• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube
Big Ideas for Small Business logo

Barbara Weltman

Big Ideas for Small Business, Inc.

Whitepaper download

Subscribe and download our eBook, "150+ Tax Deductions for Small Business A to Z."

This field is hidden when viewing the form
Get the:

  • Home
  • About Us
  • Big Ideas For Your Business
    • Idea Of The Day ®
    • SMB Legal
    • SMB Taxes
    • SMB Financial
    • Small Business
    • Newsletter Archive
  • Services
  • Books
  • Blog
  • Multimedia
    • Videos
    • Radio Shows/Podcasts
  • Be a Guest Blogger

Postponing Taxes: Sell Now, Pay Later

December 6, 2022 / By Barbara Weltman

Postponing Taxes: Sell Now Pay LaterWhen you sell inventory, the result is reported currently as ordinary income. You can’t exclude the income and you can’t defer it. When you sell business property at a profit, it usually results in a capital gain. In a handful of situations, you can exclude the gain; it’s not taxable. But generally, gain is recognized and taxed in the year of the sale. Still, there are some good ways to postpone tax on the gain. Consider these options before you finalize any sale so you can be positioned to take advantage of a particular deferral option.

Benefits of deferral

Tax deferral means you’re pushing off the time when taxes need to be paid. In inflationary times, this translates into paying taxes in the future with inflated dollars, effectively costing you less.

Deferral can also mean you benefit from cash flow; it depends on the situation. You may get your money from the sale now, but it’s not depleted by taxes until they’re paid in the future.

Installment sales

An installment sale results when you receive at least one payment from the sale in the year after the sale. Typically, installment sales spread out the payments over a number of years—5, 10, or even more. For tax purposes, you pay tax on the portion of gain related to the installment payment received. In broad strokes, if you sell something for $10,000 and receive a payment of $2,000 each year for 5 years, then 20% of the gain is taxed each year that the payment is received.

There are some downsides to an installment sale to consider:

  • If the property sold is subject to depreciation recapture, gain related to the recapture must be reported in full in the year of the sale, regardless of the fact that some or all of the proceeds will be received in the future.
  • Spreading payments over a number of years means you have to wait for your money. If you intended to do something with that money now, this may weigh against doing an installment sale.
  • There’s a risk that the buyer may default. Yes, you can probably recoup your property through legal action. But this involves time and cost, and having to dispose of the property again.
  • Not all types of business property qualify for installment sale treatment.

You can learn more about installment sale reporting from IRS Publication 537.

Deferral of gain on small business stock

Gain on the sale of qualified small business stock (QSBS) acquired after September 27, 2010, and held more than 5 years is 100% tax free (there’s a $10 million limit). But what if you didn’t hold the stock that long? In this case, you may elect to defer gain if you reinvest the proceeds from the sale of the original QSBS into other QSBS within 60 days.

QSBS must satisfy various conditions listed in Section 1202 of the Internal Revenue Code. These are the same conditions applicable for the exclusion, other than the 5+ year holding period.

The deferral election is made on your tax return, Form 8949, simply by entering code “R” in column (f) and the postponed gain as a negative number in column (g). Nothing else has to be filed, but keep all documentation supporting the sale and reinvestment.

Deferral of gain through Opportunity Fund investments

Capital gains, as well as “Section 1231 gains” on certain business property, can be deferred by reinvesting proceeds in a Qualified Opportunity Fund (QOF) within 180 days of the date of the sale. The deferred gain will be recognized on the earlier of sale of your interest in the fund or December 31, 2026. There’s no dollar limit on the amount that can be deferred.

There are additional benefits:

  • If you hold your investment in the QOF for at least 5 years, the basis in your interest in the fund will increase by 10% of the deferred gain.
  • If you hold your investment in the QOF for at least 7 years, the basis in the fund will increase by an additional 5% of the deferred gain.
  • If you hold your investment in the QOF for at least 10 years, you can permanently exclude gain when your QOF interest is sold as long as you elect to increase the basis in your QOF to its fair market value on the date of the original sale.

Find more information about this deferral option from the IRS.

Deferring gain on involuntary conversions

If you suffer a casualty—a fire, hurricane, or other similar event—that damages or destroys business property, or there’s a theft or condemnation, insurance proceeds may result in your having a tax gain despite your economic loss. That’s because you reduced the tax basis of the property through depreciation or other first-year write-off, while the proceeds more closely reflect the value of the property at the time it went through the destructive event.

You can elect to postpone recognizing the gain if you timely reinvest in replacement property. The replacement period usually ends 2 years after the close of the first tax year in which any part of your gain is realized. It’s 3 years for realty held in a trade or business. And it’s 4 years or longer for livestock sold because of drought. Replacement property is property that’s similar or related in service or use (i.e., substantially similar to the old property). An example is the replacement of destroyed facilities on leased land in one location by the construction of similar facilities on leased land in another location.

For more information, see IRS Publication 547 (look for “Postponement of Gain”).

Final thought

These are not the only situations in which deferral is possible. For example, like-kind exchanges of real property push the tax bill forward. Because deferral rules can be varied and complicated, be sure to work with a knowledgeable tax pro so you get things right.

Tags installment sales postponing taxes small business taxes tax deferral

Primary Sidebar

Categories

  • General Business (493)
  • Guest Blog (106)
  • Homepage (21)
  • Small Business (981)
  • SMB Financial (320)
  • SMB Legal (64)
  • SMB Taxes (324)

Barbara’s Recent Posts

  • Moms Know Best: Lessons for Entrepreneurs May 8, 2025
  • Mental Health Challenges in the Workplace May 6, 2025
  • Let’s Celebrate Small Business! May 1, 2025
  • Scaling Your Business: Adding a New State Location April 29, 2025
  • What to Do about Waste Management in Your Warehouse April 28, 2025
  • Restrooms: Not Front Office but Just as Important April 25, 2025
  • Eye Strain: A Workplace Problem to Address April 24, 2025
  • What to Do When You Can’t Get Approved for a Business Loan April 23, 2025
  • A Good Time to Review Your Company’s Driving Policy April 22, 2025
  • Learning New Ways for Spring Cleaning Your Business April 17, 2025
  • How to Build Anticipation for an Upcoming Product Release April 16, 2025
  • Proposals for Better Tax Rules for Small Businesses April 15, 2025
Awarded Top 100 Small Business Blog medal (link will open in a new window or tab)
Marquis Who's Who 2023 Badge
Top Small Business Blogs (Link will open in a new window or tab.)
8 Financial blogs small business Owners Need to Read. Invoice home.  (link will open in a new window or tab)
Best Small Business Blog, Expertido.org
Top 50 Small Business Blogs 2018
Best Small Business Blogs
BizHumm Top 100 Business Blog Award to Barbara Weltman
FitsSmallBusiness.com: Award for Best Small Business Blog 2017 (link will open in a new window or tab)
FitsSmallBusiness.com: Award for Best Small Business Blog 2016 (link will open in a new window or tab)

Footer

Big Ideas for Small Business logo

Small business ideas, business tax news and small business consulting from Barbara Weltman to provide business owners with the information they need to succeed. Visit our small business blog, Idea of The Day®, small business books and articles on small business taxes, small business finance and small business legal advice.

Contact Us

[email protected]

(772) 492-9593

gacor maxwin situs slot thailand terpercaya situs slot gacor situs gacor akun pro thailand slot bandar togel terpercaya

Latest Tweets

bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

The Art and Science of Building: Exploring the Intersection of Architectural and Engineering Design https://bit.ly/40Qt0P6 #smallbusiness #design

Reply on Twitter 1891632577175253217 Retweet on Twitter 1891632577175253217 Like on Twitter 1891632577175253217 3 Twitter 1891632577175253217
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

4 Crucial Errors in Your Compliance Approach to Hiring - HR Daily Advisor https://bit.ly/4jQCcvQ #smallbusiness #hiring #compliance

Reply on Twitter 1891586740189585747 Retweet on Twitter 1891586740189585747 Like on Twitter 1891586740189585747 Twitter 1891586740189585747
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

Is Romance Back in the Office? Is this a good or bad thing?https://bit.ly/3D1Hx2x #smallbusiness #ValentinesDay #workplace #officepolicy

Reply on Twitter 1891567067897168123 Retweet on Twitter 1891567067897168123 Like on Twitter 1891567067897168123 1 Twitter 1891567067897168123
Load More

Copyright © 2008–2025 Big Ideas for Small Business, Inc  |  Designed by Hudson Fusion

  • Privacy Policy
  • Sitemap