Businesses introduce several unique characteristics for planning purposes. Each business includes several factors:
- Business value and appreciation
- Spendable cash flow
- Taxable income
There are several ways to account for business values in Moneytree Plan. This post goes over a straightforward and detailed method of modeling business value, income, and sale. It will capture details for both the income and taxes due from the sale. If you use Moneytree Advise, see our separate article on business value, income, and sale.
Current Business Value
Model the net business value for net worth purposes, if desired:
- Create an asset with a value equal to the net value of the business
- Set the group to “Other/Business”
- Set the type to “Equity/Other”
- Uncheck the box “Available for Withdrawal”
This will make the asset appear on the net worth report without overstating their liquid assets available for regular spending.
For example, consider a client with a current business with a net value of $500,000 for Net Worth purposes:
For business income, it is important capture the income for both the client’s cash flow and tax purposes.
An example of a client with gross business income of $300,000, operating expenses of $100,000 and depreciation of $75,000 is shown below.
Determine the spendable cash flow from the business:
- Cash Flow Income = Gross Business Income – Debt Payments – Cash Expenses
- The resulting amount can be entered modeled in two locations:
- The Cash Flow fields of “Other Taxable Income/Loss” in the Tax Details tab of the Taxes section
- As Other Income in the Other Income tab of the Income section (this also has options for taxes)
Determine the taxable income that will be reported:
- Taxable Income = Gross Business Income – Deductible Expenses – Depreciation on Business Assets
- Account for the result in one of two locations:
- The Tax Report fields of “Other Taxable Income/Loss” in the Tax Details tab of the Taxes section
- As a proportion of the Cash Flow amount in the Other Income section, in the “Taxable Percentage” field
The program accepts negative values for individuals operating at a taxable loss.
Prosper reports includes detailed annual cash flow and tax projections, so enter any changes to the income for cash flow and tax purposes in the Future Changes section. Be sure to include a stop age by entering the age the business income is expected to stop and zero for the dollar amounts.
For the example client, the cash flow income is $200,000, which is the gross income of $300,000 less operating expenses of $100,000. The taxable income is $125,000, which is the gross income of $300,00 less operating expenses of $100,000 and depreciation expenses of $75,000.
The tax and cash flow reports in Aspire are for the current year only due to its goal-based methodology focusing on savings prior to retirement rather than cash flow income and expenses. The entry made on tax data will only impact those current year projections. If the business income continues into retirement, the income should be entered using [Other Income] tab within the [Income] section of the data entry.
Business Sale Proceeds
Like business income, capturing sales proceeds needs to account for the net sale income and associated taxes. You will need to have an assumed sale proceed and approximate tax information for the business sale. The best way to capture the sale varies between Aspire and Prosper projections due to the underlying goal-based and cash flow methodologies, respectively.
For example, a client is selling a business at age 65 for an expected value of $750,000. The net income is assumed to be $675,000 after transaction fees and other expenses. For taxation purposes, the sale will result in a net of $300,000 of long-term capital gain income and $100,000 of ordinary income.
Capture the After Tax Net Income:
Use the “Other Income” tab in the “Income” section of the data entry to capture the assumed after-tax net income from the sale of the business. Leave the “Percentage Taxable” at 0. If the business experiences growth between now and the time date of sale, you may enter the future income amount, or have the program increase it by entering an appreciation rate beginning in the current year.
For the example, enter the client age of 65 and the net sales income of $600k. This is the net income from the sale of $675,000 less taxes of $75,000. Taxes include $45,000 assuming a 15% capital gain rate for the $300,000 of capital gain income and an additional $30,000, assuming a 30% ordinary rate on the $100,000 of ordinary income.
Prosper completes a detailed annual tax analysis, so it’s best to capture the taxable income rather than simply entering the after-tax amount used for Aspire.
Step 1: Capture the Pre-Tax Income for Cash Flow Income:
Model Cash Flow income in one of 2 ways:
- The Other Income tab in the Income section at the age of sale. Leave the Taxable % to 0 (step 2 captures the taxable income)
- The Tax Details tab in the Taxes section under “Other Taxable Income/(Loss)” category for the Cash Flow” column like for regular business income. Make sure to enter a stop age the year after the sale.
In either model, use future changes to include a stop age the following year. This way the income does not continue past the sale.
Step 2: Capture the Net Taxable Income for the Tax Expense:
The sale of the business can result in both ordinary income and capital gains taxes. Because of this, we recommended not using the “Percentage Taxable” field in Other Income. The “Percentage Taxable” field determines how much of the income to tax at ordinary income tax rates. Model the different taxable incomes in two different locations:
- Ordinary taxable income income from the sale in the “Other Taxable Income/(Loss)” field in the Tax Report column
- Reported capital gain income in the “Schedule D Capital Gain/Loss” field in the Tax Report column
Like with the cash flow income, include a stop age by entering a Future Change and setting the amounts to $0 once the sale is complete.
For the example, the pre-tax business sale income is $675,000 and the sale results in a net of $300,000 of long-term capital gain income and $100,000 of ordinary income. The entries below show how to model the these values. The cash flow income is entered using the “Other Taxable Income” category under Tax Details rather than Other Income in this example.
The cash flow amount will be an income source and taxes due will be part of annual expenses on the Cash Flow Illustration.