Installment Sales Income Interest on Deferred Tax

Interest on Deferred Tax

Generally, interest must be paid on the deferred tax related to any obligation that arises during a tax year from the disposition of property under the installment method if:

• The property had a sales price over $150,000 and

• The aggregate balance of all nondealer installment obligations arising during, and outstanding at the close of, the tax year is more than $5 million.

Interest must be paid in subsequent years if installment obligations that originally required interest to be paid are still outstanding at the close of a tax year.

The interest rules do not apply to dispositions of:

• Farm property,

• Personal use property by an individual,

• Real property in tax years beginning before 1988, or

• Personal property before 1989.

How to figure interest on deferred tax.

First, find the underpayment rate in effect for the month with or within which your tax year ends. The underpayment rate is published quarterly in the Internal Revenue Bulletin, available at IRS.gov/irb. Then multiply that rate by the deferred tax. The deferred tax is equal to the balance of the unrecognized gain at the end of the tax year multiplied by your maximum tax rate (ordinary or capital gain, as appropriate) in effect for the tax year.

How to report the interest.

Enter the interest as additional tax on your tax return. Individuals include it in the amount to be entered on the other taxes line (Schedule 2 (Form 1040), line 8, or Form 1040-NR, line 17). U.S. corporations include the interest on the other taxes line on Form 1120, Schedule J, line 9f. Foreign corporations using Form 1120-F include the interest on the other taxes line (Form 1120-F, Schedule J, line 8).

Corporations may deduct the interest in the year it is paid or accrued. For individuals and other taxpayers, this interest is not deductible.

Additional Information 

See Publication 537 for additional information, including details about reductions in selling price, the single sale of several assets, like-kind exchanges, dispositions of installment obligations, and repossessions.