Accrual Basis Taxpayers Once Again Able to Get Installment Sale Treatment for Asset Sales
In late 1999, Congress surprised business lawyers by enacting legislation denying accrual basis taxpayers installment method accounting for deferred payment asset sales. Under the 1999 Tax Relief Extension Act, for transactions on or after December 17, 1999, an accrual basis taxpayer would be required to recognize taxable gain on an installment sale in the year of the sale and not over the period in which the installment payments are made. This change created significant impediments for many taxpayers looking to structure a business or real estate sale with a portion of the sale proceeds being paid over time. It caused the full tax to be due on the date of the transaction, even though the consideration for the transaction would be received over time.
Fortunately, almost a year after its enactment, Congress has repealed the installment method prohibition, once again allowing accrual basis taxpayers to report gain on installment sales using the installment method, as the payments are received and not in the year of sale. The Installment Tax Correction Act of 2000 repealed the 1999 prohibition retroactively.