This review of the Tax Relief Extension Act of 1999 pertains mostly to areas that are of interest to individuals and small business owners. A most significant change in this new law is that for sales entered into after December 17, 1999, taxpayers are prohibited from using the installment method of accounting for dispositions of property that would otherwise be reported using an accrual method of accounting. This law does not affect the current rule regarding the availability for the installment method for dispositions of property used or produced in the business of farming, sales by cash method taxpayers or timeshares of residential losts if the taxpayer opts to pay interest under Section 453(I).
In essence, what this new law is declaring is that you cannot use the installment method of accounting to report a sale for tax purposes if you are on the accrual method of accounting. As the accrual method is a fairly popular method of accounting, this law will have a great affect on many businesses. This provision of this law is so cumbersome to small business owners that a backlash from owners and trade organizations is almost expected. Perhaps this provision will be repealed in 2000, bu7t for now it is still a relity. Following is an example of how this new law can affect your business:
Cole Inc. is an accrual basis S corporation. Cole agrees to sell all of its assets to Smith Inc. for a $2,000,000 down payment and 5 annual payments of $2,000,000 each year. Under the new law, Cole Inc. must report the entire $12,000,000 sale price in the year of the sale. In many cases, you may wind up paying more in taxes in the year of the sale than you generate from the sale itself. It may be worthwhile during the negotiation process to accept a lower price in exchange for a larger downpayment.