Gross Profit Ratio

In an Installment Sale, the relationship between the gross profit (gain) and the Contract Price. The resulting fraction is applied to periodic receipts from the buyer to determine the taxable gain from each receipt.

In an Installment Sale the relationship between the gross profit (gain) and the Contract Price. The resulting fraction is applied to periodic receipts from the buyer to determine the taxable gain from each receipt.
Example: Land, held as a Capital Asset by Collins, is sold for $10,000. Collins' tax basis was $4,000, so the resulting gain was $6,000. The gross profit ratio is 60% ($6,000 divided by $10,000 equals 60%). Collins accepted a $1,000 cash Down Payment with the $9,000 balance of the price to be paid over 3 years. Of each amount paid toward the principal, 60% is gain to be taxed and the balance is a nontaxable return of capital. See Contract Price.

Gross profit divided by net sales. High ratios are favorable in that they indicate the business is earning a good return on the sale of its merchandise, although that may also invite competition. See also Gross Profit.