Selling a Business in Installments: An IRS Worked Example: Installment Sale Taxes (2025 IRS Guide)
This guide covers “Selling a Business in Installments: An IRS Worked Example” within installment sale taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 537 (2025), Installment Sales, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. The following topics are discussed.
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Electing out of the installment method.
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Payments received or considered received.
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Escrow account.
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Depreciation recapture income.
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Sale to a related person.
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Like-kind exchange.
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Contingent payment sale.
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Single sale of several assets.
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Sale of a business.
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Unstated interest and OID.
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Disposition of an installment obligation.
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Repossession.
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Interest on deferred tax.
Selling a Business in Installments: An IRS Worked Example
On June 4, 2025, you sold the machine shop you’d operated since 2016. You received a $100,000 down payment and the buyer’s note for $120,000. The note payments are $15,000 each, plus 10% adequate stated interest, due every July 1 and January 1, beginning in 2026. The total selling price is $220,000. Your selling expenses are $11,000.
The selling expenses are divided among all the assets sold, including inventory. Your selling expense for each asset is 5% of the asset’s selling price ($11,000 selling expense ÷ $220,000 total selling price).
The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows.
| Depre- ciation | Adj. | ||
| Asset | FMV | Claimed | Basis |
| Inventory | $10,000 | -0- | $8,000 |
| Land | 42,000 | -0- | 15,000 |
| Building | 48,000 | $9,000 | 36,000 |
| Machine A | 71,000 | 27,200 | 63,800 |
| Machine B | 24,000 | 12,960 | 22,040 |
| Truck | 6,500 | 18,624 | 5,376 |
| Total | $201,500 | $67,784 | $150,216 |
Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). The remaining $18,500 ($220,000 – $201,500) is allocated to your goodwill, a section 197 intangible.
The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart.
| Sale Price | Sale Exp. | Adj. Basis | Gain | |
| Inventory | $10,000 | $500 | $8,000 | $1,500 |
| Land | 42,000 | 2,100 | 15,000 | 24,900 |
| Building | 48,000 | 2,400 | 36,000 | 9,600 |
| Mch. A | 71,000 | 3,550 | 63,800 | 3,650 |
| Mch. B | 24,000 | 1,200 | 22,040 | 760 |
| Truck | 6,500 | 325 | 5,376 | 799 |
| Goodwill | 18,500 | 925 | -0- | 17,575 |
| Total | $220,000 | $11,000 | $150,216 | $58,784 |
The building was acquired in 2016, the year the business began, and it’s section 1250 property. There’s no depreciation recapture income because the building was depreciated using the straight line method.
All gain on the truck, machine A, and machine B is depreciation recapture income since it’s the lesser of the depreciation claimed or the gain on the sale. Figure depreciation recapture in Part III of Form 4797.
The total depreciation recapture income reported in Part II of Form 4797 is $5,209. This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). These gains are reported in full in the year of sale and aren’t included in the installment sale computation.
Of the $220,000 total selling price, the $10,000 for inventory assets can’t be reported using the installment method. The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale.
The selling price equals the contract price for the installment sale ($108,500). The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart.
| Selling Price | Install- ment Sale Basis | Gross Profit | |
| Land | $42,000 | $17,100 | $24,900 |
| Building | 48,000 | 38,400 | 9,600 |
| Goodwill | 18,500 | 925 | 17,575 |
| Total | $108,500 | $56,425 | $52,075 |
The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). The gross profit percentage for each asset is figured as follows.
| Percentage | |
| Land— $24,900 ÷ $108,500 | 22.95 |
| Building— $9,600 ÷ $108,500 | 8.85 |
| Goodwill— $17,575 ÷ $108,500 | 16.20 |
| Total | 48.00 |
The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. The selling price for the installment sale is $108,500. This is 49.3% of the total selling price of $220,000 ($108,500 ÷ $220,000). The selling price of assets not reported on the installment method is $111,500. This is 50.7% ($111,500 ÷ $220,000) of the total selling price.
Multiply principal payments by 49.3% (0.493) to determine the part of the payment for the installment sale. The balance, 50.7%, is for the part reported in the year of the sale.
The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Only the part for the installment sale (49.3%) is used in the installment sale computation.
The only payment received in 2025 is the down payment of $100,000. The part of the payment for the installment sale is $49,300 ($100,000 × 49.3% (0.493)). This amount is used in the installment sale computation.
Installment income for 2025.
Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2025.
| Income | |
| Land—22.95% of $49,300 | $11,314 |
| Building—8.85% of $49,300 | 4,363 |
| Goodwill—16.2% of $49,300 | 7,987 |
| Total installment income for 2025 | $23,664 |
Installment income after 2025.
You figure installment income for years after 2025 by applying the same gross profit percentages to 49.3% of the total payments you receive on the buyer’s note during the year.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 537 (2025), Installment Sales: Sale of a Business — Example—Sale of a Business — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.