Reporting the sale of your small business using the installment method can save significant amounts of federal income tax, and provide flexibility to both seller and buyer.

An installment sale can save tax dollars. Each year, over 250,000 businesses are sold using an installment sale of assets, where the buyer pays all, or part of the purchase price in installments over several years.

Congress has been “Off and On” with rules allowing gain from a sale of the assets of an entire business to be reported on the installment basis. Right now they are “On” and you can spread at least part of the tax otherwise due on the sale of your business assets over the same period you receive payments. The installment method allows your income tax liability on gain from the sale of assets that produce capital gain, such as Goodwill and Land, to be paid as you receive sales proceeds.

Typical prospects for an installment sale are owner-managed businesses with less than $10 million in annual revenues. Buyers of such businesses typically can't get full financing from the capital markets, and they typically want to acquire assets, not stock. Larger businesses rarely use the installment method, because they can get financing, and they more often acquire stock instead of assets.

Stock acquisitions require extensive due diligence. If you buy stock, you inherit the seller's tax liabilities for prior years, environmental liabilities, and a number of other possibly devastating non-financial exposures. Asset acquisitions are usually less complex.

An asset acquisition also may have significant tax benefits for the buyer. A purchaser of assets records them at the price paid for them, usually increasing their basis for purposes of claiming depreciation and amortization. The installment method allows the buyer to begin realizing the benefits of increased depreciation and amortization deductions before the entire purchase price is paid - using money NOT paid as taxes to pay part of the installment payments..