Section 1244 Stock
Certain small business corporations may issue stock to employees and officers under Section 1244 (small business stock). Records must be kept that distinguish Section 1244 stock from other stock interests. You must also provide documentation that you are the original holder, the corporation qualified to issue this particular stock and it was issued for money or other property.

Important aspects of Section 1244 Stock for the Exam include:

  1. Losses on this stock are treated as ordinary and capital,
  2. Ordinary loss limits are $50,000 for single filers and $100,000 for married filing jointly and
  3. Losses above the ordinary loss limits are treated as capital losses.

Installment Sales
An installment sale is a sale in which the seller receives installment payments over time for the purchase of the property. At least one of the payments must be made after the close of the tax year in which the sale occurs to qualify as an installment sale.

Exceptions that do not qualify as installment sales:

  • Publicly traded securities
  • Property sold at a loss
  • All payments are made in the year of the sale
  • Related party sale (sold within two-year holding period of original purchase date)

Installment sales use the gross-profit gain reporting method:

Profit/Sale Price = Gross Profit Percentage

Example:
Lisa sold land to Jeff under the installment sales method for $250,000. The land has a FMV of $300,000 and Jeff put $50,000 as a down payment. Lisa's adjusted basis in the land is $100,000. Jeff signed an eight-year note to pay $25,000 plus interest each year. How much gain must Lisa report in year one?

Profit from sale divided by sales price = Gross profit percentage
Profit from sale = $150,000 ($250,000 - $100,000)
Sales price = $250,000
$150,000/$250,000 = 60% gross profit percentage

Answer: Installment $50,000 x 0.60 = $30,000 gain

Installment sales gains are treated as capital gains. They can be long- or short-term depending on the holding period of the property prior to the sale.



Involuntary Conversions

Related Articles
  1. Investing

    Avoiding A Big Tax Bill On Real Estate Gains

    Installment sales allow sellers to defer taxes on real estate profits.
  2. Personal Finance

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  3. Taxes

    What Is Section 1231 Property?

    Section 1231 property is depreciable business property that’s held for a year or longer.
  4. Investing

    What's a Hire Purchase?

    Hire purchase is a term used in Great Britain to describe an installment plan payment arrangement.
  5. Investing

    Understanding Gross Sales

    Gross sales represents the overall revenue of a company through its sales activities.
  6. Taxes

    Form 9465: Don't Pay Your Back Taxes Without It

    This form can lighten your tax load if you owe Uncle Sam.
  7. Insurance

    Hiring a Contractor vs. DIY: Cost – Benefits

    When you want to change something about your home, the first question to ask yourself is whether it’s more cost-effective to DIY or hire a professional.
  8. Taxes

    Can't Pay Your Taxes? What to Do Now

    Not enough cash on hand for your April tax bill? No need to panic. Here's what to do.
  9. Investing

    Net Sales

    Net Sales is an accounting term used to analyze a company's performance. It is the sales revenue that remains after deducting for product returns, damaged or missing products, and discounts. ...
  10. Investing

    Solar Wars: Solar City vs. Verengo Solar vs. Sungevity

    Read about three important players in the growing solar-energy services market, and learn more about their business operations and market positions.
Trading Center