He Is Selling the Business on a Five-Year Note to Spread the Tax. Medicare Can Turn the Installments Into Years of Surcharges
Spreading a business sale across a five-year note looks like a clean tax move until Medicare enters the picture and starts billing for the same income twice over, in ways most seller tax projections never account for.
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A 67-year-old owner is selling his company and financing part of the price himself. He gets cash at closing and a five-year note for the rest. The installment method can spread eligible taxable gain across five tax returns.
Plenty of owners are heading toward the same decision. McKinsey estimates about 6 million small and midsize businesses are poised to face ownership changes by 2035, with more than $5 trillion of enterprise value involved. The income surcharge known as IRMAA reaches only about 8% of Part B enrollees. Using 2026 thresholds for illustration, a seller whose MAGI stays at or below $109,000 single or $218,000 joint can stop worrying. Others might want to start strategizing.
Every Installment Puts Gain Back on His Return
An installment payment has three parts. Interest counts as ordinary income. Return of basis generally goes untaxed. Gain follows the sale’s gross-profit percentage. At a 60% gross-profit percentage, a $200,000 principal payment puts $120,000 of gain on that year’s return, and the note’s interest comes on top of that.
IRMAA runs on modified adjusted gross income: AGI (Form 1040, line 11) plus tax-exempt interest (line 2a). Municipal bond interest he thinks of as tax-free still counts. Medicare also looks back two years, so installments received in 2026 through 2030 set his premiums for 2028 through 2032. He will think of the sale as done in 2030. Medicare keeps billing him for it through 2032.
$120,000 of Gain Lands Him in the Second Tier
He is single, with $120,000 of installment gain and $30,000 of pension, interest and other income. His MAGI reaches about $150,000 before the note’s interest. Using 2026 thresholds, that puts him $13,000 over the $137,000 second-tier line.
His Part B premium rises to $405.80 a month from $202.90. Part D IRMAA adds another $37.50 a month. Together that comes to $2,884.80 a year in surcharges, or $14,424 over five premium years if every year stays in that level.
If his MAGI remains within the $137,000 limit, he drops to the first level. That level still costs $81.20 a month for Part B and $14.50 for Part D, or $1,148.40 a year. He pays no surcharge only at or below $109,000. The note’s interest makes those lines harder to stay under, because it can carry him across a threshold the gain alone would have left him below.
One Big Year Versus Five Medium Years
| Structure (single, 2026 levels) | MAGI per Year | Annual IRMAA Surcharge, Part B + Part D, Per Person | Total Surcharge, All Affected Premium Years |
|---|---|---|---|
| All gain in one year | $630,000 | $6,936 | $6,936 |
| Five-year note | About $150,000 | $2,884.80 | $14,424 |
At 2026 levels, the note costs $7,488 more in Medicare surcharges. The lump sum has its own cost: recognizing more gain in one year can push some income into higher tax brackets, so he should compare the income-tax result with the Medicare gap. He should run both cases. Most seller tax projections leave IRMAA out, which is exactly the blind spot we mapped in a free guide to Medicare’s hidden bills.
His first year will likely come in larger than the rest. The purchase price gets split among inventory, equipment, real estate and goodwill. Inventory generally cannot use the installment method, and depreciation recapture gets taxed in the year of sale even when the buyer pays over time. That spike can push his 2028 premium into a higher level than the four years that follow.
SSA-44 Will Not Erase a Voluntary Sale
Form SSA-44 lets him ask Social Security to use more recent income after certain qualifying events: marriage, divorce, death of a spouse, work stoppage or reduction, loss of income-producing property, loss of pension income or an employer settlement. Selling a business does not count. If he stopped working when he sold, he can file on work stoppage, but SSA then uses his estimated current-year MAGI, and that still includes the installment gain. The loss-of-property event covers losses outside his control, such as a disaster. A sale does not count.
Run These Numbers Before He Signs
- Get the purchase price allocation in writing. Have his CPA mark which dollars count for installment treatment and which get taxed in year one.
- Build a five-row projection showing each year’s gain, note interest and other income against the IRMAA thresholds in effect for that premium calculation. Match each row to the premium year two years later.
- Negotiate the payment schedule. If estimated MAGI lands just above a threshold, a larger down payment or smaller principal payments over more years can keep the remaining years in a lower level.
The note does what he wanted for income taxes. Medicare reads income one return at a time, so spreading the gain across five returns spreads the surcharge across five years too.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
