How to report installment sale of stock

[ToddL]

What type of stock did you sell?

[bobby182]

common stock of private company

[ToddL]

Only if the stock is qualified under Section 1202, Qualified Small Business Stock ,  can you report it using the installment method.  

You will enter this under the Federal Taxes tab, Wages and Income section, Investment Income category, Stocks, Mutual Funds, Bonds, and Other interview. You will type in the information yourself, select “No financial institution,” and complete the “Enter Other Sales” interview. 

[t342]

Is it actually true that stock needs to be qualified small business stock in order to be eligible for installment sale treatment? I have not seen anywhere in IRS documentation that says this or links installment sale rules with 1202. The only places I see that refer to this idea are connected to Turbo Tax, but Turbo Tax might be wrong.

I am not an expert. But it seems like Turbo Tax may be assuming that stock that is not qualified small business stock is necessarily stock traded on an exchange, but that is not always true. Installment sale treatment is generally not available for stock traded on an established exchange, but can't there be stock that is not available on an exchange that is ALSO not qualified small business stock? In that case, wouldn't installment sale treatment be available?

[TomYoung]

This is a known defect in TurboTax even though TurboTax does not include it on their lists of "calculations not supported by TurboTax".  Certainly non-public, non-QSB stocks can be reported using the installment method.

Try the following.  It does seem to work but no guarantees:

Begin the Installment Sales interview under the "Less Common Income" section
Answer "Yes" to the question "Do you want to report an installment sale?"
On the "Property Description" page enter "Description of Property Sold", "Date you Acquired This Property", "Date Your Sold This Property"
On the "Sales Information" page enter "Selling Price", "Sales Expenses" and "Cost or Basis"
On the "How Was This Item Used?" page answer "No"
On the "Sold Stock" page answer "No"
On the page "Collectible" answer "No"
On the page "Passive Activities" answer "No"
On the page "Debt Assumed by Buyer" enter the appropriate amount ($0, I assume)
On the page "Principal and Interest Received" enter the appropriate amounts
On the page "Depreciable Property" answer "No"
On the "Related Party Sale" page answer "No" (I assume)

[t342]

Thank you. That is very helpful. I am surprised there are so many forum responses saying that stock sales need to be of QSB to have installment sale treatment, which indeed does not seem correct. The method you outline seems to be working for me.

[ToddL]

I've got a little more to add to the discussion. While I agree there may be non-QSB stock that is not traded on an established exchange, there are several IRS references that lead me to believe that installment sale treatment is limited to QSB stock.

1. Publication 537 (2017), Installment Sales
Stock or securities. You can’t use the installment method to report gain from the sale of stock or securities traded on an established securities market. You must report the entire gain on the sale in the year in which the trade date falls.

(This clearly rules out installment sale treatment for publicly traded stocks for installment sale treatment, as do the instructions for Form 6252).

2. Instructions for Schedule D (Form 1041) (2017)

Gain from an installment sale of QSB stock.
If all payments aren't received in the year of sale, a sale of QSB stock that isn't traded on an established securities market generally is treated as an installment sale and is reported on Form 6252. Part or all of any gain from the sale that is reported on Form 6252 for the current year may be eligible for the section 1202 exclusion. Report the long-term gain from Form 6252 on Schedule D, line 11. In column (a) of Form 8949, Part II, enter the name of the corporation whose stock was sold. In column (f), enter “Q” and in column (g) enter the amount of the allowable exclusion as a negative number. See the Instructions for Form 8949, columns (f), (g), and (h). If you are completing line 18c of Schedule D, enter as a positive number the amount of your allowable exclusion for the year on line 2 of the 28% Rate Gain Worksheet; if you excluded 60% of the gain, enter 2/3 of the exclusion: if you excluded 75% of the gain, enter 1/3 of the exclusion: if you excluded 100% of the gain, don't enter an amount.

(This highlights the fact that QSB stocks are definitely eligible for installment sale treatment).

3.  Instructions for Schedule D (Form 1041) (2017)

To be QSB stock, the stock must meet all of the following tests:
1. It must be stock in a C corporation (that is, not S corporation stock).
2. It must have been originally issued after August 10, 1993.
3. As of the date the stock was issued, the corporation was a QSB. A QSB is a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.
4. The estate or trust acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the estate or trust may meet the test if it acquired the stock from another person who met this test (such as by gift or inheritance) or through a conversion or exchange of QSB stock the estate or trust held.
5. During substantially all the time the estate or trust held the stock:
a. The corporation was a C corporation,
b. At least 80% of the value of the corporation's assets was used in the active conduct of one or more qualified businesses (defined below), and
c. The corporation wasn't a foreign corporation, DISC, former DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company, real estate investment trust, REMIC, FASIT, or cooperative.
 
Qualified business.
A qualified business is any business OTHER than the following: 
• One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;
• One whose principal asset is the reputation or skill of one or more employees;
• Any banking, insurance, financing, leasing, investing, or similar business;
• Any farming business (including the raising or harvesting of trees);
• Any business involving the production of products for which percentage depletion can be claimed; or
• Any business of operating a hotel, motel, restaurant, or similar business.

(That leaves an awful lot of possibilities for non-QSB, non-publicly traded stocks that would appear not to have been addressed by the IRS when it comes to installment sale treatment.

However, while non-QSB, non-publicly traded stocks are not specifically excluded (as publicly traded stocks are), they are NOT specifically included (as in #2 above) in any "how to" instructions from the IRS. Absent further research, I'd be hesitant to claim installment sale treatment for non-QSB, non-publicly traded stock.

[t342]

Thanks for this good info. And again, I am not a tax expert. I do think, however, based on the items you highlight here (which are the main items I have found also), the rules strongly suggest that non-QSB, non-publicly traded stocks can qualify for installment sale treatment. The key instructional doc on Installment Sales is 537, and that is fairly straightforward in saying the following:

1) An installment sale is the sale of property where you receive at least one payment after the tax year of sale;
2) certain types of sales are *specifically* (ie, expressly) excluded, included sales of stock traded on an established exchange; and
3) if a sale is an installment sale, you must report it as such unless you specifically elect out of it.

Based on these points, the document stands for the idea that you presume a property sale with at least one payment after tax year of sale is an installment sale, unless there is a clearly marked exception or you expressly elect to treat it differently. Regarding stock sales, the only clearly marked exception is that regarding sales of stock on established exchanges.

The qualified small business documentation you note suggests to me not that the IRS is saying only that kind of stock can be an installment sale; but rather that there are a variety of special rules for qualified small business stock, and in the context of explaining those rules the IRS explains how to properly handle installment sales in that context. Basically, not that only qsb stock qualifies for installment sale treatment, but that there are special characteristics of qsb stock that you should keep in mind when reporting installment sales.

That, at least, is my non-professional reading. If there is somewhere where the IRS provides for more exclusions to installment sales, or provides further detail about this all, that could change things. I am also just not sure why Turbo Tax does what it does. (Anyone have other TT versions, like business, to see what they do there?) But otherwise it seems that non-qsb, non-publicly traded stock should be allowed to be included in installment sales.

[ToddL]

I agree with your reasoning.

[t342]

Thanks--and thanks for laying out the documentation well above.

[sergeik]

Can someone suggest how non-QSB non-publicly traded must be reported? I've reported the sale on 6252 for 2017 tax year. At the same year I've got 1099B with amount equal to the installment I got in 2017. This triggered automatic IRS audit as TurboTax hasn't reported anything on 8949 and IRS's 1099B totals (some) didn't match 1099B from my 1040 (nothing).

I think I've filled 6252 correctly, however I probably had to create 8949 with zero gain (otherwise I would be paying taxes twice). I guess this could be done either by specifying cost basis equal to the amount on 1099B or by applying a negative adjustment. Can anyone give me a hint on that could be the right way?

[TomYoung]

@sergeik 

This is not an "authoritative" answer - I have no cite for it - but I'd say entering the "trade" at a $0 gain/loss on Form 8949 would be a good approach.  You didn't trigger an IRS "audit", (in the formal sense), you triggered a computer-generated "no match" bit of correspondence.  Putting the trade on Form 8949 should satisfy the computer.

[sergeik]

Thanks. I understand this is not a formal tax advice. What is more reasonable way to report a zero gain transaction on 8949 in your opinion? I see 2 approaches (lets assume the first year proceeds are $10k):

- Put $10k as proceeds (column (d)) and as cost basis (column (e)), put code B in column (f)

- Put $10k as proceeds (column (d)), nothing as cost basis (column (e)), put code O in column (f) ("You have an adjustment not explained earlier in this column"), put "(10,000)" (means negative $10k) as "Amount of adjustment" (column (g)). Then print and attach an explanation on why I've made the decision. The explanation is probably only needed to respond to CP2501/CP2000, not needed when filing a tax return.

[Gary161]

Small business stock. I bought 100 shares for $1 when I joined the corporation.