Although the Internal Revenue Service (IRS) has not directly addressed this matter, interest accruing from installment agreements sales under Internal Revenue Code (IRC) section 453A is likely not included in net investment income for purposes of calculating the net investment income tax (NIIT) imposed pursuant to IRC section 1411.
The NIIT imposed pursuant to IRC section 1411 generally applies a 3.8% tax to net investment income, which includes, but is not limited to, interest, dividends, annuities, royalties, rents, businesses involved in trading financial instruments, and businesses that are passive activities. IRC section 453A applies an interest on deferred tax liability from installment obligations if a taxpayer’s outstanding aggregate obligations arising in that year and outstanding at year’s end exceeds $5 million. The interest under Section 453A is equal to the applicable percentage of the deferred tax liability (determined by dividing the aggregate face amount of obligations at year end over $5 million by the aggregate face amount of the obligations at year end) times the underpayment rate in effect under IRC section 6621.
Section 1411 does not explicitly state whether or not deferred interest under section 453A is included in net investment income for purposes of calculating the NIIT, however, other guidance indicates that it does not. The instructions to Form 8960 (“Net Investment Income Tax—Individuals, Trusts, and Estates”) provide that the following reported amounts should be included when entering the amount of taxable interest received:
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Form 1040 (line 8a),
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Form 1041 (line 1),
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Form 1041-QFT (line 1a), and
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Form 1040NR (interest received shown on attached statement).
IRS Publication 537 regarding installment sales elaborates that section 453A interest (interest on deferred tax) must be reported as “additional tax” on the “other taxes” line on Forms 1040 (line 62) and 1040NR (line 60). Because Section 453A interest is treated as additional tax rather than as interest, and because amounts listed on line 62 on Form 1040 and line 60 on Form 1040NR are not included as taxable interest pursuant to the instructions for Form 8960, it should follow that section 453A interest should not be considered taxable interest on Form 8960. Based on the information available, the section 453A interest would not likely be included in net investment income for purposes of calculating the NIIT.
*The authors would like to express their gratitude to Elena Heys for her research and contributions in putting this analysis together.
