Business installment sale payments

[nyra]

I inherited a client that sold a business several years ago in an installment sale. For simplicity, let's say he reports $100,000 each year in installment sale income on Form 6252. Each year he also sends 1099s to several other people, each for 2% of the annual income he reports from the sale (so $2k each). 

I don't see the 1099 payments reported anywhere on his previous tax returns and I am wondering if those are deductible at all? I don't have the original sale agreement so I don't know anything else about the substance of the payments. The client hasn't said anything, I'm mostly just curious.

Could someone point me in the right direction as to whether those payments are deductible and/or how they would be reported on the tax return?

[qbteachmt]

Details matter.

You didn't identify if his reporting to others is 1099-Int? 1099-Misc? 2% of what, for what reason? Is no one sending a 1099 of some type to him?

You likely see a payment to him that is principal and interest. Somewhere there is an agreement.

Is his payment to the other people interest only, or is it part of a payout that is principal and interest? Somewhere something is documented.

Do you know what the initial numbers are for whatever was sold, and how the installment period is structured?

"Could someone point me in the right direction as to whether those payments are deductible and/or how they would be reported on the tax return?"

Business or personal return? Business or personal sale?

There are hardly any details here.

[dkh · Accepted solution]

I'd ask the client for the documentation for the sale of the business and the tax return for same year.   Hopefully all your questions can be answered after looking at the documents.

[nyra]

He has been sending 1099-NECs. The 1099-NEC to each person is for 2% of the annual installment amount that he reports as income. The installment income has just been recorded as principal only each year, no interest portion. He does not get a 1099 of any kind. As far as I can tell, the total amount of the sale is reported on his return, which is why the 1099 payments to other people are confusing me. This is all on his personal 1040 return, he is retired and no longer has any business returns. 

I'm sure he has documentation and the sale agreement somewhere. Since the 1099s have not even been reported at all on his returns for the past several years, I'm just trying to get some ideas for where to start or what to even look for before going down this rabbit hole and asking the client for other documentation. 

[nyra]

Alright, guess I'll start there and see what I find. Thanks!

[qbteachmt]

1099-NEC is for services rendered to a business by a business person who is not acting as an employee of a corporation, so that's weird.

"Since the 1099s have not even been reported at all on his returns for the past several years"

They don't "get reported" like that. They are informational. The reason to issue a 1099-NEC to another person is because their services to your business totaled $600 or more, you want to include that as a business expense, and to "prove to the IRS" that it is business, you report the person you paid via 1099-NEC, when you paid them not through a third-party settlement agent (such as, you would not report if you paid through PayPal or VISA, because those agents will be reporting via 1099-K). If I do work for your business, and you pay me in cash, for instance, and it is $600 or more total in the year, you issue me and the IRS a 1099-NEC because I am not an employee of the business that just did that work for you. I am that business.

Reporting the payment as ordinary taxable income, is a bit of an assumption, as well. The gain from the sale is reportable, and the interest is reportable, which is the function of installment sales. But what if this was $500,000 sale, with $350,000 paid and $150,000 financed? Over some length of time, at some interest rate...or $2million sale, no down, and some sort of terms? Now, what if his basis was $500,000 in either example? See how gain is dependent on the facts, interest is dependent on the facts. You need to know the facts. The entire payment likely is not taxable.

Try this:

https://www.irs.gov/taxtopics/tc705