Property transaction planning
The Timing and Method Plan
Control when income lands: spread installment gain by gross-profit percentage, use the gross-receipts test to unlock exemptions, and spread a positive 481(a).
How the exam words it
- -The stem sells property on installments and asks the gain this year, testing gross-profit-percentage times cash collected.
- -It gives prior-three-year average gross receipts and asks which cash-method, UNICAP, or 163(j) exemption applies.
- -It changes an accounting method and asks how the section 481(a) adjustment is reported.
- -It contrasts cash and accrual and asks which method the taxpayer may use.
The playbook
- 1Compute installment gain as cash received times gross profit divided by contract price, remembering recapture is fully recognized in the year of sale.
- 2Apply the small-business gross-receipts test (about 31,000,000 for 2025) to allow the cash method and exempt the business from UNICAP, 163(j), and mandatory percentage-of-completion.
- 3Report a method change on Form 3115 and spread a positive section 481(a) adjustment over four years, taking a negative one all at once.
- 4Choose cash for deferral when eligible, recognizing income when received and deductions when paid.
The trap
Recognizing all installment gain up front, or applying the 163(j) limit to a business under the gross-receipts threshold. Installment gain follows collections, and a qualifying small business is exempt from 163(j).
How the exam varies it
The same pattern, re-skinned along these axes:
Installment gross-profit-percentage recognitionSmall-business gross-receipts test and its UNICAP and 163(j) exemptionsForm 3115 method change and the four-year 481(a) spread
Drill this pattern
8 questions of The Timing and Method Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.