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Administrative Procedure

Administrative Procedure AP 201: Installment Sales

Date: 01/31/2018
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Income Tax

Procedures

201.1. Introduction.

201.2. Application.

201.3. Posting Security.

201.4. Filing on the Installment Method.

201.5. Release of Security.

201.6. Large Installment Sales Addition to Tax.

201.1. Introduction

            An installment sale is a disposition of property in which at least one payment is received by the seller after the close of a taxable year. I.R.C. § 453. Under the installment method, tax is paid on each installment in the year the installment is received.

 

            For tax years beginning on or after January 1, 2005, Massachusetts taxpayers using the installment method of reporting for federal purposes, may automatically qualify for this method for Massachusetts purposes as well, depending on the amount of Massachusetts gain for the transaction.1 G.L. c. 62, § 63. See TIR 04-28. For purposes of this Administrative Procedure, a partnership entering into an installment sale transaction is treated as the taxpayer.  

 

            Taxpayers with Massachusetts gain for the entire transaction of less than $1 million must automatically follow the method of reporting for federal purposes. Therefore, taxpayers using the installment method of reporting for federal purposes must also use the installment method of reporting for Massachusetts purposes. Such taxpayers are not allowed to elect out of the Massachusetts installment method of reporting. Taxpayers electing out of the installment method of reporting for federal purposes are automatically treated as electing out of the Massachusetts installment method of reporting. Such taxpayers are not allowed to elect the Massachusetts installment method of reporting.

 

            Taxpayers with Massachusetts gain for the entire transaction of at least $1 million are automatically treated as electing out of the installment method of reporting for Massachusetts purposes if they elect out of the federal installment method of reporting. Such taxpayers are not allowed to elect the Massachusetts installment method of reporting.

 

            Taxpayers with Massachusetts gain for the entire transaction of at least $1 million who elect the installment method of reporting for federal purposes have a choice between electing in or out of the Massachusetts installment method of reporting. Taxpayers must apply to elect to use the installment method of reporting by following the guidelines listed below. Taxpayers not making or not permitted to make this election must pay tax on the total gain in the year in which the transaction occurs.

201.2. Application

            A taxpayer wishing to report income using the installment method must apply in writing to:

 

Massachusetts Department of Revenue (DOR)

Filing Enforcement Bureau, Installment Sales Unit

200 Arlington Street, Room 4300

Chelsea, MA 02150

(617)887-6950

 

            This application should be received before or with the filing of the income tax return for the year in which the transaction takes place. Include the following information in the application:

 

Year of sale.

Type of property sold (if real estate, include complete address; if shares of stock, include complete description).

Name and address of purchaser.

Selling price.

Massachusetts basis (See G.L. c. 62, § 6F).

Gain.

Amount received in year of sale.

Amortization schedule showing principal and interest payments to be received and indicating the month and year amortization is to begin.

Gross profit ratio (taxpayer's gain on the transaction divided by the total contract price).

Copy of purchase and sale agreement.

Copy of U.S. Form 6252.

 

            If a request to report income on the installment method is denied, the taxpayer will be notified in writing. If the request is recommended for approval, the taxpayer will receive a tentative approval letter requesting that security be posted equaling the amount of the maximum future taxes due.

201.3. Posting Security

            Final approval to file on the installment method is conditioned upon the posting of acceptable security. However, for sales on or after January 1, 2005, no security need be posted where the Massachusetts gain for the entire transaction is less than $1 million. Examples of acceptable security are: surety bonds, fully assignable savings accounts in a bank or trust company in Massachusetts, Massachusetts bank letters of credit or obligations of the United States or the Commonwealth of Massachusetts which mature not more than five years from the date of the last payment of tax on the deferred gain.

 

            Security must be posted within 30 days after the date of the tentative approval letter.

201.4. Filing and Reporting on the Installment Method

     Once a request is approved and acceptable security is posted, income tax returns for all years involved should be filed just as any other income tax return would be filed (i.e., either e-filed or mailed to the appropriate post office box as directed in the instruction booklet). Returns should not be mailed directly to the Installment Sale Section unless the taxpayer is seeking release of security.

 

            All schedules connected with the installment transaction must be submitted with the tax return, including: Massachusetts Schedule D (or Schedule D-IS), Federal Schedule D, Federal Forms 6252 (for each sale) and 4797. All income from Installment Sales occurring before January 1, 1996, shall be classified as a capital gain or ordinary income under the law in effect on the date the sale took place.

 

            Taxpayers with installment sales occurring between January 1, 1996 and December 31, 2002, must file Schedule D-IS with their returns instead of Schedule D. Capital gains from these sales must be reported on Schedule D-IS, Part 2, and are taxed at the capital gain tax rate in effect in the year of the sale. Capital gains from all other sources must be reported on Schedule D-IS, Part 1, and are taxed at the prevailing capital gain tax rate in effect in the current tax year.

 

            Capital gains from Installment Sales occurring after January 1, 2003, must be reported on Schedule D (or Schedule D-IS, Part 1 when required) and are taxed at the prevailing capital gain tax rate in effect in the current tax year.

 

      Short term capital gains, capital gains from pre-1996 installment sales and all capital gains from the sale of collectibles must be reported on Schedule B, Part 2. Short term capital gains must be reported on Schedule B, Line 10 and long term capital gains from the sale of collectibles must be reported on Schedule B, Line 11. Long term capital gains from installment sales which began prior to 1996 must also be reported on Schedule B, Line 11. 

 

      Interest received on the note connected with any installment sale transaction is taxable to residents and non-residents alike per G.L, c. 62, § 63(d). This interest must be reported on Massachusetts Schedule B.

201.5 Release of Security

            At the taxpayer's request, security will be released either when tax on the entire gain is paid or proportionately every other year after the posting of security. To request a full or partial release of security, a taxpayer must attach a cover letter to the return when filed, setting forth all relevant details and computations. Both the return and the letter should be mailed to the Installment Sales Unit at the address listed in section 201.2 of this procedure.

201.6 Large Installment Sales Addition to Tax

     Effective for tax years beginning on or after January 1, 2010, with respect to installment obligations as of the close of the tax year, interest must be paid on the deferred tax of certain installment sales, as required federally under IRC §§ 453A(a)-(c), 453(l)(2)(B). An addition to tax applies to taxpayers who have deferred the gain, and the tax associated with that gain, on non-dealer installment sales with a sales price over $150,000 if the aggregate face amount of the installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million. An installment sale addition to tax must also be paid on the deferred gain from the installment sale of timeshares, campgrounds, and residential lots if the sale meets certain criteria. See G.L. c. 62C, § 32A and Technical Information Release 10-11.

Here is for an explanation of how to calculate this addition to tax.      

  1. Massachusetts currently follows the 2005 Internal Revenue Code.  G.L. c. 62, § 1(c) as amended by c. 163 of the Acts of 2005.  Unless the Department indicates otherwise, § 453 as amended and in effect on January 1, 2005 will determine the Massachusetts treatment of installment transactions.

 

G.L. c. 62, §§ 1(c) as amended by c. 163 of the Acts of 2005, 6F, 63, 63(d)

G.L. c. 62C, § 32A

I.R.C. §§ 453, 453A(a)-(c), 453(l)(2)(B)

TIR 04-28

TIR 10-11

Schedule B, Interest and Dividends

Schedule D, Long-Term Capital Gains and Losses 

Schedule D-IS, Installment Sales

Schedule D (Federal), Capital Gains and Losses

Form 4797 (Federal), Sales of Business Property

Form 6252 (Federal), Sales of Business Property 

Referenced Sources:

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