Why installment sales are a powerful tool in agriculture

You can sell a tractor using the installment method, but you must account for the recapture of depreciation in the year of sale. For fully depreciated equipment, you pay full tax in the year of sale and receive tax-free payments in subsequent years. Not ideal.

CONTROLLED ENTITY

There are also issues with installment sales between related parties. Sales of depreciable property (this does not include land) to a controlled entity do not qualify for the installment method. The controlled entity includes:

— Taxpayer and all controlled entities (ie the taxpayer owns, directly or indirectly, more than 50% of the entity).

— Taxpayer and any trust with the taxpayer or his or her spouse is a beneficiary.

— Two or more partnerships in which the same taxpayer holds, directly or indirectly, more than 50% of the capital or profits.

Although there are restrictions on sales to entities, sales from an individual taxpayer to another individual, regardless of their relationship, are eligible for the installment method.

Another problem with installment sales between related parties is that if a related party disposes of the property within two years, the remainder of the installment sale is taxable that year.

By the way: I’ve seen tied marketing companies set up for revenue deferral purposes that fail this test. Usually this surprises the farmer and leads to major tax problems.

Installment sales are a powerful tool in agriculture. However, there is a level of complexity that must be understood. Before concluding an installment sale, consult your tax specialist.

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DTN tax columnist Rod Mauszycki, JD, MBT, is a tax practitioner with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod’s “Ask the Taxman” column at www.about.dtnpf.com/tax. You can email Rod at taxman@dtn.com.

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