What is an installment sale and how do I report it? In this talk, I'll go through what an installment sale is and how it's reported. There are two characteristics that ...
Monetized Installment Sales
You may elect out by reporting all the gain as income in the year of the sale on Form 4797.pdf, Sales of Business Property, or on Form 1040, Schedule D.pdf, Capital Gains and Losses, and Form 8949.pdf, Sales and Other Dispositions of Capital Assets.
In an earnout sale, the buyer pays less money at the time of the sale but makes additional payments based on the future success of the business. An earnout sale is not unlike royalties received by an author. The seller (the author) receives royalty payments from the buyer (the publishing company) based on the success of the business (the book).
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. See Electing Out of the Installment Method , later, for information on recognizing the entire gain in the year of sale.
Still, if the buyer is offering a high interest rate on the sale, and if you feel the buyer is an adequate security risk, an installment sale may be warranted.
To qualify as an installment sale: the seller sells property to a buyer where the seller receives at least one payment in a year after the year of sale. Taxpayers can elect not to use the installment sale method by including all the gains in income in the year of the sale.