Users regularly ask how to model business sales, values, and incomes in their software. Moneytree Advise takes a big-picture look at income and expenses, so it will not try to take a deep look at the tax consequences of the sale. Using the Special Income and Special Expense sections, advisors can still model these facets of businesses. If you use Moneytree Plan, see our separate article on business value, income, and sale.
Easily model the value of the business in Other Assets. Modeled here, the business value appears for net worth without appearing as part of their retirement capital assets readily available for withdrawal.
If the clients reinvest any or all of their business income, the net proceeds can be entered as Special Income. If the clients do not reinvest their business income, ignore the pre-retirement business income or include it with earned income. Keep in mind: increasing the business income can throw off the Social Security approximated by the program when left at $0. For income modeled in Special Income, the pre-retirement income reinvests into the clients’ taxable savings and investments regardless of spending.
For clients operating at a loss, model the loss in Special Expense/Goal if the loss is covered by assets. If they cover pre-retirement losses with earned income, include the loss with personal expenses or ignore the loss altogether. For expenses modeled as Special Expenses, the pre-retirement amounts will be covered by assets regardless of income.
Consider a client currently who has a business they expect to sell for $450,000 in today’s dollars after taxes. The client is planning to sell the business when they retire in 15 years. They expect the business value to grow by 4% per year between now and retirement. The client reinvests $24,000 per year from the proceeds of the business into their investment account. The client expects to increase the reinvested income by 3% until retirement.
Capturing the Business Value
This step captures the current value of the business for the client’s net worth.
Enter the business asset in the Other Assets input section. Include the business name, value, and owner.
Capturing the Reinvested Business Income
Here, the income that the client intends to reinvest is modeled in Special Income. This captures income that is reinvested without having to increase earned income or additions to an investment account. Do not model additions in the Investments section when using Special Income. The program automatically reinvests Special Income in pre-retirement years regardless of expenses.
For this model enter the “Annual After Tax Amount” of $24,000, the “Increase % Rate” of 3%, the “First Year of Income” for the current calendar year, and the “Number of Years” of 15.
Capturing the Business Sale Proceeds
This step captures the proceeds of the business, which becomes available after the sale and reinvested into the assets available for retirement.
Go to the Special Income input section to bring in the after-tax income expected when the client sells their business. Enter the calendar year of the sale as the “First Year of Income”. Set the “Number Of Years” to 1 to make sure the sale occurs over a single year.
From the example above, the client intends to sell the business for $450,000 in today’s dollars and expects the value to increase at 4% per year until they sell the business. The program will automatically increase this income amount by 4% per year and it will come into the projection in 15 years with the future value of $810,425.
The surplus from the business sale reinvests into the Taxable Savings & Investments account. The invested income grows by the rate of return entered in the Rates section for “Rate of Return on Taxable Assets”.