Regarding Notes Receivable and Form 6252: I understand my borrowers are reporting the interest they received from the note receivable on Schedule B and the principal portion is reported on 6252. My question is what line of 6252 do I use? All of my reference materials say to use line 25. On line 21 there is a figure that I believe to be the full principal amount received, but should I be using line 24 which has had the gross profit percentage from line 19 factored in?
You guessed right, the correct line for principal received is Line 21 of the Form 6252. That is the principal received in the prior year. CAUTION: You want to use the full principal, not just the taxable part, because we are looking for cashflow, not taxable income.
- If you are calculating historical cashflow, Form 6252 Line 21 is appropriate. If you are calculating recurring cashflow understand that we cannot tell by looking if they will continue to receive payments. You’ll have to ask to determine if they are continuing, and perhaps get a copy of the contract to confirm it.
- If you are concerned about whether they are receiving payments as agreed (or if the person/company paying might be having a tough time), compare the combination of Form 6252 Line 21 principal with Schedule B Interest to the contract. (That requires you to obtain a copy of the contract).
- Even though the borrower is receiving income from a note or contract receivable as indicated on Schedule B, there may not be a Form 6252:
- If it is payments on a loan and not from an installment sale
- If it is an installment sale but the item was sold at a loss
- If it is an installment sale but they chose to take the entire gain in year of sale for tax reasons
- Some financial institutions require that payments from a note or contract receivable be seasoned before counting it. If so, a common requirement is at least 6 to 12 months.