What's New in Taxes
Treasury eases new installment sale rules
A business sale made after December 16, 1999, could trigger more tax than the entire first-year proceeds from the sale. That's because a new law taxes most installment sellers on their total profit in the year of sale. Before, such sellers would have paid tax only on the portion of the profits actually received in any year.
Example: A company sells its assets for $250,000, payable in equal installments over five years. The tax basis for the assets sold is $50,000, so the taxable gain on the sale is $200,000.
If the company's tax bracket is 34%, tax in the year of sale will be $68,000 even though the company receives only $50,000 from the buyer. Under prior law, only one-fifth of the tax, or $13,600, would have been due on the first year's installment.
The tax law change only applies to accrual method taxpayers, and it does not affect property used or produced in a farming business or, under certain conditions, sales of residential lots or timeshares. However, since most businesses use the accrual method, their sales of fixtures, equipment, or other business assets generally will be fully taxed in the year of sale.
Planning can ease the tax bite
In most cases, the new law's potential cash crunch can be avoided with planning. Possible solutions include:
- Taking a large enough down payment to pay all of the taxes due.
- Taking a loan from a third party (using the buyer's note as security) to help cover the taxes.
- Structuring the sale as a tax-deferred exchange.
- Selling stock in the business instead of assets.
Recent Treasury regulations help some businesses
The business community has not been happy with the 1999 tax law change and has been agitating for its repeal. To provide some relief, the Treasury issued regulations allowing qualified businesses with average annual gross receipts of $1 million or less to use the cash method of accounting, which also would allow them to report sales on the installment method.
Congress has indicated that it would like to repeal this unpopular provision. While legislation works its uncertain way through Congress, it is essential that you seek advice on any proposed sale of business assets before proceeding. Call our office for details and assistance.