Taxing Ideas: Business Gifts

REVERSES THE LAW SIGNED DECEMBER 17, 1999 – That tax law change required a seller to pay tax on the full gains of a sale in the year that the sale was made.

One year ago (PIPELINE, January, 2000) we reported the signing into law of a law that made selling small businesses almost impossible. Any of you who have considered buying or selling an insurance agency since December 17, 1999 have been told that there is a problem. A new law came into effect that day in 1999 that precluded an accrual basis taxpayer from using installment sale rules to report the gain from the sale over the period of the installment agreement. The total gain was required to be reported in the year of sale even if no principal was received on the debt. Obviously, this has generated an outcry from taxpayers.

After a year of active lobbying from all types of small business groups, we finally have relief! On January 2, 2000 President Clinton signed the Installment Tax Correction Act of 2000. This long awaited change now allows an accrual basis taxpayer to sell his business on the installment sale basis IN THE SAME MANNER THAT WAS ALLOWED BEFORE THE 1999 LAW CHANGE and – best yet – it is retroactive to December 17, 1999 – the day the ban was effective.

The 2000 Act now permits affected accrual basis taxpayers who have not yet filed their 1999 income tax returns to file them using the old installment method for reporting eligible income. The 2000 Act, however, does not contain any provisions for those people who already filed a 1999 return in accordance with the 1999 rules. We assume some guidance will be forthcoming from IRS regarding special rules for those tax filers.

What this means is that if you sold your business between December 17 and December 31, 1999 AND HAVE ALREADY FILED THE TAX RETURN FOR THAT YEAR you may not be able to change your election to the accrual method that would permit you to take profits in the years received. The IRS will issue guidelines for those cases. Tell your accountant to keep his eyes open for these rulings.

Since the Installment Tax Correction Act of 2000 is retroactive to December 17, 1999, however, even if you adhered to the law and evolved a sale of your business in 2000 under the guidelines that required payment of taxes on all profits in the same year as the transaction – if you have not yet filed your tax return for the year in which the transaction was made – you may reverse your decision and conduct the sale as an installment sale under the accrual method of accounting that permits you to take profits as they are paid to you.