Updated July 28, 2026. Quick answer: It is a ratio. §453A(c)(4) sets the applicable percentage as the portion of year-end aggregate face amount in excess of $5,000,000, divided by the total outstanding face amount. So crossing the line does not put the whole obligation into the charge — only the slice above it. This is widely described as a cliff and it is not one.
Two thresholds doing two different jobs
| Test | What it decides |
|---|---|
| §453A(b)(1) — sales price over $150,000 | Whether the section applies at all |
| §453A(b)(2) — year-end aggregate face amount over $5,000,000 | Whether the interest charge applies |
These get conflated constantly. The first is a gate on the section; the second is a gate on the charge, tested on obligations outstanding at year end that arose during the year.
Because the second test is measured at year end, the amount outstanding on 31 December is the number that matters — not the sale price and not the average balance. That makes the timing of principal payments a lever, and it is one very few sellers know they have.
It is an addition to tax, not interest you can deduct
§453A(c)(1) provides that “the tax imposed … shall be increased by the amount of interest.” It is not an interest expense. Anyone modelling it as deductible is understating the cost.
And do not borrow against the note without checking §453A(d). The net proceeds of debt secured by a covered installment obligation “shall be treated as a payment received on such installment obligation” — so pledging the note accelerates the very tax the installment method deferred.
Two moving inputs, never hardcode them. The §453A interest charge runs off the §6621(a)(2) underpayment rate, which resets quarterly, and off the maximum rate under §1 or §11, which changes with rate law. Any specific percentage in an article is stale. The two dollar thresholds, by contrast, are NOT indexed — §453A contains no cost-of-living provision, so $150,000 and $5,000,000 mean less in real terms every year.
Sources
IRC §453(a), (c), (d), (i); §453A(b), (c) and (d); Temp. Reg. §15a.453-1(c) and (d); §1060(a) and Treas. Reg. §1.1060-1(c) and (e); the asset classes at Treas. Reg. §1.338-6(b) as reproduced in the Instructions for Form 8594; §1042(a), (b), (c); §1202(a)(1) and (c)(1); §6621(a)(2). All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.