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ME-Eng
New Member

How do I file for selling a company equity and getting paid that amount over several years?

I owned a percentage of a company. I left the company and hence now I am being paid that percent value over the next 5 years. I get a monthly severance pay check for the next 5 years monthly.  So each month i get  (value of my percent ownership at the time of departure)/(5 years*12 months) How do i declare that on my yearly taxes?



3 Replies
TomYoung
Level 13

How do I file for selling a company equity and getting paid that amount over several years?

You say "severance pay" but it sounds more like an installment sale of your equity in the company.  Which is it?  Will the company be reporting these payments to you annually?  If so, what form will be used?
ME-Eng
New Member

How do I file for selling a company equity and getting paid that amount over several years?

Yes! Was trying to find a good word to describe the situation and installment sale is perfect. The only legal document I have is a paper signed by the parties involved during the transaction. So I am not getting any other document between now and the few years to come.
TomYoung
Level 13

How do I file for selling a company equity and getting paid that amount over several years?

I assume that the "equity" does not involve publicly traded stock and that you have a profit on the sale.

Generally, this will be reported using the Installment Sales interview.  Assuming that this is a partnership or S-Corp situation you'll want to wait until you receive your Schedule K-1 information as that information will affect your basis, and the profit. 

If the payout schedule does not explicitly provide for an "interest" element - and it sounds like it doesn't - then you must impute a portion of each year's payment as "interest", reported as interest income. (IRS statement:)

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If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as unstated interest or original issue discount for tax purposes, even if you have a loss. You must use the applicable federal rate (AFR) to figure the amount of stated principal recharacterized as unstated interest or original issue discount. The AFRs are published monthly in the Index of Applicable Federal Rates (AFR) Rulings.

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This might be a good year to not try and "go it alone" for preparing your income tax return but, instead, getting some competent local professional help. 

Tom Young

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