A taxpayer who is eligible to report transactions using the installment method is required to account under this method unless he elects out of the method on his tax return for the year in which the transaction occurs. The installment method is the default method for reporting sales involving future-year contingent consideration (IRC section 453), subject to certain exceptions-namely, sales of publicly traded stock cannot be reported using the installment method, and instead must be reported using the closed transaction method per IRC section 453(k). Each of the methods described below has its own benefits and pitfalls that taxpayers and tax professionals should examine before electing a particular approach. This article will discuss the three methods-installment, closed transaction, and open transaction-available to taxpayers for reporting sales that involve contingent consideration potentially payable outside the year of the sale. How do taxpayers account for and report the sale of a capital asset when the amount ultimately payable is unknown in the year of the transaction? Alternatively, a buyer and seller may agree to a payment structure whereby proceeds will become payable upon the realizations of certain milestones related to the purchased asset. What happens, however, when a sale contract provides for the possibility of payments outside of the year of the sale? Buyers and sellers are increasingly incorporating such terms in sale contracts, as these provisions offer a level of risk mitigation for the buyer by deferring payments and tying them to conditional outcomes, while also providing potential upsides to sellers if the sale proves lucrative for the buyer.įor example, a contract may provide for a partial cash payment from the buyer to the seller in the year of the sale, but also provide that the buyer shall pay the seller a future percentage of earnings derived from the asset for a set number of years.
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