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Installment Method

The installment method allows reporting of income from sales of property over multiple years. It applies to sales by dealers of personal property, casual sales of personal property where the initial payment is under 25% of the selling price, and sales of real property where the initial payment is under 25%. Key terms include selling price, contract price, and initial payments. Formulas are provided to calculate installment income based on payments received each year relative to the total contract price and gross profit. The installment method can also be used to pay capital gains tax in installments for certain sales of real property and shares of stock if initial payments are under 25% of the selling price.

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295 views3 pages

Installment Method

The installment method allows reporting of income from sales of property over multiple years. It applies to sales by dealers of personal property, casual sales of personal property where the initial payment is under 25% of the selling price, and sales of real property where the initial payment is under 25%. Key terms include selling price, contract price, and initial payments. Formulas are provided to calculate installment income based on payments received each year relative to the total contract price and gross profit. The installment method can also be used to pay capital gains tax in installments for certain sales of real property and shares of stock if initial payments are under 25% of the selling price.

Uploaded by

Aira Mae Mendoza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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May 2022

INSTALLMENT METHOD
Atty. C. Llamado

Installment Method Defined

The installment method is a special method of accounting whereby income on installment sales
of property during the year is allowed to be reported in installments in proportion to the
installment payments actually received which the gross profit bears to the total contract price.1

The 3 Cases Where Income May be Reported in Installments:2

(a) Sale of personal property by a dealer – Dealers in personal property who regularly sell
or otherwise dispose of personal property on the installment plan.

(b) Casual sale of personal property – Persons who make a casual sale or casual disposition
of personal property subject to the following conditions:

(1) The selling price exceeds ₱1,000;

(2) The initial payment must not exceed 25% of the selling price; and

(3) The property sold is not of a kind which would be includible in the inventory if on hand
at the close of the taxable year.

(c) Sale of real property – Persons who sell or otherwise dispose of real property on
installment plan are also allowed to use the installment method to report the gain on the
sale subject to one condition:

That the initial payment must not exceed 25% of the selling price.

Important Installment Method Terms

(a) SELLING PRICE – The amount realized on the sale

Cash received ₱ xxxx


FMV of the property received xxxx
Installment obligations of the buyer (evidence of
indebtedness) xxxx
Mortgage assumed by the buyer xxxx
Selling price ₱ xxxx

1
Sec. 49, NIRC.
2
Ibid.
1
May 2022

(b) CONTRACT PRICE – The amount which the purchaser contracts to pay the seller. It
includes:

Selling price ₱ xxxx


Less: Mortgage assumed by the buyer xxxx
Balance ₱ xxxx
Add: Excess of mortgage over cost xxxx
Contract price ₱ xxxx

Note: Mortgage assumed by the buyer, if any, is part of the selling price, but is not part of the
contract price.

(c) INITIAL PAYMENTS – Payments received in cash or property (other than evidence of
indebtedness of the purchaser) during the taxable year in which the sale is made.

Downpayment ₱ xxxx
Installments received in year of sale xxxx
Total ₱ xxxx
Add: Excess of mortgage over cost xxxx
Initial payments ₱ xxxx

Notes:

1) “Initial payments” means at least one (1) other payment in addition to the initial
payment. If there is no payment during the first year, the income may not be
returned on the installment basis;

2) Commissions and other selling expenses paid or incurred by the vendor are
not to be deducted or taken into account in determining the amount of the
“initial payments”, the “total contract price,” or the “selling price”.3

Formulas to Report Income under the Installment Method

In year of sale:

Initial payments Gross Profit Income to be reported


x =
Contract Price for the year

In subsequent years:

Installment payment received Gross Profit Income to be reported


x =
Contract Price for the year

Note: The installment method does not apply to deductions. Deductible items shall be
deducted for the taxable year in which the items are “paid or incurred” or “paid or
accrued.”

3
Sec. 175, RR No. 2-1940.

2
May 2022

Sale of Real Property (Capital Asset)

The sale of real property which is a capital asset is subject to final capital gains tax, whether
the seller is an individual, estate or trust, or a domestic corporation.

Can the final tax be paid in installments?

Yes, the final tax can be paid in installments if the initial payments do not exceed 25% of the
selling price.

Formula to compute the final tax in installments:

Initial Payment
In year of sale: x Final Tax
Contract Price

Installments Received
In subsequent years: x Final Tax
Contract Price

Sale of Shares of Stock of a Domestic Company (Capital Asset)

When the shares are not traded through the stock exchange – the tax is based on the net capital
gain realized:

(a) If sold by an individual – Subject to 15% final tax.

(b) If sold by a corporation – Subject to 15% final tax.

(c) If the shares are not traded through the stock exchange and are sold in installments, can the
final tax be paid in installments?

Yes, if the initial payment is not more than 25% of the selling price.

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