Installment sales offer taxpayers a practical way to report gains from the sale of certain property over time, aligning tax payments with the receipt of income. If your clients are selling real estate or business assets, understanding the rules outlined in IRS Publication 537 is essential to correctly reporting their income on their tax return.

What is an installment sale?

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. This payment structure defers a portion of the taxable gain to future years, matching tax liability with the receipt of actual payments.

Installment sales are often used to sell real estate, closely held businesses or other high-value assets, especially when the buyer cannot pay the full purchase price upfront. The installment method spreads out the taxable gain over the period during which payments are received rather than recognizing the entire gain in the year of sale.

What qualifies and what doesn’t?

Not all sales qualify for installment reporting. Sales of inventory or dealer property, such as items held for sale in the ordinary course of business, are not eligible for sale. Similarly, if the property sold is publicly traded or the seller chooses not to use the installment method, the rules do not apply.

Additionally, depreciation recapture under §§1245 and 1250 must be reported as ordinary income in the year of sale, even if payments are made in later years. This rule applies to the portion of the gain attributed to depreciation previously claimed, and it cannot be deferred under the installment method.

Key terms to understand

Before diving into the mechanics of reporting, it’s essential to understand some terms:

• Selling price: Total amount the buyer agrees to pay, including any liabilities assumed
• Gross profit: Selling price minus the adjusted basis and selling expenses
• Contract price: Selling price, minus any qualifying indebtedness assumed by the buyer that doesn’t exceed the seller’s basis
• Gross profit percentage: Gross profit divided by contract price. This determines how much of each payment is taxable

How to report an installment sale

Installment sales are reported using Form 6252, Installment Sale Income, which must be filed for each year you receive a payment. The form calculates the gain to report based on the gross profit percentage.

Step-by-step:

1. Complete Form 6252:

• Part I asks for general information about the sale, including the property description, date of sale and buyer information
• Part II calculates the gross profit, contract price and gross profit percentage
• Part III computes the gain to be reported for the current year based on the payments received

2. Transfer to Schedule D or Form 4797:

• For personal or investment property, report the gain from Form 6252 on Schedule D (Form 1040)
• If the asset was used in trade or business, the gain is reported on Form 4797

3. Include interest income:

• Interest on installment obligations is not part of the gain; it must be reported separately as interest income on Schedule B (Form 1040) for individual taxpayers. Corporations and other entities will report interest on their respective business tax returns.
• If the contract doesn’t specify interest, the tax professional may need to impute interest under the original issue discount (OID) rules

4. Report in each year a payment is received:

• Every year a payment is received, the taxpayer must report that year’s portion of the gain using the gross profit percentage
• Keep copies of Form 6252 and the amortization schedule to track remaining basis and gain

Electing out of the installment method

Taxpayers may elect not to use the installment method. To do this, they must report the entire gain in the year of sale, even if payments are received in later years. This election is made by reporting the full gain on a timely filed return, without using Form 6252. The taxpayer might choose to elect out if they expect to be in a higher tax bracket in future years or if they want to avoid the complexity of tracking installment payments.

Special situations

• Contingent payment sales: Special rules apply if the number of future payments depends on uncertain factors. In rare cases, you may need to estimate the total contract price or use the open transaction method
• Related party sales: If the taxpayer sells property to a related party and disposes of it within two years, the taxpayer may have to recognize all the remaining gain
• Repossession: If the buyer defaults and the taxpayer/seller repossesses the property, Publication 537 provides guidance on how to compute the gain or loss from repossession and the basis of the reacquired property

Installment sales offer significant tax deferral benefits when structured and reported correctly. By understanding how to calculate and report gains, and when the installment method applies, you can help your clients reduce their audit risk and ensure compliance. When in doubt, refer to Publication 537.

On July 4, 2025, President Trump signed into law the formerly known as the One Big Beautiful Bill Act (OBBBA). This legislation implements major tax reforms, including a federal income tax deduction for overtime pay. This provision, effective from tax years 2025 through 2028, permits eligible workers to deduct part of their overtime earnings from their taxable income.

What the law says

Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay, such as the “half” portion of “time-and-a-half” compensation, that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099 or other specified statement furnished to the individual.

Eligible employees can claim an above-the-line deduction of up to $12,500 for overtime pay annually, or $25,000 for married couples filing jointly.

It’s important to note that this is a deduction, not an exemption; therefore, while it reduces taxable income, it does not eliminate taxes on overtime pay entirely. Payroll taxes (Social Security and Medicare) still apply.

The deduction phases out for individuals with a modified adjusted gross income (MAGI) exceeding $150,000 and joint filers exceeding $300,000, reducing by $100 for every $1,000 over these thresholds. To take the deduction, you will need a Social Security number.

Applicability to different overtime rates

The deduction applies to overtime pay required by the FLSA, which usually mandates that employers pay non-exempt employees at least one and a half times their regular rate for hours worked beyond 40 in a workweek. However, some employers provide double-time pay for certain hours or conditions. The IRS has not yet issued specific guidance on whether double-time pay qualifies for this deduction or the exact definition of overtime. Until such guidance is issued, it is safest to assume that only FLSA-mandated overtime pay is eligible.

Transitional rules allow employers to estimate this amount for tax year 2025 only.

Example: Jane Doe is a single employee who earns $60,000 in regular wages and $10,000 in qualified overtime pay in 2025. Her total income is $70,000. Under this provision:

• Jane can deduct the full $10,000 of qualified overtime pay from her taxable income at the end of the year.
• Her taxable income for federal purposes would include $60,000 of regular wages plus $10,000 of overtime, totaling $70,000. However, since the $10,000 is qualified overtime, she can claim a $10,000 deduction on her tax return. [$60,000 (regular wages) + $10,000 (overtime) - $10,000 (deduction for overtime)].

Guidance for tax professionals

1. Client eligibility assessment

• Employment status: confirm that the client is a non-exempt employee under the FLSA
• Income thresholds: ensure the client’s MAGI does not exceed the phase-out thresholds

2. Documentation and record-keeping

• Overtime tracking: advise clients to maintain accurate records of overtime hours worked and corresponding pay received
• Employer reporting: Employers are required to report overtime pay separately on Form W-2, necessitating updates to payroll systems to track and report this information accurately.

3. Tax planning

• Withholding adjustments: Clients might consider changing their withholding to match the expected deduction, potentially increasing their take-home pay over the course of the year.
• State taxes: notify clients that this federal deduction does not impact state income taxes unless their state has similar provisions

4. Employer considerations:

• Payroll systems: Employers should update payroll systems to accurately track and report overtime pay separately.
• Policy changes: Employers should be careful when restructuring compensation plans only to increase this deduction, since the IRS might closely scrutinize such changes for compliance.

Pending guidance

The IRS is expected to publish detailed guidance on implementing this deduction, including definitions of qualifying overtime pay and documentation requirements. Tax professionals should stay informed of these developments to provide accurate advice to clients.

Conclusion

The OBBBA’s provision for a federal income tax deduction on overtime pay allows eligible workers to lower their taxable income. Given this new law, tax professionals are essential in helping clients understand eligibility, maintain proper documentation and optimize tax strategies.

Note: This information is based on the current understanding of the OBBBA as of July 15, 2025. Tax professionals should consult the latest IRS guidance and official resources for the most up-to-date information.

The legislation known as One Big Beautiful Bill Act of 2025 (OBBBA) introduces a major change to how tip income is treated for federal tax purposes. Starting with tax year 2025, legislation allows eligible workers to deduct up to $25,000 in reported tip income from their federal taxable income.

Here’s a breakdown of what the law states, who qualifies, who doesn’t, and what tax professionals should consider when advising clients.

Key provisions of the no tax on tips

• Annual deduction limit: Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned

• Eligibility:

  • By Oct. 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024. Examples likely include waiters, bartenders, hotel bellhops, casino dealers, hairdressers, and other similar service roles.
  • The deduction only applies to cash or card-based tips that you received from customers or through tip sharing in qualifying jobs. Service charges, regular wages or non-cash rewards are not considered qualified.
    • Adjusted gross income (AGI): $150,000 for single filers
    • $300,000 for married filing jointly

• Timeframe: applies to tax years 2025 through 2028

• Phaseout formula: the deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified AGI exceeds the threshold.

• Employer reporting requirement: Tips must be reported to the employer and shown on Form W-2 or Form 1099 to qualify for the deduction.

Special focus: cash tips must be reported

Cash tips are often overlooked or underreported. Under this law, failure to report means loss of the deduction. Tips must be reported to the employer and included on statements furnished to the individual under IRC §6041(d)(3), §6041A(e)(3), §6050W(f)(2), or §6051(a)(18), or reported by the taxpayer on Form 4137.

Additional provisions

• Social Security number requirement: The taxpayer must include their Social Security number on the return to claim the deduction.
• Joint filers: Both spouses must file jointly to claim the deduction if married.
• Anti-abuse rules: The secretary is authorized to issue regulations to prevent reclassification of income as tips and to prevent abuse of the deduction.

What doesn’t count?

Not all payments received by service workers are eligible for the new tip income deduction. Tax professionals should be aware of the following exclusions:

• Unreported cash tips
• Tips not listed on the W-2 or Form 1099
• Service charges

Example: At a restaurant, Jamel’s bill includes a 15% service charge automatically added because he is part of a large group. He pays the total with his credit card. Even though it looks like a tip on the receipt, it’s a mandatory fee and not eligible for the tip income deduction. His server is Josh; therefore, Josh cannot count the 15% service fee as a tip.

There’s an income phaseout

The deduction is subject to an income-based phaseout. For every $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income MAGI exceeds $150,000 ($300,000 for joint filers), the deduction is reduced by $100.

Considerations for tax pros

1. Review client records

Advise clients in tip-based occupations to maintain accurate, contemporaneous records of all tips received and reported. Consistent tracking throughout the year is essential.

2. Confirm W-2 accuracy

Make sure client’s W-2s accurately reflect total reported tips. If clients have unreported tips , they must file Form 4137 to pay the appropriate FICA taxes. Remember, these unreported tips are not eligible for the deduction.

3. Withholding adjustments

Help clients estimate proper withholding or estimated quarterly tax payments based on the lower taxable income from the deduction.

4. Audit risk and compliance

Be alert to any attempts to reclassify wages as tips. Document legitimate tip income clearly to reduce audit risk.

5. Advise employers

Update payroll systems to ensure tips reported by employees are correctly captured. Businesses in the personal care sector may now benefit from an expanded FICA tip credit.

Final takeaway

The new tip deduction offers tax savings to lower- and middle-income workers, but only if they correctly report all tips to their employer. Tax professionals should ensure clients know the rules and follow them closely to benefit from this provision.