Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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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.
Related reading on this site: IRS Tax Topic 705.
Related reading on this site: IRS Publication 537.
More IRS forms and schedules, read line by line: Form 6252 instructions.
The IRS form or worksheet behind this, read line by line: Form 4797 instructions.
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.