Installment Sales Offer Both Pluses and Minuses
A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.
But an installment sale can backfire on the seller. For example:
Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
If tax rates increase, the overall tax could wind up being more.
Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.
Wertz & Company, LLP, is an Irvine Tax Accounting and Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.