Installment Sale and Schedule C

[JoJo]

I have a client that makes a living building and remodeling houses.  He started building a house on land he already owned and one of the subcontractors wanted to purchase it.  The sub contractor did not charge for his labor to lower the contract selling price.  My client then did an installment sale to his sub contractor.  When I prepare the 6252 installment sale and link it to Schedule C (I know the profit should be subject to social security tax) it doesn't flow through to Schedule C.   I did set up an asset entry worksheet in Schedule C and reported the sale and linked it to 6252. No matter what I do it will not flow to Schedule C.   Anyone else had this problem?  Should I not prepare the installment sale and enter income and expenses on Schedule C and then just report the interest income each year?    Of course if I do that all the profit is taxable in the current year.   He is not against paying tax on the total gain this year but it would be better is we could spread it out the number of years on the amortization schedule.  I really want to report it correctly. I certainly don't want it to come back and haunt me.  

[jeffmcpa2010]

Disclaimer. I have not had this situation so my questions are to provoke thought.

Is a Spec House Inventory?

Is there an exception for this situation, that avoids the IRS rule saying you can't use the installment method for Inventory?

Would reporting all of the sale in the current year push him over the SS limit for self employment tax purposes, and would that savings make up for the difference of reporting all of the sale in the current year even if you can find positive answers for the first 2 questions?

Hope these give you something to research and consider.

[sjrcpa]

There are some special rules under 453 that may or may not allow a builder to report on the installment method.

Report the income and interest on the Schedule C. Bypass the 6252 if it won't go to Schedule C.

EDIT: If you determine that the installment method is allowed, do the calculation manually to determine how much income is reportable this year and include that amount on Schedule C.

I have a business that subdivides old farms and sells undeveloped lots. That qualifies for installment sale reporting and this is how I do it.

[qbteachmt]

I've been thinking along the same lines as Jeff, but also, I usually find the whole "waived my charges" scenario was not to either one's benefit.

Your client sold the product and also happens to be the Lender = two different activities.

[JoJo]

 He normally builds houses for other customers.  They pay for the materials and he doesn't have a lot of expenses to claim on the construction business with the exception of equipment & tool depreciation and vehicle expense.  The house was certainly not in inventory.   He has a rental house and the rental house had two lots.  Since Covid had slowed his business down and the housing market has gone crazy he decided to build.  The house was built in 4 months, and he knew his sub contractor was going to purchase it within a month of when he started building.  The sale would not push him over the SS limit for self-employment since he has a large farm that normally keeps his taxable social security limit down.  Although the farm did make a considerable profit this year.  The installment sale would lower the amount in taxes due this year and he will most likely have much less income in the following years.   

I appreciate you giving me something to think about.  

[JoJo]

I agree with the waived my charges benefits.  It would have been a wash with the exception of the subcontractor having additional income to report.  

[qbteachmt]

Being a contractor means working under lots of different agreements, including T&M (time and materials) or T&M + Markup. But this: "The house was certainly not in inventory." is not what you told us. He either was building a Spec project (his own project to be sold) or it was his Personal project or he meant it to be his own Rental Income project. Spec = on speculation, to sell in a hot market.

"and he knew his sub contractor was going to purchase it within a month of when he started building."

What matters is when it went under contract, though. Not when he "knew" something was likely.

"The installment sale would lower the amount in taxes due this year and he will most likely have much less income in the following years."

Well, if I lend you the money to buy your new home, you pay me interest. That is reportable income. If I am the one that sold you the house, I am getting Profit + Interest, so that is more income.

For waiving their labor, that also reduces the basis in the house, and that is a potential taxable gain, later. What happens, though, is they buy materials "on the business" but that is for the personal project, etc. You cannot even begin to unravel this, until someone gets audited, for instance. A Worker Comp audit, a Sales Tax audit, or a Tax audit is where these things come to light.

[JoJo]

I agree it is two different activities.  

[JoJo]

I guess it was a Spec house after all.  Thank you for raising my awareness.  I am reporting all the profit this year on Schedule C.  I will still report the interest received in the year received.