Installment Method

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 ?
HRs 3594 and 3568 have been introduced to repeal the installment method change, retroactively effective for post-December 16, 1999, sales and other dispositions.
Moreover, the cash basis taxpayer who elects out of the installment method may find she is taxed on the fair market value of the obligations whether or not there is an existing market for such obligations.
The taxpayer intends to sell his 25% interest in partnership 4 to the trust, reporting the gain using the installment method under Sec.
Another reason for taxpayers to avoid section 1041 is the availability of the installment method. If a redemption is to be carried out on a deferred payment basis, the inactive spouse can defer tax by using the installment method.
If no basis for estimating collectibility exists, revenue should be recognized using the installment method or the cost-recovery method.
If assets sold on the installment method in the post-liquidation period are inventory-type assets (including stock in trade or assets held for sale in the ordinary course of business), they must be sold in a bulk sale or gain will have to be recognized by the shareholder when the installment obligation is distributed (Sec.
If a corporation sells assets before or during the recognition period and reports income under the installment method during or after that time, the built-in gain tax generally applies.
As an example of a usual situation, Father would use the installment method to sell property to Child.
If the company elects out of the installment method and reports the entire gain in the current year, no deferred tax assets or liabilities exist and a current federal income tax provision of $153,000 is recorded in connection with the net gain.
FAS 66: Sales of Real Estate Accrual method 10% Percentage of completion method 10% Installment method 10% Accrual method 90% Percentage of completion method 90% Accrual method 20% Significant receivable 15%
When a taxpayer sells assets comprising a business at a gain and all payments are not received in the year of sale, unless the taxpayer elects otherwise, the gain is required to be reported based on the installment method of accounting.
If corporations sell assets before or during the recognition period and report income under the installment method during or after that period, the built-in gain tax is imposed on the income when reported to the extent it would have been subject to the tax if the entire amount had been reported in the year of sale and the built-in gain provisions applied at the time.