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Recent Tax Changes Affecting Installment Sales, January 15, 2002 1 (January 15, 2002)

handle is hein.tera/crstax0357 and id is 1 raw text is: Order Code RS20432 Updated January 15, 2002 CRS Report for Congress Received through the CRS Web Tax Changes Affecting Installment Sales Gregg A. Esenwein Specialist in Public Finance Government and Finance Division Summary On December 17, 1999, President Clinton signed the Work Incentives Improvement Act of 1999 (H.R. 1180; P.L. 106-170). This Act included a modification and limitation on the use of the installment method of reporting asset sales for taxpayers who normally use the accrual method of accounting. This change produced a great deal of concern in the small business community. In response to this controversy, Congress acted to repeal these restrictions on installment method sales. Congressional action on this issue culminated in the passage of the Installment Tax Correction Act of 2000 (P.L. 106-573, H.R. 3594) which was signed into law on December 28, 2000. This Act repealed the restrictions on the installment sale method imposed by the 1999 Act. The repeal was made retroactive to the date of enactment of the 1999 change. This report will not be updated unless new legislative action is undertaken. Under pre-December 1999 tax law, some accrual basis taxpayers were allowed to use the installment method of accounting for certain non-dealer asset sales. However, if the cumulative total of outstanding installment sale obligations was greater than $5,000,000 at the end of the year, the taxpayer was required to pay an interest penalty on the deferred tax associated with the installment obligations in excess of the $5,000,000. Installment sales where the asset price was less than $150,000 did not count towards the $5,000,000 limit. The Work Incentives Improvement Act of 1999 (P.L. 106-170) repealed these provisions by prohibiting the use of the installment method of accounting for accrual basis taxpayers whose sales would otherwise be reported using an accrual method of accounting. The Act also modified the installment sale pledge rules so that any arrangement that gave the taxpayer the right to satisfy an outstanding debt obligation with an installment note would be treated as a direct pledge of the installment note and trigger a recognition of gain. The 1999 Act did not change the availability of the installment method of accounting for the sale of farm property or the sale of timeshare or residential lots. In addition, the Congressional Research Service °0° The Library of Congress

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