Tuesday Tax Tidbit: Installment Sales Offer Both Pluses and Minuses

A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.

But an installment sale can backfire on the seller. For example:

• Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives. 
• If tax rates increase, the overall tax could wind up being more. 

Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.

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