Background Items of income and loss generally are taken into account by a taxpayer in a taxable year based on the taxpayer's method of accounting. In contrast, an accrual method of accounting items generally requires an item to be included in income when all events have occurred that fix the right to its receipt and its amount can be determined with reasonable accuracy. Accrual methods of accounting, when compared to the cash method, generally are acknowledged to better reflect economic income and comport to generally accepted accounting principles.
Present law places several restrictions on the use of the cash method for income tax purposes.
The installment method of accounting provides an exception to these general recognition principles by allowing a taxpayer to defer recognition of income from the disposition of certain property until payment is received. Under the installment method, a taxpayer recognizes the gain resulting from the disposition of property proportionately as payments are received on the installment note. Payments taken into account for this purpose generally include cash, marketable securities, and evidences of indebtedness that are payable upon demand or are readily tradable. The use of installment reporting was originally permitted by Treasury regulations in 1918 for dealers and subsequently sanctioned by Congress in 1926 for dealers and nondealers, subject to certain conditions. In addition, the 1987 Act significantly limited the benefits of using the installment method by imposing interest charges on the deferred tax liability attributable to certain installment obligations and by treating pledges of certain installment obligations as payment, thereby triggering the recognition of income.