Accrual to Cash year of sale

Forum|Forum|1 year ago
June 18, 2025
2 replies
11 views

I have a client that sold his business in 2024 and will receive installment payments over a few years. He operates on the accrual method. My understanding is that accrual based businesses must recognize income on inventory and depreciated items in the year of sale regardless if form 6252 is filed. If that's the case, he'll have to pay taxes on depreciation recapture ($150,000) and $20,000 in inventory. The buyer did not pay for the inventory until 2025. We filed an extension. Do you think we would be able to file form 3115 to change from accrual to cash for 2024 and avoid paying the depreciation recapture and inventory in 2024?

ProSeries Professional

Best answer by sjrcpa

My concern is having to pay the taxes on the depreciation recapture all in one year. If they were cash, that can be spread out as the payments are received.

No. Installment sale reporting is not allowed for ordinary income items- sale of inventory, AR, depreciation recapture. Cash basis or accrual doesn't matter.

IRonMaN

Level 15

Why would changing from accrual to cash change depreciation recapture?

Slava Ukraini!

sjrcpa

Level 15

And the inventory would still be sold.

He and his advisors didn't negotiate well enough if he didn't get enough cash at closing to pay the tax on the ordinary income.

The more I know the more I don’t know.

BobKamman

Level 15

I think I understand the question. The inventory was sold in 2024, but payment for it was not received until 2025. So, are you stuck with paying tax on it in 2024? And the funds received in 2024 were for the depreciated property, but less than the depreciation to be recaptured. Really, the question is how do accrual taxpayers use the instalment method. Sorry, I haven't had one of those, and hope I never do.

A

Avs19Author

Level 6

That's basically correct. The sale includes the purchase of assets, inventory, and goodwill. A majority of it is goodwill which I don't think cash or accrual makes a difference. My concern is having to pay the taxes on the depreciation recapture all in one year. If they were cash, that can be spread out as the payments are received.

sjrcpaAnswer

Level 15

My concern is having to pay the taxes on the depreciation recapture all in one year. If they were cash, that can be spread out as the payments are received.

No. Installment sale reporting is not allowed for ordinary income items- sale of inventory, AR, depreciation recapture. Cash basis or accrual doesn't matter.

The more I know the more I don’t know.

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