EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). Sold all shares upon termination. How report 1099B gain if paid over 10 years?

[yogiman42]

Not receiving total amount on 1099B all at once but monthly over 10 years.

[MichaelDC]

Did you have an amount added to your W-2 over the years? Or were you allowed buy at a discount through your paycheck?

[yogiman42]

Never added to W-2. Only paid tax annually on dividends via 1099's.

[TomYoung]

Non-publicly traded?  Non-Qualified Small Business Stock?

[yogiman42]

Private company. Therefore not publicly traded.

[TomYoung]

QSBS?

[yogiman42]

Not a QSBS.  It is just a for profit, privately owned company incorporated in Michigan that has an ESOP plan with its executives. When you terminate employment you sell your shares back to the corporation and receive a 1099B showing the total sales proceeds approximately ($600,000) and the total cost ($200,000). HOWEVER, the Corporation is paying the proceeds to terminated employees via a promissory note monthly over 10 years  BUT THE TOTAL AMOUNT IS ON THE 1099B !!!  How report the 1099B gain of $400,000 for tax purposes ?

[TomYoung]

You should be able to use the installment method to report the gain, recognizing the gain over the 10 years.  You can "opt out" of using the installment method and report the entire gain in the first year if you wish, and simply recognizing interest income as you receive future payments of principal and interest.  But most people would rather use the default installment method for obvious reasons.

The reason I asked about QSBS is that there seems to be a flaw in TurboTax's programming here.  You can use the installment sales method, identify what you've sold as "stock", TurboTax then asks QSBS? and if you answer "No" then TurboTax tells you that you can't use the installment method.

I've devised a workaround which, to the best of my knowledge and belief, does allow you to report the sale as an installment sale, properly.  But check things over carefully to make sure you agree.  Broadly speaking, the installment sales method requires that you state your gain as a percentage of the proceeds ($400K/$600K = 66.67%) and then apply that percentage as principal against the note is collected.

So here's the step by step:

1. Begin the Installment Sales interview under the "Less Common Income" section
2. Answer "Yes" to the question "Do you want to report an installment sale?"
3. On the "Property Description" page enter "Description of Property Sold", "Date you Acquired This Property", "Date Your Sold This Property"
4. On the "Sales Information" page enter "Selling Price", (there's your 1099-B amount), "Sales Expenses" and "Cost or Basis"
5. On the "How Was This Item Used?" page answer "No"
6. On the "Sold Stock" page answer "No"
7. On the page "Collectible" answer "No"
8. On the page "Passive Activities" answer "No"
9. On the page "Debt Assumed by Buyer" enter the appropriate amount ($0, I assume)
10. On the page "Principal and Interest Received" enter the appropriate amounts
11. On the page "Depreciable Property" answer "No"
12. On the "Related Party Sale" page answer "No" (I assume)

Form 6252 shows the calculation of the gain and the gain then is reflected on Schedule D, Part II, line 11.

Each year you'll go back to this interview to report the principal and interest received that year.

Tom Young