Installment sale tax regulations provide business and property owners with a powerful tool that can be used to finance the acquisition or sale of businesses or real estate while deferring the taxes associated with the transaction. The installment sale method of tax reporting, which consists of reporting and paying income taxes based on the cash received each tax year, is allowed by the IRS and most states. If the seller receives a portion of the proceeds in the year of the sale and additional portions in subsequent years, the total amount of the gain is apportioned and reported in the years that the proceeds are received.
Many business and real estate sales occur at a time when a business or property owner is retiring or transitioning a business. In the year of such a transaction, a seller in this situation would generally be taxed at a higher income tax rate because they are reporting normal income as well as income related to the sale. However, in the years following a sale, a retiring business owner may be taxed at much lower rates due to the loss of operating income after the sale. With IRS tax brackets ranging from a low of 10% to a high of 39.6%, significant opportunities are available reduce income taxes by using the installment method of tax reporting for the purpose of deferring income to lower tax rate years.
Another tax saving opportunity made available through the use of the installment sale method of tax reporting is to spread income into future years in order to match the gain with off-setting expenses. Apportioning the income from the sale of a business into subsequent years provides the opportunity for it to be matched with pension plan contributions and other deductions, thus reducing the tax burden of the sale. At the same time, this tax strategy may provide the combined benefit of allowing the seller to realize lower tax brackets by rolling significant amounts of income into qualified retirement plans in the years that the proceeds of a sale are received.
An Installment sale is reported on IRS Form 6252 with the total amount of the sale determined in the year the sale is finalized. In future years, when additional proceeds are received, the portion of the gain allocable to those years is reported on the same IRS Form 6252. If a property or business is sold and a deprecation deduction is claimed, the deprecation must be captured in the year of the claim regardless of whether an installment payment was received for that year. As with any significant transaction which generates capital gains, the seller should look at all opportunities to off-set income and defer income taxes. Installment sale reporting, used alone or in combination with other tax planning strategies, is one of the most powerful and easy to use tax saving tools available for achieving this end.
The experienced professionals at CGT Solutions have a thorough understanding of the IRS regulations governing installment sales and have successfully structured many such transactions. If you are interested in investigating the tax saving opportunities associated with the sale of a business or real estate through the use of an installment sale, contact us today to receive a free, no obligation consultation!
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