Can a non compete be part of an installment sale 6252

[Carl56]

Can a non compete be part of a installment sale or should it be not attached to  form 6252?  I entered it as a an asset held for less than one year so it will be short term CG.  But when linked to the installment sale I am showing almost a $1100 less in the federal tax owed on a $5000 dollar non compete clause compared to when not linking it to the 6252 owing the $1100...  Something is not adding up so Im guessing it cannot be linked?

[DaveF1006]

In reviewing the IRS publication regarding installment sales, there is no mention of special considerations for non-compete clauses so this is not part of an installment sale. This then would be treated as a normal installment sales assuming there are no other contingencies attached. 

Be sure to read the publication link I have included. Lot's of good information there to review.

[Carl56]

Not sure what you mean as it would be treated as part of a normal installment sale.  It is either part of the installment sale or it isn't.  I see nowhere that it cannot be included in the installment sale, but then again if it is going to be treated as ordinary income in the year of the sale it could not be.  But then yet again, I did not receive but a partial payment in 2021, so it is quite confusing.  Not sure how tax accountants have treated this in business sales that they have assisted in.  

[ColeenD3]

As @DaveF1006 said, " This then would be treated as a normal installment sales assuming there are no other contingencies attached."

Single Sale of Several Assets

If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. You also have to allocate part of the selling price to each asset. If you sell assets that constitute a trade or business, see Sale of a Business, later.

Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. This becomes the net FMV.

A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. However, if an asset is sold at a loss, its disposition can’t be reported on the installment method. It must be reported separately. The remaining assets sold at a gain are reported together.

Here is the LINK again.

[Warm]

Did you ever figure this out?  From what I’ve gathered from CPAs, it’s treated as ‘ordinary non passive income.’ So NOT put on installments.  There is an example on irs site for the sale of a business using installment method, and you would include it only for your calculations (to figure out your gross profit %), then take it out and, this is where I am unsure of where it would go on a 1040 (or does it go on 1120s)?  Do you know?

[tr1anglessk]

Non-Compete Clauses are (generally) ordinary income, as the value assigned to these are typically value received for lost services "compensatory".

The reason non-compete clauses are not listed in the Installment Sale instructions is because non-compete clauses are not assets available for sale, and also the tax treatment for this type of income is discussed elsewhere in the tax code. It's the same with A/R sold on installment (also treated as ordinary income, and not mentioned in the Installment publication because the taxability of these "hot assets" like A/R are discussed elsewhere in the tax code).

[Mike9241]

the easiest way to report the non-compete component of the sale is as follows

say the noncompete was $60K and everything else was $180K. thus the total proceeds will be $240K (exclusive of interest). the non-compete is 25% of the total so for each payment you get 25% would go towards the non-comete and 75% would be reported on the 6252. the non-compete portion is reported on line 10 of form 4797 - no basis.

note that the tax laws require there to be interest paid on the deferred payments. if none is specified or inadequate it must be imputed which makes part of the payments and total interest

The interest rate for an installment sale depends on various factors such as the type of sale, the parties involved, and the terms of the contract. In general, an installment sale contract provides for adequate stated interest if the stated interes...¹. The test rate of interest is determined by the IRS and is updated periodically ¹.

If you are looking for more information on installment sales, you may find the following resources helpful:

• IRS Publication 537: This publication provides detailed information on installment sales, including the rules for determining the interest rate.