Year-End Tax Tip: Large Installment Sales

Oftentimes, business owners rush to finalize transactions before the end of the year, driven by various strategic considerations. However, if you’re closing a large installment sale or transaction in the final months of the year, it’s crucial to consider the potential tax implications—and how a slight delay might save you money.

The 453A Interest Charge

When you sell property and receive payments over time, the IRS requires you to pay tax on the gain in the year you receive each installment. This tax is governed by Section 453 of the Internal Revenue Code, which allows for installment sales. However, for larger transactions (installment balance over $5M), Section 453A introduces an additional wrinkle: it imposes an interest charge on the deferred tax liability. This interest charge is designed to ensure the IRS receives a reasonable return on the deferred taxes. The current rate is 8% of the deferred tax liability.

Here’s where timing becomes crucial. If you’re closing your transaction at the end of the year, you’ll find yourself facing this interest charge sooner than necessary. Payments on the deferred tax liability might be due as soon as four months after the close of the transaction, rather than giving you up to 16 months if you delay the deal into the new year. Additionally, the interest is charged at the end of the year and does not account for having the deferral for only a small portion of the year.

Why Delay?

By postponing the closing of your installment sale until January, you can effectively extend the time frame for paying the 453A interest charge. Instead of paying the tax liability in April (the typical four-month deadline), you would potentially have until the following April—giving you up to 16 months to settle your tax obligations. Additionally, if the only part of the transaction that changes is moving the initial payment from December to January, you would have a permanent tax savings equal to what the 453A charge would be if the transaction occurred in December instead.

Considerations and Next Steps

Review Your Timeline: Assess whether you can push the closing date of your transaction to January. This delay can align your tax payment schedule to a more favorable timeline and possibly allow for a permanent tax savings.

Consult Your CPA: Discuss with your CPA or tax advisor to understand how this delay impacts your specific situation and to ensure compliance with IRS rules.

Evaluate Financial Impact: Weigh the benefits of delaying against any potential business or strategic disadvantages.

By taking the time to evaluate your transaction’s timing, you might be able to optimize your tax situation and improve your cash flow. If you’re on the brink of closing a significant deal, consider the potential savings and benefits of postponing it to the new year. It could make a substantial difference to your bottom line.