Installment Method

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Installment Method

In accounting, a way to recognize revenue from the sale of an asset in which one records revenue as installment payments are made. For example, when one sells an expensive asset, such as land, he/she may record the profit (or loss) on that sale as installment payments are received, rather than all at once. This spreads out the recognition of revenue over a longer period of time, possibly several years. This can reduce one's capital gains tax liability.

installment method

The accounting method of treating revenue from the sale of an asset on installments such that profits are recognized in proportion to the percentage of the sale price collected in a given accounting period. For example, if an asset with a book value of $12,000 is sold for $15,000 and payment is to occur in 5 equal installments of $3,000 each, the seller would record annual profits of ($15,000 - $12,000)/5, or $600. The installment method is a conservative way of treating an installment sale because profit is not recognized until receipt of payment.

Installment Method

A method of accounting enabling a taxpayer to spread the recognition of gain on the sale of property over the payment period. Under this procedure, the seller computes the gross profit percent from the sale (that is, the gain divided by the contract price) and applies it to each payment received to arrive at the amount of the gain to be recognized.
References in periodicals archive ?
453-1(c) generally require taxpayers to use the installment sales method of accounting for sales with a contingent portion of the selling price, providing a legislative/regulatory "solution" to the closed-open dilemma.
Greenwood said the installment sales method is used by small businesses for a variety of reasons.
The installment sales method of determining income may not be used for ACE purposes except for those taxpayers who are paying interest on the deferred taxes associated with the installment sale.
Based on accounting treatment for the sale under the installment sales method, approximately 10% of the gain will be recognized in 2008 and approximately 90% is anticipated to be recognized in 2009.
Wally Herger (R-California), a leader in the fight to repeal a provision in federal tax law which effectively prohibits accrual basis taxpayers from utilizing the installment sales method when selling their businesses.
In addition, the TAM violates the underlying tax concept of "wherewithal to pay," which requires that the income recognition or tax benefit be matched to the fiscal period in which the actual cash was received or disbursed (such as permitting postponement of revenue recognition under the installment sales method or prohibiting a current deduction for estimated warranty claims).
For tax purposes, the transaction will be accounted for using the installment sales method, with the resulting gain distributed to shareholders over six years.
A major focus of the PIA meetings on Capitol Hill will be repeal of a provision in federal tax law which effectively prohibits accrual basis taxpayers from utilizing the installment sales method when selling their businesses.
The approach could benefit the seller as well, because structuring the sales agreement in this fashion may allow the seller to defer recognition of some of the gain under the installment sales method.