note 219 | | | INSTALLMENT METHOD | ‘Atty. C. Llamado | Installment Method Defined ‘The inllment method is «special mtd of accounting wherby income on inslinet sales of property during the year is allowed tobe reported in installments in proportion to the installment payments actually received which the gross profit bears tothe total contract price (Sec. 49(A), NIRC), The 3 Cases Where Income May be Reported in Installments: (@) Sate of personal property by a dealer — Dealers in personal property who regularly sell ‘or otherwise dispose of personal property on te installment plan (See. 49 (A), NIRC). (©) Casual sale of personal property ~ Persons who make a casual sale or casual Aispostion of personal property subject to the following conditions: (1) The seling price exceeds 1,000, (2) The initial payment must not exceed 25% ofthe selling price; and (2) The property sold is nota kind which would be incluible inthe inventory if on hand at the close ofthe taxable year (See. 49 (B), NIRC). (©) 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 inital payment must not exceed 25% of the selling price (See. 49 (B) and (C), NIC). {Important Installment Method Terms (@) SELLING PRICE~ The amouat realizedon the sale | Cash received Po wot FMV of the property received ro0K Installment obligations of the buyer (evidence of indebtedness) | 00K ‘Mortgage assumed by the buyer 0K Selling price wonOctober 2019 (©) CONTRACT PRICE. The emount which the purchaser contracts to pay the seller. It includes: ‘Selling price F 00K Less: Mortgage assumed by the buyer roo Balance P0000 ‘Add: Excess of mortgage over cost ‘Contract price P00 Note: Mortgage assumed by the buyer, if any, i part of the selling price, but isnot part of the contact price, (©) INITIAL PAYMENTS - Payments received in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year ia which the sale is made, Downpayment cd Installments received in year of sale 00x. Total >see ‘Add: Excess of mortgage over cost ox. Initial payments ? ox Notes: 1) ““hitial payments” means atleast one (1) other payment in addition to the initial payment. If there is no payment during the frst year, the income may not be Feturned on the installment bass, 2) Commis ling expenses paid or incurred by the vendor are ‘Bot to_be deducted or taken into account in determining the amount of the ‘initial payments”, the “total contract price,” or the “selling price” (Sec. 175, Rev, Reg No, 2-1940), Formula to Report Income under the Installment Method GrossProfit Installment payments ___ Income tobe reported Contact Price ‘sctly received forthe year o Installment pevment received Gross Profit —-__—_—Income tbe reported 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 of “paid oF accrued”October 2019 Sale of Real Property (Capital Asset) | ‘The sale of real property which is a capital aset i subject to final capital gains tax, whether the seller is an individual, estate or trust, or «corporation. (Can the final tx be paid in installments? Yes, the final tax can be paid in installments ifthe initial payments do not exceed 25% of the selling price. Formula to compute the final tx io installments Inyearef sale ‘nite Payment Final Tax Insibsecucatycars: —MalmenReweied Fins toy ‘Sale of Shares of Staci of a Domestic Company (Capital Asset) ‘When the shares are not inded through the stock exchange - the tax is based on the net capital gain realized: (4) If sold by en individual - Subject to 15% fin! tax. (0) If sold by a corporation ~ Subject to 15% final tx if sold by a domestic comporation; or ‘5%/10% if sold by a tore corporstion. (© Ifthe shares are not trade! through the stock exchange and are sold in installments, can the final tox be pid in installments? ‘Yes, ifthe itis payraeas not more than 25% of the selling pice