INSTALLMENT METHOD

Installment Method Defined

The installment method is a special method of accounting whereby income on installment sales of property during
the year is allowed to be reported in installments in proportion to the installment payments actually received
which the gross profit bears to the total contract price (Sec. 49 (A) NTRC).

The 3 Cases Where Income May be Reported in Installments:

(a) Sale of personal property by a dealer – Dealers in personal property who regularly sell or otherwise
dispose of personal property on the installment plan (Sec. 49 (A), NIRC).

(b) Casual sale of personal property – Persons who make a casual sale or casual disposition of personal
property subject to the following conditions:

(1) The selling price exceeds P1,000;

(2) The initial payment must not exceed 25% of the selling price; and
(3) The property sold is not kind which would be includible in the inventory if on hand at the close of
the taxable year (Sec. 49 (B), NIRC)

(c) Sale of real property – Persons who sell or otherwise dispose of real property on installment plan are
also allowed to use the installment method to report the gain on the sale subject to one condition:

That the initial payment must not exceed 25% of the selling price (Sec. 49 (B) and (C), NIRC)

Important Installment Method Terms

(a) SELLING PRICE – The amount realized on the sale

Cash received P xxx

FMV of the property received xxx
Installment obligations of the buyer (evidence of indebtedness) xxx
Mortgage assumed by the buyer xxx
Selling price P xxx

(b) CONTRACT PRICE – The amount which the purchaser contracts to pay the seller. It includes:

Selling price P xxx

Less: Mortgage assumed by the buyer xxx
Balance xxx
Add: Excess of mortgage over cost xxx
Contract price P xxx

Note: Mortgage assumed by the buyer, if any, is part of the selling price, but is not part of the contract
price.

(c) INITIAL PAYMENTS – Payments received in cash or property (other than evidence of indebtedness of
the purchaser) during the taxable year in which the sale is made.

Down payment P xxx

Installments received in year of sale xxx
Total xxx
Add: Excess of mortgage over cost xxx
Initial payments P xxx

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 Notes:
1) “Initial payments” means at least one (1) other payment in addition to the initial payment. If
there is no payment during the first year, the income may not be returned on the installment basis;
2) Commissions and other selling expenses paid or incurred by the vendor are not to be
deducted or taken into account in determining the amount of the “initial payments”, the
“total contract price,” or the “selling price” (Sec. 175, Rev. Reg. No. 2-1940)

Formula to Report Income under the Installment Method

Gross Profit x Installment = Income to be reported

Contract Price payments actually for the year
received

OR

Installment payment received x Gross Profit = Income to be reported

Contract Price for the year

Note: The installment method does not apply to deductions. Deductible items shall be deducted for the taxable
year in which the items are “paid or incurred” or “paid or accrued.”

Sale of Real Property (Capital Asset)

The sale of real property which is a capital asset is subject to final capital gains tax, whether the seller is an
individual, estate or trust, or a corporation.

Can the final tax be paid in installments?

Yes, the final tax can be paid in installments if the initial payments do not exceed 25% of the selling
price.

Formula to compute the final tax in installments:

In year of sale: Initial Payment x Final Tax

Contract Price

In subsequent years: Installments Received x Final Tax

Contract Price

Sale of Shares of Stock of a Domestic Company (Capital Asset)

When the shares are not traded through the stock exchange – the tax is based on the net capital gain realized:
(a) If sold by an individual – Subject to 15% final tax
(b) If sold by a corporation – subject to 15% final tax if sold by a domestic corporation; or 5% / 10% if sold
by a foreign corporation.
(c) If the shares are not traded through the stock exchange and are sold in installments, can the final tax be
paid in installments?

Yes, if the initial payment is not more than 25% of the selling price.

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