As a tax practitioner, you will encounter individuals in all income groups with installment sales. The complexity of considerations for such taxpayers is a significant opportunity for an enrolled agent to render assistance.
Few people are capable of preparing their own tax returns correctly when installment sales are involved. Therefore, you can market your qualifications as a tax expert from having passed the special enrollment examination to capture clients with installment sale income. After showing your value with this situation, you are certain to attain a long-term client relationship.
Taxpayers incur installment sales whenever they defer receipt for some portion of sale proceeds to a future year. By doing so, they get to defer paying tax on some of their gains from selling the properties. That’s how handling the tax reporting and calculation becomes complicated for most people in these circumstances.
To figure it out correctly, they need the help of tax professionals – such as enrolled agents. This gives a taxpayer the additional benefit of having someone with training and authority to defend the accuracy of calculations with the IRS.
Only gains are reported throughout the years of installment sale payments. The full amount of any loss is reported in the year of sale, regardless of when payments are received. In addition, the installment method only applies to tangible personal property and real estate. It isn’t used for sales of business inventory or investment securities.
By completing an enrolled agent course you learn how to use the installment method to report taxable gain each year that payments are received. Of course, this requires calculation of the profit margin in the year of sale. That percentage is then applied to payments received – excluding interest – in each tax year.
Taxpayers then find the results of your annual calculation on Form 6252 in their tax returns. The taxable gain determination on this form is reported on Schedule D for calculation of capital gains and losses.
Your proficiency in tax matters helps the recipient of installment payments report interest as ordinary income elsewhere on a tax return. Only the principal received representing the deferred selling price matters for the capital gain.
Interest is required on installment sales. In fact, the amount of interest charged must equal or exceed the applicable federal rate published monthly by the IRS. This means that some of a taxpayer’s installment payments are always a minimum amount of interest. Only the remainder is deferred sale proceeds upon which the lower tax rate on capital gains applies.
You may have to impute a required amount of interest for someone with an installment agreement that doesn’t state a sufficient interest rate. Such complications are another point for promoting your services after passing the enrolled agent examination. People with installment sales definitely benefit when alerted to the tax expertise you possess for helping them.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.