Methods of Computing Tax Liability For Contingent Sales
- Maximum Selling Price:
If the maximum amount of sales can be determined in the year in which they occur by assuming that all contingencies are met, the price can be calculated in a manner similar to the installment sales method. If the amount is reduced in subsequent years, than the formula is recomputed accordingly.
- Fixed Period:
If the maximum selling price cannot be determined, but the period over which payments may be received is fixed, then the seller’s basis is recovered ratably over the period during which payment may be received under the contract.
- If the agreement neither specifies a stated maximum price nor limits payments to a fixed period, than a question arises as to whether a sale has realistically occurred.
Read more about this topic: Contingent Payment Sales
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