

For instance, if a business asset is sold for a $1,000 gain, and only half of the sales price is cash-received in the first year – the taxpayer need only report half of the total gain, or $500, in the year of sale. 

Predictably, tax life is never quite that simple.  If full payments on the note never arrive, prior year returns may have to be amended to correct gains reported from the original sale.  In case the asset sold is eventually repossessed, prior gain equals all cash received and the reacquired asset retains its historical basis. 

Assuming a portion of the note receivable is contingent upon a future event - the total gain on sale is calculated as if the contingency occurs to the sellers’ benefit – unless proceeds upon contingency are not capable of measurement.  If the contingent event never transpires, again prior year returns may have to be amended. 

And tax life is replete with trap-like exceptions.  If the asset sold was depreciated, all “recapturable” depreciation must be recognized and taxed in the year of sale, regardless of actual cash receipts. 

Owners of Sub S corporations may encounter specialized ambushes of their own when they sell their businesses.  If structured as an asset sale - a dual installment sale ensues - one at the corporate level and another when excess assets are distributed to shareholders.  Typically, this anomaly front-end loads the tax burden in the year of sale. 

“Can’t crow before I’m out of the woods – there’s exceptions to the rule.”  Van Halen 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.