Installment Sale of a Business

[nyc_d4]

Hello!

I sold a business last year due to differences with a partner. He purchased my membership shares via an installment sale, where he paid a down payment and entered an agreement to pay out a fixed amount over a 3 year period on a monthly basis. He has effectively defaulted and I am currently pursuing a lawsuit. He seems to not have filed taxes with our accountant yet. How would I account for the taxes I owe on the sale of this transaction if my accountant does not have the company's tax return for 2024? In 2024, he paid me a $4k and one payment of ~$700. 

I'm curious because although I sold my shares and received some funds, this does not account for the money I put into the business, so I am still at a loss in the grand scheme of things. How would I account for this, and how would I account for the lack of a tax return for the final year of the business in which I was involved? 

Thank you!

[Cindy4]

If you structured the sale as an installment agreement, you are required to report it using the installment method unless you "elect out." This means you only report the portion of the gain as income in the year you receive the payment.

You would use Form 6252, Installment Sale Income, to report this transaction.  This form is used to calculate your gross profit percentage for the entire sale. You'll need to know the total selling price and your adjusted basis in the business.  Once you have the gross profit percentage, you apply it to the payments you actually received in 2024. 

The installment method rules do not apply to sales that result in a loss. If the total selling price of your shares (including the full value of the installment note) is less than your adjusted basis, you would report the entire loss in the year of the sale, not over time.   

This is very complicated as you don't know at this time how much you will receive and what will be reported on the K-1.  That may be something that your lawyer can also address.