Question Description

I’m working on a accounting discussion question and need an explanation to help me understand better.

Use your favorite search engine to find the IRS’ website and locate Publication 537: “Installment Sales.” After reviewing that publication, answer the following questions:

  • Which form is used to report an installment sale?
  • What are the requirements to report a sale on the installment basis for tax purposes?
  • If the taxpayer receives money over several periods, why would a taxpayer want to report a sale on the installment basis, rather than in the tax period when the sale originated?
  • How would you advise your tax client whether or not to elect the installment method? That is, what factors would you incorporate in that recommendation?
  • Do the discussion then do reponse each posted
  • Posted 1
  • IRS Publication 537 discusses the definition, rules and processes by which a tax payer can handle Installment Sales for tax purposes. To start, IRS Pub 537 defines an installment sale as “a sale of property where you receive at least one payment after the tax year of the sale.” (p. 2) For instance, if you sell your home (non-rental) or other non-business property, the general rules of installment sales apply, while more complex transactions are also found in the publication under the ‘other rules’ section along with specific publications related to special assets (such as a business or rental property). While there may be multiple forms related to installment sales, again depending on the property involved in the sale, Form 6252 “Installment Sale Income” is the primary form required for all installment sales.The three main requirements for reporting installment sales are 1) their must be a gain and 2) their must be payments related to the property sale in the year after the taxable year of sale, 3) use of Form 6252 to properly calculate and report an installment sale. Taxpayers use the installment sale method in order to better match economic benefit with cash flow. In short, revenue recognition for tax purposes is deferred until cash is receive which helps tax payers smooth out cash flows. Also, by utilizing the installment method, tax payers may avoid their marginal tax rates from increasing. To help a client determine if electing the installment method, we’d have to do a little tax planning work. First, we’d need to ensure the transaction qualifies. Second, we would need to evaluate their marginal tax rates and calculate the impact on the overall tax paid between taking all the income in the current tax year or spreading it out over the payment period. Lastly, and most likely the driving factor – can the client afford the tax bill for cash not received if we were to utilize the installment method.
  • Posted 2
  • Form 6252 is used to report an installment sale. It can also help determine gross profit, contract price, and gross profit percentage.What are the requirements to report a sale on the installment basis for tax purposes?The allocation of the sales price among section 197 intangibles and other business assets must be reported by the buyer and seller.If the taxpayer receives money over several periods, why would a taxpayer want to report a sale on the installment basis, rather than in the tax period when the sale originated?Because the taxpayer would be able to report under the installment method. Under the installment method the gross profit on a sale is deferred until receiving cash from the sale of the buyer. As a result of this, income is taxed at a lower tax rate.How would you advise your tax client whether or not to elect the installment method? That is, what factors would you incorporate in that recommendation? If the property is sold at a loss, the entire capital loss in the year must be reported and the installment method can’t be used. If my tax client wants to report the sale of inventory, personal property or real property by dealers, stock, bonds, and other investment securities; they will be advised that the installment method isn’t an option for them.

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