Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

State Tax Forms 2011

File State Taxes For FreeIrs E File Form 4868Amended 2010 Tax ReturnHr Block Taxes OnlineFree Tax Filing 2012 State And Federal2012 Amended Tax FormH R Block 2011 DownloadStudents Filing Taxes 2013How Can I File An Amended Tax ReturnFree 2012 Tax HelpFree EfileTax Act Online 2011Irs Form 1040ez FillableTurbotax Free State Efile CouponFile Old Tax Returns FreeTurbotax Military2010 Federal Tax Return Form1040 State Tax FormAmendment Form For TaxesHow To Amend My TaxesMy Pay MilFile 2012 Taxes OnlineHow To Do Amended Tax ReturnFree Irs Tax FilingTurbotax Business Fed E File 2012Where Can I File Only My State Taxes For FreeFiling Amended Tax Return 20122011 Tax Form 1040ez2010 1040 Tax Forms1040x Site Efile Com2012 1040 Ez FormMyfreetaxes Com TaxtimeIrs Amendment FormHow Can I File My 2006 TaxesWww Irs Gov EfileCan You Refile TaxesIrs 2012 Tax Forms 1040ezTurbotax Amended Return2010 TaxE File State Taxes

State Tax Forms 2011

State tax forms 2011 2. State tax forms 2011   Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. State tax forms 2011 The pay may be in cash, property, or services. State tax forms 2011 It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. State tax forms 2011 For information about deducting employment taxes, see chapter 5. State tax forms 2011 You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. State tax forms 2011 Empowerment zone employment credit (Form 8844). State tax forms 2011 Indian employment credit (Form 8845). State tax forms 2011 Work opportunity credit (Form 5884). State tax forms 2011 Credit for employer differential wage payments (Form 8932). State tax forms 2011 Reduce your deduction for employee wages by the amount of employment credits you claim. State tax forms 2011 For more information about these credits, see the form on which the credit is claimed. State tax forms 2011 Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. State tax forms 2011 Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. State tax forms 2011 These and other requirements that apply to all business expenses are explained in chapter 1. State tax forms 2011 In addition, the pay must meet both of the following tests. State tax forms 2011 Test 1. State tax forms 2011 It must be reasonable. State tax forms 2011 Test 2. State tax forms 2011 It must be for services performed. State tax forms 2011 The form or method of figuring the pay does not affect its deductibility. State tax forms 2011 For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. State tax forms 2011 Test 1—Reasonableness You must be able to prove that the pay is reasonable. State tax forms 2011 Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. State tax forms 2011 If the pay is excessive, the excess pay is disallowed as a deduction. State tax forms 2011 Factors to consider. State tax forms 2011   Determine the reasonableness of pay by the facts and circumstances. State tax forms 2011 Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. State tax forms 2011   To determine if pay is reasonable, also consider the following items and any other pertinent facts. State tax forms 2011 The duties performed by the employee. State tax forms 2011 The volume of business handled. State tax forms 2011 The character and amount of responsibility. State tax forms 2011 The complexities of your business. State tax forms 2011 The amount of time required. State tax forms 2011 The cost of living in the locality. State tax forms 2011 The ability and achievements of the individual employee performing the service. State tax forms 2011 The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. State tax forms 2011 Your policy regarding pay for all your employees. State tax forms 2011 The history of pay for each employee. State tax forms 2011 Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. State tax forms 2011 Employee-shareholder salaries. State tax forms 2011   If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. State tax forms 2011 The excessive part of the salary would not be allowed as a salary deduction by the corporation. State tax forms 2011 For more information on corporate distributions to shareholders, see Publication 542, Corporations. State tax forms 2011 Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. State tax forms 2011 For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. State tax forms 2011 Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. State tax forms 2011 If you give property to an employee as an employee achievement award, your deduction may be limited. State tax forms 2011 Achievement awards. State tax forms 2011   An achievement award is an item of tangible personal property that meets all the following requirements. State tax forms 2011 It is given to an employee for length of service or safety achievement. State tax forms 2011 It is awarded as part of a meaningful presentation. State tax forms 2011 It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. State tax forms 2011 Length-of-service award. State tax forms 2011    An award will qualify as a length-of-service award only if either of the following applies. State tax forms 2011 The employee receives the award after his or her first 5 years of employment. State tax forms 2011 The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. State tax forms 2011 Safety achievement award. State tax forms 2011    An award for safety achievement will qualify as an achievement award unless one of the following applies. State tax forms 2011 It is given to a manager, administrator, clerical employee, or other professional employee. State tax forms 2011 During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). State tax forms 2011 Deduction limit. State tax forms 2011   Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. State tax forms 2011 $400 for awards that are not qualified plan awards. State tax forms 2011 $1,600 for all awards, whether or not qualified plan awards. State tax forms 2011   A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. State tax forms 2011   A highly compensated employee is an employee who meets either of the following tests. State tax forms 2011 The employee was a 5% owner at any time during the year or the preceding year. State tax forms 2011 The employee received more than $115,000 in pay for the preceding year. State tax forms 2011 You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. State tax forms 2011   An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. State tax forms 2011 To figure this average cost, ignore awards of nominal value. State tax forms 2011 Deduct achievement awards as a nonwage business expense on your return or business schedule. State tax forms 2011 You may not owe employment taxes on the value of some achievement awards you provide to an employee. State tax forms 2011 See Publication 15-B. State tax forms 2011 Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. State tax forms 2011 However, the total bonuses, salaries, and other pay must be reasonable for the services performed. State tax forms 2011 If the bonus is paid in property, see Property , later. State tax forms 2011 Gifts of nominal value. State tax forms 2011    If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. State tax forms 2011 Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. State tax forms 2011 For more information on this deduction limit, see Meals and lodging , later. State tax forms 2011 Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. State tax forms 2011 Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. State tax forms 2011 For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. State tax forms 2011 Fringe Benefits A fringe benefit is a form of pay for the performance of services. State tax forms 2011 You can generally deduct the cost of fringe benefits. State tax forms 2011 You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. State tax forms 2011 You also may not owe employment taxes on the value of the fringe benefits. State tax forms 2011 See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. State tax forms 2011 Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. State tax forms 2011 Certain fringe benefits are discussed next. State tax forms 2011 See Publication 15-B for more details on these and other fringe benefits. State tax forms 2011 Meals and lodging. State tax forms 2011   You can usually deduct the cost of furnishing meals and lodging to your employees. State tax forms 2011 Deduct the cost in whatever category the expense falls. State tax forms 2011 For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. State tax forms 2011 If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. State tax forms 2011 Deduction limit on meals. State tax forms 2011   You can generally deduct only 50% of the cost of furnishing meals to your employees. State tax forms 2011 However, you can deduct the full cost of the following meals. State tax forms 2011 Meals whose value you include in an employee's wages. State tax forms 2011 Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. State tax forms 2011 This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. State tax forms 2011 Meals you furnish to your employees at the work site when you operate a restaurant or catering service. State tax forms 2011 Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. State tax forms 2011 Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). State tax forms 2011 This does not include meals you furnish on vessels primarily providing luxury water transportation. State tax forms 2011 Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. State tax forms 2011 This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. State tax forms 2011 Employee benefit programs. State tax forms 2011   Employee benefit programs include the following. State tax forms 2011 Accident and health plans. State tax forms 2011 Adoption assistance. State tax forms 2011 Cafeteria plans. State tax forms 2011 Dependent care assistance. State tax forms 2011 Education assistance. State tax forms 2011 Life insurance coverage. State tax forms 2011 Welfare benefit funds. State tax forms 2011   You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. State tax forms 2011 For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. State tax forms 2011 ). State tax forms 2011 Life insurance coverage. State tax forms 2011   You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. State tax forms 2011 See Regulations section 1. State tax forms 2011 264-1 for more information. State tax forms 2011 Welfare benefit funds. State tax forms 2011   A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. State tax forms 2011 Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. State tax forms 2011   Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. State tax forms 2011 If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. State tax forms 2011   Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. State tax forms 2011 The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. State tax forms 2011 The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. State tax forms 2011 These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. State tax forms 2011   For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. State tax forms 2011 Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. State tax forms 2011 However, if the employee performs no services, treat the amount you advanced as a loan. State tax forms 2011 If the employee does not repay the loan, treat it as income to the employee. State tax forms 2011 Below-market interest rate loans. State tax forms 2011   On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. State tax forms 2011 See Below-Market Loans in chapter 4. State tax forms 2011 Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. State tax forms 2011 The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. State tax forms 2011 You can claim the deduction only for the tax year in which your employee includes the property's value in income. State tax forms 2011 Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. State tax forms 2011 You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. State tax forms 2011 Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. State tax forms 2011 These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. State tax forms 2011 Restricted property. State tax forms 2011   If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. State tax forms 2011 However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. State tax forms 2011    “Substantially vested” means the property is not subject to a substantial risk of forfeiture. State tax forms 2011 This means that the recipient is not likely to have to give up his or her rights in the property in the future. State tax forms 2011 Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. State tax forms 2011 However, your deduction may be limited. State tax forms 2011 If you make the payment under an accountable plan, deduct it in the category of the expense paid. State tax forms 2011 For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. State tax forms 2011 If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. State tax forms 2011 See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. State tax forms 2011 Sick and Vacation Pay Sick pay. State tax forms 2011   You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. State tax forms 2011 However, your deduction is limited to amounts not compensated by insurance or other means. State tax forms 2011 Vacation pay. State tax forms 2011   Vacation pay is an employee benefit. State tax forms 2011 It includes amounts paid for unused vacation leave. State tax forms 2011 You can deduct vacation pay only in the tax year in which the employee actually receives it. State tax forms 2011 This rule applies regardless of whether you use the cash or accrual method of accounting. State tax forms 2011 Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

Understanding Your LT26 Notice

You were previously asked information regarding the filing of your tax return for a specific tax period.


What you need to do

  • File the tax return to the address on the letter.
  • If return previously filed, contact the telephone number listed on the letter.
  • If not required to file a tax return, contact the telephone number listed on the letter.

You may want to

  • Contact our office either by phone or mail the return within 10 days of the date of this letter.
  • An envelope is provided for your convenience.

Answers to Common Questions

Q. Based on my income I do not think I need to file?

A. Check irs.gov to see if your income is below the filing requirement, but you should still contact IRS.

Q. What if I already filed the return?

A. If it has been over 10 weeks, send a signed copy of the return again.

Q. Why are you contacting me to file the return? Am I due a refund?

A. To receive the refund, a delinquent return must be filed within three years of the original return due date, or within two years of the date of the payment, if applicable.

Q. What if I am unable to pay the full balance at the time of filing?

A. Go to irs.gov and complete Form 9464 (Installment Agreement Request) and mail with the return.

 

Page Last Reviewed or Updated: 28-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The State Tax Forms 2011

State tax forms 2011 Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. State tax forms 2011 General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. State tax forms 2011 Several assets. State tax forms 2011 Special situations. State tax forms 2011 Schedule D (Form 1040). State tax forms 2011 Form 4797. State tax forms 2011 How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. State tax forms 2011 The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. State tax forms 2011 The installment sales method cannot be used for the following. State tax forms 2011 Sale of inventory. State tax forms 2011   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. State tax forms 2011 See Sale of a Business under Other Rules, later. State tax forms 2011 Dealer sales. State tax forms 2011   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. State tax forms 2011 This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. State tax forms 2011 However, the rule does not apply to an installment sale of property used or produced in farming. State tax forms 2011 Special rule. State tax forms 2011   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. State tax forms 2011 For more information, see section 453(l). State tax forms 2011 Stock or securities. State tax forms 2011   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. State tax forms 2011 You must report the entire gain on the sale in the year in which the trade date falls. State tax forms 2011 Installment obligation. State tax forms 2011   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. State tax forms 2011 General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. State tax forms 2011 See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. State tax forms 2011 Sale at a loss. State tax forms 2011   If your sale results in a loss, you cannot use the installment method. State tax forms 2011 If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. State tax forms 2011 Unstated interest. State tax forms 2011   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. State tax forms 2011 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. State tax forms 2011 Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. State tax forms 2011 Each payment on an installment sale usually consists of the following three parts. State tax forms 2011 Interest income. State tax forms 2011 Return of your adjusted basis in the property. State tax forms 2011 Gain on the sale. State tax forms 2011 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. State tax forms 2011 You do not include in income the part that is the return of your basis in the property. State tax forms 2011 Basis is the amount of your investment in the property for installment sale purposes. State tax forms 2011 Interest Income You must report interest as ordinary income. State tax forms 2011 Interest is generally not included in a down payment. State tax forms 2011 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. State tax forms 2011 Interest provided in the agreement is called stated interest. State tax forms 2011 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. State tax forms 2011 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. State tax forms 2011 Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. State tax forms 2011 A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). State tax forms 2011 Figuring adjusted basis for installment sale purposes. State tax forms 2011   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. State tax forms 2011 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. State tax forms 2011 Worksheet A. State tax forms 2011 Figuring Adjusted Basis and Gross Profit Percentage 1. State tax forms 2011 Enter the selling price for the property   2. State tax forms 2011 Enter your adjusted basis for the property     3. State tax forms 2011 Enter your selling expenses     4. State tax forms 2011 Enter any depreciation recapture     5. State tax forms 2011 Add lines 2, 3, and 4. State tax forms 2011  This is your adjusted basis for installment sale purposes   6. State tax forms 2011 Subtract line 5 from line 1. State tax forms 2011 If zero or less, enter -0-. State tax forms 2011  This is your gross profit     If the amount entered on line 6 is zero, stop here. State tax forms 2011 You cannot use the installment method. State tax forms 2011   7. State tax forms 2011 Enter the contract price for the property   8. State tax forms 2011 Divide line 6 by line 7. State tax forms 2011 This is your gross profit percentage   Selling price. State tax forms 2011   The selling price is the total cost of the property to the buyer and includes any of the following. State tax forms 2011 Any money you are to receive. State tax forms 2011 The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). State tax forms 2011 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). State tax forms 2011 Any of your selling expenses the buyer pays. State tax forms 2011   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. State tax forms 2011 Adjusted basis for installment sale purposes. State tax forms 2011   Your adjusted basis is the total of the following three items. State tax forms 2011 Adjusted basis. State tax forms 2011 Selling expenses. State tax forms 2011 Depreciation recapture. State tax forms 2011 Adjusted basis. State tax forms 2011   Basis is your investment in the property for installment sale purposes. State tax forms 2011 The way you figure basis depends on how you acquire the property. State tax forms 2011 The basis of property you buy is generally its cost. State tax forms 2011 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. State tax forms 2011   While you own property, various events may change your original basis. State tax forms 2011 Some events, such as adding rooms or making permanent improvements, increase basis. State tax forms 2011 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. State tax forms 2011 The result is adjusted basis. State tax forms 2011   For more information on how to figure basis and adjusted basis, see Publication 551. State tax forms 2011 For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. State tax forms 2011 Selling expenses. State tax forms 2011   Selling expenses relate to the sale of the property. State tax forms 2011 They include commissions, attorney fees, and any other expenses paid on the sale. State tax forms 2011 Selling expenses are added to the basis of the sold property. State tax forms 2011 Depreciation recapture. State tax forms 2011   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. State tax forms 2011 See Depreciation Recapture Income under Other Rules, later. State tax forms 2011 Gross profit. State tax forms 2011   Gross profit is the total gain you report on the installment method. State tax forms 2011   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. State tax forms 2011 If the property you sold was your home, subtract from the gross profit any gain you can exclude. State tax forms 2011 See Sale of Your Home , later, under Reporting Installment Sale Income. State tax forms 2011 Contract price. State tax forms 2011   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. State tax forms 2011 Gross profit percentage. State tax forms 2011   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. State tax forms 2011 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. State tax forms 2011   The gross profit percentage generally remains the same for each payment you receive. State tax forms 2011 However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. State tax forms 2011 Example. State tax forms 2011 You sell property at a contract price of $6,000 and your gross profit is $1,500. State tax forms 2011 Your gross profit percentage is 25% ($1,500 ÷ $6,000). State tax forms 2011 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. State tax forms 2011 The remainder (balance) of each payment is the tax-free return of your adjusted basis. State tax forms 2011 Amount to report as installment sale income. State tax forms 2011   Multiply the payments you receive each year (less interest) by the gross profit percentage. State tax forms 2011 The result is your installment sale income for the tax year. State tax forms 2011 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. State tax forms 2011 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. State tax forms 2011 For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. State tax forms 2011 Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. State tax forms 2011 You then must refigure the gross profit percentage for the remaining payments. State tax forms 2011 Refigure your gross profit using Worksheet B. State tax forms 2011 You will spread any remaining gain over future installments. State tax forms 2011 Worksheet B. State tax forms 2011 New Gross Profit Percentage — Selling Price Reduced 1. State tax forms 2011 Enter the reduced selling  price for the property   2. State tax forms 2011 Enter your adjusted  basis for the  property     3. State tax forms 2011 Enter your selling  expenses     4. State tax forms 2011 Enter any depreciation  recapture     5. State tax forms 2011 Add lines 2, 3, and 4. State tax forms 2011   6. State tax forms 2011 Subtract line 5 from line 1. State tax forms 2011  This is your adjusted  gross profit   7. State tax forms 2011 Enter any installment sale  income reported in  prior year(s)   8. State tax forms 2011 Subtract line 7 from line 6   9. State tax forms 2011 Future installments   10. State tax forms 2011 Divide line 8 by line 9. State tax forms 2011  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax forms 2011 Example. State tax forms 2011 In 2011, you sold land with a basis of $40,000 for $100,000. State tax forms 2011 Your gross profit was $60,000. State tax forms 2011 You received a $20,000 down payment and the buyer's note for $80,000. State tax forms 2011 The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. State tax forms 2011 Your gross profit percentage is 60%. State tax forms 2011 You reported a gain of $12,000 on each payment received in 2011 and 2012. State tax forms 2011 In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. State tax forms 2011 The new gross profit percentage, 46. State tax forms 2011 67%, is figured on Example—Worksheet B. State tax forms 2011 You will report a gain of $7,000 (46. State tax forms 2011 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. State tax forms 2011 Example — Worksheet B. State tax forms 2011 New Gross Profit Percentage — Selling Price Reduced 1. State tax forms 2011 Enter the reduced selling  price for the property 85,000 2. State tax forms 2011 Enter your adjusted  basis for the  property 40,000   3. State tax forms 2011 Enter your selling  expenses -0-   4. State tax forms 2011 Enter any depreciation  recapture -0-   5. State tax forms 2011 Add lines 2, 3, and 4. State tax forms 2011 40,000 6. State tax forms 2011 Subtract line 5 from line 1. State tax forms 2011  This is your adjusted  gross profit 45,000 7. State tax forms 2011 Enter any installment sale  income reported in  prior year(s) 24,000 8. State tax forms 2011 Subtract line 7 from line 6 21,000 9. State tax forms 2011 Future installments 45,000 10. State tax forms 2011 Divide line 8 by line 9. State tax forms 2011  This is your new gross profit percentage* 46. State tax forms 2011 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax forms 2011 Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. State tax forms 2011 You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. State tax forms 2011 See Schedule D (Form 1040) and Form 4797 , later. State tax forms 2011 If the property was your main home, you may be able to exclude part or all of the gain. State tax forms 2011 See Sale of Your Home , later. State tax forms 2011 Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. State tax forms 2011 Attach it to your tax return for each year. State tax forms 2011 Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. State tax forms 2011 Which parts to complete. State tax forms 2011   Which part to complete depends on whether you are filing the form for the year of sale or a later year. State tax forms 2011 Year of sale. State tax forms 2011   Complete lines 1 through 4, Part I, and Part II. State tax forms 2011 If you sold property to a related party during the year, also complete Part III. State tax forms 2011 Later years. State tax forms 2011   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. State tax forms 2011   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. State tax forms 2011 (After December 31, 1986, the installment method is not available for the sale of marketable securities. State tax forms 2011 ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. State tax forms 2011 Complete Part III unless you received the final payment during the tax year. State tax forms 2011   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. State tax forms 2011 Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. State tax forms 2011 Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. State tax forms 2011 Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). State tax forms 2011 If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. State tax forms 2011 Your gain is long-term if you owned the property for more than 1 year when you sold it. State tax forms 2011 Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. State tax forms 2011 All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. State tax forms 2011 For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. State tax forms 2011 If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. State tax forms 2011 ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. State tax forms 2011 See Publication 523 for information about excluding the gain. State tax forms 2011 If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. State tax forms 2011 Seller-financed mortgage. State tax forms 2011   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. State tax forms 2011   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. State tax forms 2011   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. State tax forms 2011   If either person fails to include the other person's SSN, a $50 penalty will be assessed. State tax forms 2011 Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. State tax forms 2011 The following topics are discussed. State tax forms 2011 Electing out of the installment method. State tax forms 2011 Payments received or considered received. State tax forms 2011 Escrow account. State tax forms 2011 Depreciation recapture income. State tax forms 2011 Sale to a related person. State tax forms 2011 Like-kind exchange. State tax forms 2011 Contingent payment sale. State tax forms 2011 Single sale of several assets. State tax forms 2011 Sale of a business. State tax forms 2011 Unstated interest and original issue discount. State tax forms 2011 Disposition of an installment obligation. State tax forms 2011 Repossession. State tax forms 2011 Interest on deferred tax. State tax forms 2011 Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. State tax forms 2011 To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. State tax forms 2011 Notes, mortgages, and land contracts are examples of obligations that are included at FMV. State tax forms 2011 You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. State tax forms 2011 If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). State tax forms 2011 Example. State tax forms 2011 You sold a parcel of land for $50,000. State tax forms 2011 You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. State tax forms 2011 The buyer gave you a note for $40,000. State tax forms 2011 The note had an FMV of $40,000. State tax forms 2011 You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. State tax forms 2011 The land cost $25,000, and you owned it for more than one year. State tax forms 2011 You decide to elect out of the installment method and report the entire gain in the year of sale. State tax forms 2011 Gain realized:     Selling price $50,000 Minus: Property's adj. State tax forms 2011 basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. State tax forms 2011 basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. State tax forms 2011 You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. State tax forms 2011 The interest on the note is ordinary income and is reported as interest income each year. State tax forms 2011 How to elect out. State tax forms 2011   To make this election, do not report your sale on Form 6252. State tax forms 2011 Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. State tax forms 2011 When to elect out. State tax forms 2011   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. State tax forms 2011 Automatic six-month extension. State tax forms 2011   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). State tax forms 2011 Write “Filed pursuant to section 301. State tax forms 2011 9100-2” at the top of the amended return and file it where the original return was filed. State tax forms 2011 Revoking the election. State tax forms 2011   Once made, the election can be revoked only with IRS approval. State tax forms 2011 A revocation is retroactive. State tax forms 2011 You will not be allowed to revoke the election if either of the following applies. State tax forms 2011 One of the purposes is to avoid federal income tax. State tax forms 2011 The tax year in which any payment was received has closed. State tax forms 2011 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. State tax forms 2011 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. State tax forms 2011 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. State tax forms 2011 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. State tax forms 2011 Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. State tax forms 2011 Include these expenses in the selling and contract prices when figuring the gross profit percentage. State tax forms 2011 Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. State tax forms 2011 Mortgage not more than basis. State tax forms 2011   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. State tax forms 2011 It is considered a recovery of your basis. State tax forms 2011 The contract price is the selling price minus the mortgage. State tax forms 2011 Example. State tax forms 2011 You sell property with an adjusted basis of $19,000. State tax forms 2011 You have selling expenses of $1,000. State tax forms 2011 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). State tax forms 2011 The selling price is $25,000 ($15,000 + $10,000). State tax forms 2011 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). State tax forms 2011 The contract price is $10,000 ($25,000 − $15,000 mortgage). State tax forms 2011 Your gross profit percentage is 50% ($5,000 ÷ $10,000). State tax forms 2011 You report half of each $2,000 payment received as gain from the sale. State tax forms 2011 You also report all interest you receive as ordinary income. State tax forms 2011 Mortgage more than basis. State tax forms 2011   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. State tax forms 2011 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. State tax forms 2011   To figure the contract price, subtract the mortgage from the selling price. State tax forms 2011 This is the total amount (other than interest) you will receive directly from the buyer. State tax forms 2011 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). State tax forms 2011 The contract price is then the same as your gross profit from the sale. State tax forms 2011    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. State tax forms 2011 Example. State tax forms 2011 The selling price for your property is $9,000. State tax forms 2011 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. State tax forms 2011 Your adjusted basis in the property is $4,400. State tax forms 2011 You have selling expenses of $600, for a total installment sale basis of $5,000. State tax forms 2011 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). State tax forms 2011 This amount is included in the contract price and treated as a payment received in the year of sale. State tax forms 2011 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. State tax forms 2011 Report 100% of each payment (less interest) as gain from the sale. State tax forms 2011 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. State tax forms 2011 Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. State tax forms 2011 You are considered to receive a payment equal to the outstanding canceled debt. State tax forms 2011 Example. State tax forms 2011 Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. State tax forms 2011 On April 4, 2013, she bought the land for $70,000. State tax forms 2011 At that time, $30,000 of her loan to you was outstanding. State tax forms 2011 She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. State tax forms 2011 She did not assume an existing mortgage. State tax forms 2011 She canceled the $30,000 debt you owed her. State tax forms 2011 You are considered to have received a $30,000 payment at the time of the sale. State tax forms 2011 Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. State tax forms 2011 If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. State tax forms 2011 Compare the debt to your installment sale basis in the property being sold. State tax forms 2011 If the debt is less than your installment sale basis, none of it is treated as a payment. State tax forms 2011 If it is more, only the difference is treated as a payment. State tax forms 2011 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. State tax forms 2011 These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . State tax forms 2011 However, they apply only to the following types of debt the buyer assumes. State tax forms 2011 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. State tax forms 2011 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. State tax forms 2011 If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. State tax forms 2011 The value of the assumed debt is then considered a payment to you in the year of sale. State tax forms 2011 Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. State tax forms 2011 However, see Like-Kind Exchange , later. State tax forms 2011 Generally, the amount of the payment is the property's FMV on the date you receive it. State tax forms 2011 Exception. State tax forms 2011   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. State tax forms 2011 See Unstated Interest and Original Issue Discount (OID) , later. State tax forms 2011 Debt not payable on demand. State tax forms 2011   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. State tax forms 2011 This is true even if the debt is guaranteed by a third party, including a government agency. State tax forms 2011 Fair market value (FMV). State tax forms 2011   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. State tax forms 2011 Third-party note. State tax forms 2011   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. State tax forms 2011 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. State tax forms 2011 The excess of the note's face value over its FMV is interest. State tax forms 2011 Exclude this interest in determining the selling price of the property. State tax forms 2011 However, see Exception under Property Used As a Payment, earlier. State tax forms 2011 Example. State tax forms 2011 You sold real estate in an installment sale. State tax forms 2011 As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. State tax forms 2011 The FMV of the third-party note at the time of the sale was $30,000. State tax forms 2011 This amount, not $50,000, is a payment to you in the year of sale. State tax forms 2011 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. State tax forms 2011 The remaining 40% is interest taxed as ordinary income. State tax forms 2011 Bond. State tax forms 2011   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. State tax forms 2011 For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. State tax forms 2011    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. State tax forms 2011 However, see Exception under Property Used As a Payment, earlier. State tax forms 2011 Buyer's note. State tax forms 2011   The buyer's note (unless payable on demand) is not considered payment on the sale. State tax forms 2011 However, its full face value is included when figuring the selling price and the contract price. State tax forms 2011 Payments you receive on the note are used to figure your gain in the year received. State tax forms 2011 Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. State tax forms 2011 This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. State tax forms 2011 It does not apply to the following dispositions. State tax forms 2011 Sales of property used or produced in farming. State tax forms 2011 Sales of personal-use property. State tax forms 2011 Qualifying sales of time-shares and residential lots. State tax forms 2011 The net debt proceeds are the gross debt minus the direct expenses of getting the debt. State tax forms 2011 The amount treated as a payment is considered received on the later of the following dates. State tax forms 2011 The date the debt becomes secured. State tax forms 2011 The date you receive the debt proceeds. State tax forms 2011 A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. State tax forms 2011 For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. State tax forms 2011 Limit. State tax forms 2011   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. State tax forms 2011 The total contract price on the installment sale. State tax forms 2011 Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. State tax forms 2011 Installment payments. State tax forms 2011   The pledge rule accelerates the reporting of the installment obligation payments. State tax forms 2011 Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. State tax forms 2011 Exception. State tax forms 2011   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. State tax forms 2011 The debt was outstanding on December 17, 1987. State tax forms 2011 The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. State tax forms 2011   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. State tax forms 2011   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. State tax forms 2011 Any excess is treated as a payment on the installment obligation. State tax forms 2011 Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. State tax forms 2011 These sales cannot be reported on the installment method. State tax forms 2011 The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. State tax forms 2011 When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. State tax forms 2011 Example. State tax forms 2011 You sell property for $100,000. State tax forms 2011 The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. State tax forms 2011 You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. State tax forms 2011 You report the entire gain in the year of sale. State tax forms 2011 Escrow established in a later year. State tax forms 2011   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. State tax forms 2011 Substantial restriction. State tax forms 2011   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. State tax forms 2011 For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. State tax forms 2011 Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. State tax forms 2011 Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. State tax forms 2011 Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. State tax forms 2011 The recapture income is also included in Part I of Form 6252. State tax forms 2011 However, the gain equal to the recapture income is reported in full in the year of the sale. State tax forms 2011 Only the gain greater than the recapture income is reported on the installment method. State tax forms 2011 For more information on depreciation recapture, see chapter 3 in Publication 544. State tax forms 2011 The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. State tax forms 2011 Determining gross profit is discussed under General Rules , earlier. State tax forms 2011 Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. State tax forms 2011 If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. State tax forms 2011 These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. State tax forms 2011 Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. State tax forms 2011 Instead, all payments to be received are considered received in the year of sale. State tax forms 2011 However, see Exception , below. State tax forms 2011 Depreciable property for this rule is any property the purchaser can depreciate. State tax forms 2011 Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. State tax forms 2011 In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. State tax forms 2011 The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. State tax forms 2011 Exception. State tax forms 2011   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. State tax forms 2011 You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. State tax forms 2011 Related person. State tax forms 2011   Related persons include the following. State tax forms 2011 A person and all controlled entities with respect to that person. State tax forms 2011 A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. State tax forms 2011 Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. State tax forms 2011 Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. State tax forms 2011   For information about which entities are controlled entities, see section 1239(c). State tax forms 2011 Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. State tax forms 2011 The related person makes the second disposition before making all payments on the first disposition. State tax forms 2011 The related person disposes of the property within 2 years of the first disposition. State tax forms 2011 This rule does not apply if the property involved is marketable securities. State tax forms 2011 Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. State tax forms 2011 See Exception , later. State tax forms 2011 Related person. State tax forms 2011   Related persons include the following. State tax forms 2011 Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. State tax forms 2011 A partnership or estate and a partner or beneficiary. State tax forms 2011 A trust (other than a section 401(a) employees trust) and a beneficiary. State tax forms 2011 A trust and an owner of the trust. State tax forms 2011 Two corporations that are members of the same controlled group as defined in section 267(f). State tax forms 2011 The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. State tax forms 2011 A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. State tax forms 2011 An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. State tax forms 2011 A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. State tax forms 2011 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. State tax forms 2011 Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax forms 2011 An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax forms 2011 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. State tax forms 2011 An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. State tax forms 2011 Example 1. State tax forms 2011 In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. State tax forms 2011 His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. State tax forms 2011 His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). State tax forms 2011 He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. State tax forms 2011 50). State tax forms 2011 Bob made no improvements to the property and sold it to Alfalfa Inc. State tax forms 2011 , in 2013 for $600,000 after making the payment for that year. State tax forms 2011 The amount realized from the second disposition is $600,000. State tax forms 2011 Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . State tax forms 2011 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). State tax forms 2011 Example 2. State tax forms 2011 Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. State tax forms 2011 The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . State tax forms 2011 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. State tax forms 2011 They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. State tax forms 2011 In 2016, he receives the final $100,000 payment. State tax forms 2011 He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . State tax forms 2011 50 Installment sale income for 2016 $ 50,000 Exception. State tax forms 2011   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. State tax forms 2011 Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. State tax forms 2011   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. State tax forms 2011 However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. State tax forms 2011   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. State tax forms 2011 An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. State tax forms 2011 A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. State tax forms 2011 Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. State tax forms 2011 These trades are known as like-kind exchanges. State tax forms 2011 The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. State tax forms 2011 You do not have to report any part of your gain if you receive only like-kind property. State tax forms 2011 However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. State tax forms 2011 For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. State tax forms 2011 Installment payments. State tax forms 2011   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. State tax forms 2011 The contract price is reduced by the FMV of the like-kind property received in the trade. State tax forms 2011 The gross profit is reduced by any gain on the trade that can be postponed. State tax forms 2011 Like-kind property received in the trade is not considered payment on the installment obligation. State tax forms 2011 Example. State tax forms 2011 In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. State tax forms 2011 He also receives an installment note for $800,000 in the trade. State tax forms 2011 Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. State tax forms 2011 George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). State tax forms 2011 His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). State tax forms 2011 The contract price is $800,000 ($1,000,000 − $200,000). State tax forms 2011 The gross profit percentage is 75% ($600,000 ÷ $800,000). State tax forms 2011 He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. State tax forms 2011 He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). State tax forms 2011 Deferred exchanges. State tax forms 2011   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. State tax forms 2011 Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. State tax forms 2011 If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. State tax forms 2011 See Regulations section 1. State tax forms 2011 1031(k)-1(j)(2) for these rules. State tax forms 2011 Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. State tax forms 2011 This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. State tax forms 2011 If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. State tax forms 2011 For rules on using the installment method for a contingent payment sale, see Regulations section 15a. State tax forms 2011 453-1(c). State tax forms 2011 Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. State tax forms 2011 You also have to allocate part of the selling price to each asset. State tax forms 2011 If you sell assets that constitute a trade or business, see Sale of a Business , later. State tax forms 2011 Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. State tax forms 2011 If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. State tax forms 2011 This becomes the net FMV. State tax forms 2011 A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. State tax forms 2011 However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. State tax forms 2011 It must be reported separately. State tax forms 2011 The remaining assets sold at a gain are reported together. State tax forms 2011 Example. State tax forms 2011 You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. State tax forms 2011 The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. State tax forms 2011 Your installment sale basis for each parcel was $15,000. State tax forms 2011 Your net gain was $85,000 ($130,000 − $45,000). State tax forms 2011 You report the gain on the installment method. State tax forms 2011 The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. State tax forms 2011 The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. State tax forms 2011 The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. State tax forms 2011 You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. State tax forms 2011 Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. State tax forms 2011 You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. State tax forms 2011 The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. State tax forms 2011 You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. State tax forms 2011 However, if parcel C was held for personal use, the loss is not deductible. State tax forms 2011 You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). State tax forms 2011 Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. State tax forms 2011 Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. State tax forms 2011 Assets sold at a loss. State tax forms 2011 Real and personal property eligible for the installment method. State tax forms 2011 Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. State tax forms 2011 Inventory. State tax forms 2011   The sale of inventories of personal property cannot be reported on the installment method. State tax forms 2011 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. State tax forms 2011   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. State tax forms 2011 If you do not, each payment must be allocated between the inventory and the other assets sold. State tax forms 2011   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. State tax forms 2011 Use your basis in the inventory to figure the cost of goods sold. State tax forms 2011 Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. State tax forms 2011 Residual method. State tax forms 2011   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. State tax forms 2011 This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. State tax forms 2011   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. State tax forms 2011 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). State tax forms 2011   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. State tax forms 2011   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). State tax forms 2011 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. State tax forms 2011   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. State tax forms 2011 Certificates of deposit, U. State tax forms 2011 S. State tax forms 2011 Government securities, foreign currency, and actively traded personal property, including stock and securities. State tax forms 2011 Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. State tax forms 2011 However, see Regulations section 1. State tax forms 2011 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. State tax forms 2011 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. State tax forms 2011 All other assets except section 197 intangibles. State tax forms 2011 Section 197 intangibles except goodwill and going concern value. State tax forms 2011 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). State tax forms 2011   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. State tax forms 2011 For example, if an asset is described in both (4) and (6), include it in (4). State tax forms 2011 Agreement. State tax forms 2011   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. State tax forms 2011 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. State tax forms 2011 Reporting requirement. State tax forms 2011   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. State tax forms 2011 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. State tax forms 2011 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. State tax forms 2011 Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. State tax forms 2011 The sale of a partnership interest is treated as the sale of a single capital asset. State tax forms 2011 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. State tax forms 2011 (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. State tax forms 2011 ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. State tax forms 2011 The gain allocated to the other assets can be reported under the installment method. State tax forms 2011 For more information on the treatment of unrealized receivables and inventory, see Publication 541. State tax forms 2011 Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. State tax forms 2011 You received a $100,000 down payment and the buyer's note for $120,000. State tax forms 2011 The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. State tax forms 2011 The total selling price is $220,000. State tax forms 2011 Your selling expenses are $11,000. State tax forms 2011 The selling expenses are divided among all the assets sold, including inventory. State tax forms 2011 Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). State tax forms 2011 The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. State tax forms 2011 Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). State tax forms 2011 The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. State tax forms 2011 The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. State tax forms 2011   Sale  Price Sale   Exp. State tax forms 2011 Adj. State tax forms 2011   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. State tax forms 2011 A 71,000 3,550 63,800 3,650 Mch. State tax forms 2011 B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. State tax forms 2011 There is no depreciation recapture income because the building was depreciated using the straight line method. State tax forms 2011 All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. State tax forms 2011 Figure depreciation recapture in Part III of Form 4797. State tax forms 2011 The total depreciation recapture income reported in Part II of Form 4797 is $5,209. State tax forms 2011 This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). State tax forms 2011 These gains are reported in full in the year of sale and are not included in the installment sale computation. State tax forms 2011 Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. State tax forms 2011 The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. State tax forms 2011 The selling price equals the contract price for the installment sale ($108,500). State tax forms 2011 The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. State tax forms 2011   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). State tax forms 2011 The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. State tax forms 2011 95 Building— $9,600 ÷ $108,500 8. State tax forms 2011 85 Goodwill— $17,575 ÷ $108,500 16. State tax forms 2011 20 Total 48. State tax forms 2011 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. State tax forms 2011 The selling price for the installment sale is $108,500. State tax forms 2011 This is 49. State tax forms 2011 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). State tax forms 2011 The selling price of assets not reported on the installment method is $111,500. State tax forms 2011 This is 50. State tax forms 2011 7% ($111,500 ÷ $220,000) of the total selling price. State tax forms 2011 Multiply principal payments by 49. State tax forms 2011 3% to determine the part of the payment for the installment sale. State tax forms 2011 The balance, 50. State tax forms 2011 7%, is for the part reported in the year of the sale. State tax forms 2011 The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. State tax forms 2011 When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. State tax forms 2011 Only the part for the installment sale (49. State tax forms 2011 3%) is used in the installment sale computation. State tax forms 2011 The only payment received in 2013 is the down payment of $100,000. State tax forms 2011 The part of the payment for the installment sale is $49,300 ($100,000 × 49. State tax forms 2011 3%). State tax forms 2011 This amount is used in the installment sale computation. State tax forms 2011 Installment income for 2013. State tax forms 2011   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. State tax forms 2011 Income Land—22. State tax forms 2011 95% of $49,300 $11,314 Building—8. State tax forms 2011 85% of $49,300 4,363 Goodwill—16. State tax forms 2011 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. State tax forms 2011   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. State tax forms 2011 3% of the total payments you receive on the buyer's note during the year. State tax forms 2011 Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. State tax forms 2011 Interest provided in the contract is called stated interest. State tax forms 2011 If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. State tax forms 2011 If section 483 applies to the contract, this interest is called unstated interest. State tax forms 2011 If section 1274 applies to the contract, this interest is called original issue discount (OID). State tax forms 2011 An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). State tax forms 2011 Treatment of unstated interest and OID. State tax forms 2011   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. State tax forms 2011 As a result, the buyer cannot deduct the unstated interest. State tax forms 2011 The seller must report the unstated interest as income. State tax forms 2011   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. State tax forms 2011   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. State tax forms 2011 Rules for the seller. State tax forms 2011   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. State tax forms 2011 If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. State tax forms 2011   Include the unstated interest in income based on your regular method of accounting. State tax forms 2011 Include OID in income over the term of the contract. State tax forms 2011   The OID includible in income each year is based on the constant yield method described in section 1272. State tax forms 2011 (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. State tax forms 2011 )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. State tax forms 2011 Reduce the selling price by any stated principal treated as interest to determine the gain. State tax forms 2011   Report unstated interest or OID on your tax return, in addition to stated interest. State tax forms 2011 Rules for the buyer. State tax forms 2011   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. State tax forms 2011 These rules do not apply to personal-use property (for example, property not used in a trade or business). State tax forms 2011 Adequate stated interest. State tax forms 2011   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. State tax forms 2011 The present value of a payment is determined based on the test rate of interest, defined next. State tax forms 2011 (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. State tax forms 2011 ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. State tax forms 2011 Test rate of interest. State tax forms 2011   The test rate of interest for a contract is the 3-month rate. State tax forms 2011 The 3-month rate is the lower of the following applicable federal rates (AFRs). State tax forms 2011 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. State tax forms 2011 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. State tax forms 2011 Applicable federal rate (AFR). State tax forms 2011   The AFR depends on the month the binding