Is installment sale reporting mandatory?

You’re required to report gain on an installment sale under the installment method unless you “elect out” on or before the due date for filing your tax return (including extensions) for the year of the sale.

How do you elect the installment method?

In order to elect out of the installment sales method, a taxpayer must make an election on or before the due date for filing the return for the taxable year in which the underlying sale occurs (note that if a taxpayer is involved in more than one transaction in which the installment sales method would apply, it must …

What happens to a S corporation during an installment sale?

Because no cash is received, the S corporation recognizes no gain, and the shareholder’s basis remains zero. Since the installment obligation is the only asset distributed in liquidation, the shareholder takes a zero basis in the receivable, and all payments received are taxable.

What are the rules for an installment sale?

Under these rules, the note’s distribution is treated as a disposition of the installment obligation. The S corporation recognizes gain of $1,000. The shareholder recognizes no gain or loss on the distribution, as the basis in the S corporation is increased to $1,000 by virtue of the gain recognition, and takes a $1,000 basis in the note.

How is an installment sale reported in SEC 453?

The entire $1,000 gain is eligible for installment sale reporting under Sec. 453. The realized gain on the asset sale is $1,000, but none of the gain is recognized. After the asset sale, the S corporation adopts a plan of liquidation and distributes the note in liquidation.

When does an S Corp have a plan of liquidation?

When the shareholder collects the $1,000 in year two, the shareholder realizes no gain or loss. If the S corporation plans ahead and adopts a plan of liquidation before the asset sale, gain recognition can be deferred until the receipt of payment on the installment obligation in the subsequent tax year.