April 2000

House Restores Installment Sales Method

President Threatens Veto

The House of Representatives on March 9 passed a measure to restore the installment sales method to accrual-basis corporate taxpayers. The House included the provision in H.R. 3081, the Employment Growth Act of 1999 (the minimum wage bill), which President Bill Clinton has threatened to veto. Although the bill includes a two-year, $1 minimum wage increase that the President seeks, it also contains $123 billion in tax cuts, an amount he considers too large.

The AICPA, which supported the House provision, expects passage of the minimum wage bill to be complicated. Tom Higginbotham, AICPA vice president for congressional and political affairs, explained that Congress and the President could need to strike a three-way bargain. First, the Senate attached its version of the minimum wage bill to a bankruptcy reform bill the President has said he does not like. Second, the Senate wants a three-year phase-in but the President and the House prefer a two-year phase-in. Third, regarding the size of the tax cut, the President is closer to the Senate, which prefers a smaller tax cut than the House.

Businesses conduct many sales over time, often with little cash changing hands at closing. The installment sales method permits taxpayers to report gain from the sale of most property over the period of time that they receive cash.

Last December, the President signed the Tax Relief Extension Act of 1999 (TREA), which included a provision repealing the installment sales method for accrual-basis corporations. The President and Congress intended to catch large corporations that they felt used the installment sales rules to indefinitely delay payment of taxes.

"Unfortunately, Congress caught small, accrual-basis corporations in the net too," said John Kearney, chair of the NYSSCPA Tax Division Oversight Committee. "If a small corporation was in the process of a sale that would qualify for the installment sales method when TREA was signed, it found itself unexpectedly owing tax up front before it had received the cash to pay. Looking forward, the TREA provision is likely to chill sales of small businesses because they often don't have the wherewithal to finance up-front payment of taxes on the sales of their businesses."

In addition to restoring the installment sales method to most accrual-basis corporations, tax-cut provisions in the minimum wage bill passed by the House include:

* Increasing the self-employed medical insurance deduction to 100 percent in 2001,
* Phasing in an increase to the maximum 401(k) contribution from $10,000 to $14,000,
* Raising the one-year write-off provision for equipment to $30,000 in 2001,
* Raising the percentage of business meals allowed to be deducted,
* Modifying the generation-skipping transfer tax, and
* Reducing the maximum estate tax rate from 55 percent to 50 percent by 2002. *