Updated July 28, 2026. Quick answer: Temp. Reg. §15a.453-1(c)(1) defines a contingent payment sale as one in which “the aggregate selling price cannot be determined by the close of the taxable year”, and provides that “unless the taxpayer otherwise elects … contingent payment sales are to be reported on the installment method.” It is the default. You must affirmatively elect out, on time, to avoid it.
Why the default matters
Most sellers with an earnout assume they will be taxed as money arrives, which is what the installment method does — so the default usually matches the expectation. The problem is the cases where it does not, and those are decided by a deadline that passes quietly.
| Situation | Consider |
|---|---|
| You expect the earnout to pay out | The default is probably fine |
| You have expiring losses this year | Electing out may be better |
| The obligation is large | The §453A interest charge may apply |
| Depreciable assets are in the deal | Recapture is taxed in year one regardless |
The election deadline is the extended due date for the year of sale. An earnout is precisely the situation where a seller waits to see what happens before deciding — and by the time the answer is clear, the election has expired and §453(d)(3) makes it revocable only with consent.
A sourcing caveat I will state rather than hide. The contingent-payment default above is quoted from a single primary source; two other repositories were unreachable for it. It is consistent with §453(a)’s general default rule, but if this point is load-bearing for a decision you are about to make, have your adviser confirm the regulation directly.
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.