CCH Federal Taxation Basic Principles
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Installment Method—Four-Step Computation
Chapter 11, Exhibit 20
Installment method computations require four steps:
1. Allocate installment payments between principal and interest.
2. Compute ordinary income (“OI”) and Code Sec. 1231 gain. (If the property had been held long-term for investment purposes, rather than business purposes, then the gain would be classified as a long-term capital gain (LTCG), rather than a Code Sec. 1231 gain.)
3. Compute the gross profit %.
4. Compute recognized gain on the down payment and deferred gain on the installment payments.