TurboTax is applying erroneous restrictions on use of Installment Sale for private company stock

[Island Hopper]

WILL SOMEONE FROM TurboTax PLEASE READ THIS MESSAGE

Some new language has been added in the past 2 weeks, but TurboTax (Live and Desktop) is still not allowing use of Installment Sale reporting for valid private company stock sales.

The only IRS restriction on using Installment Sale is that it can't be stock which can be sold on an established stock market or exchange (IRS Pub 537) - in other words it has to be private (unlisted) stock. That language was recently added to the Installment Sale Summary page, put inaccurate restrictions are still in place.

To use Installment Sale, TurboTax requires that the stock meet all the requirements for section 1202 small business stock (QSBS). This is not correct.

Section 1202 has very tight restrictions, including C-corp, company asset levels, certain service businesses excluded, etc. - all necessary to earn the exclusion on capital gains taxation of up to $10 million.

QSBS (1202) is a subsegment of private company stocks.

There are more S-corps than C-corps, and Founders, employees and investors are allowed to use Installment sale for their S-corp stock sales.

There are lots of issuances of C-corp stock that do not meet 1202 (QSBS) requirements.

These restrictions need to be modified.

Now, a taxpayer can say the stock sale meets the 1202 qualifications, but if the stock has been held for 5 years or more, no capital gains are recognized. Overriding the adjustment then precludes e-filing.

PLEASE FIX THIS

[DianeW777]

TurboTax does a great job of handling most individual tax situations however there are some items that become complicated. The link below shows these complicated situations and the information about your situation and how to handle it are printed here for your convenience.  You can do this in TurboTax Desktop.

• Unsupported Situations

Sale of Qualified Small Business Stock and Installment Sales (Form 6252): 

For sales of Qualified Small Business Stock, the program does not apply the Section 1202(b) gain limitation to the exclusion. If you have a gain in excess of the Section 1202(b) limit, you must split the disposition and enter it as two separate transactions. Check the "Yes" box on Line E of the Form 6252 General Information Smart Worksheet only for that portion of the sale that does not exceed the gain limitation.

[Island Hopper]

Diane, thanks for replying, but I am not describing the problem well enough.

This has nothing to do with 1202 QSBS stock sales or an exclusion limitation.

The question is why does TurboTax limit Installment Sales to only 1202 stock - a small segment of total private company stock types? It is an Unsupported Situation that has many more taxpayers than 1202 stock does.

Tax CPAs have been using Installment sales for private company S-corp stock sales for decades.

It does not require any change in TurboTax  processing changes. 

TurboTax should ask if the stock sold meets the IRS regulation - not traded on a public exchange.

If it does meet the private stock requirement, then handle them all the same way. Then ask if the stock meets 1202 requirements, and if it has been held for more than 5 years, eliminate the capital gain from the 1202 sale.

Is this a clearer description?

[Island Hopper]

But Diane,

My issue is that applying installment sales to non-QSBS (1202) is no different than how TurboTax is handling it for QSBS. And there are a lot more non-QSBS sales.

The logic tree should go like this:

Is the stock you sold listed on a public exchange? - answer no

Then you can use the installment sale

Does the stock qualify for 1202? - answer no 

Then normal handling as an installment.

If yes to 1202, then if held more than 5 years there is no recognized capital gain - if less than 5 years the normal installment sale gross profit is recognized for the annual payment.

EASY FIX.