Key Takeaways
- The gross profit ratio determines the taxable portion of each installment payment — total gain divided by total contract price.
- Depreciation recapture must be recognized in the year of sale and cannot be deferred under the installment method.
- Seller financing is present in 75-90% of small business transactions, typically funding 30-60% of the purchase price.
- The Applicable Federal Rate (AFR) sets the minimum interest rate for seller financing to avoid imputed interest.
- Related-party dispositions within two years trigger acceleration of the seller's deferred installment gain.
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Test Your Knowledge
1.Under IRC §453, can depreciation recapture be deferred using the installment method?
2.What percentage of small business transactions include seller financing according to the SBA?
3.What triggers acceleration of deferred installment gain under the related-party rules?
4.What is a common seller financing structure that balances buyer cash flow and seller risk?