The Federal Tax Code

Cash basis accounting accounts money transactions only. This means that transactions are recorded if and only if money is received. Installment sale means that properties are disposed or sold in a manner that payments are proportioned and the first payment should be received before the end of the taxable year when the property is disposed. In this case, if a person uses a cash basis accounting in his or her business, the gain will be that he or she will pay less tax in that accounting period because in cash basis only part of the installment sale will be recorded and only a part of the payment is received (Fishman, 2006).

In accrual basis accounting, transactions are recorded whenever revenue is incurred. This means that an installment sale will be recorded on its full price on that accounting period. If the full price is recorded, then that means full tax on that particular sale will be deducted. However, there will be no records of sale will be accounted for the future accounting periods. This means that no tax will be withheld from that sale on the future accounting period (Walther, 2009).

According to the Federal tax code section 453 also known as Installment Method, installment sale occurs when a disposition of property takes place and the initial payment, which is a part of the full payment, is received before the end the accounting period where the transaction happens.

Dealers cannot use installment sale. Dealers are said to be the ‘first disposition’, the person who initially disposes the property. One seen reason behind this is to eliminate the over profit obtained by the dealers. Dealers are usually the producers of a certain property, product or good. In this case, if they sell their products, then they should have a profit from it.

However, installment sales give an interest that could increase the price of a property, product, and good over time. If installment will be applied to dealers, then profit of the dealers would be doubled over time depending on the interest rate applied on the product, property, good or service (Internal Revenue Code).

References

  • Fishman, S. (2006). Lower Taxes in 7 Easy Steps. Berkeley, Calif. Nolo.
  • Internal Revenue Code, Subtitle A, CHAPTER 1, Subchapter E, PART II, Subpart B, Sec. 453: Installment Method. Retrieved April 6, 2009 from http://www.fourmilab.ch/uscode/26usc/www/t26-A-1-E-II-B-453.html
  • Walther, L. (2009). Chapter 3: Income Measurement. Principlesofaccounting. Retrieved April 6, 2009 from http://www.principlesofaccounting.com/chapter%203.htm