NAVIPLAN PREMIUM LEARNING GUIDE Business entities
Contents Business entities 1 Learning objectives 1 NaviPlan planning stages 1 Client case 2 Enter different business entity types 3 Business Entity Details 5 Activity tab details 6 Return Rates tab details 7 Analyze effects on net worth, cash flow, and taxes 8 Effects on net worth 8 Effects on cash flow 9 Effects on taxes 10 Sell a business entity as part of the current plan 11 Model business entity recommendations 13 Business Entity Details dialog box Activity tab details 15 Business Entity Details dialog box Sale Information tab details 16 Exercises 19 Conclusion 21 Answers to exercises 22 NaviPlan Premium resources 23 i
NaviPlan Premium Learning Guide: Business entities ii
NaviPlan Premium Resources Business entities The ability to model business entities is an additional feature that is only available when you are using the Detailed Income Tax method in NaviPlan Premium. To access this feature, the Business Planning module must be selected on the Plan Management section Modules category Modules page. This learning guide assumes that you have completed the Start planning module (available at support.eisi.com/naviplan) and already know how to create a client file. The Business entities module will help you model different business entities and understand how the different business entity types may affect a plan s net worth, cash flow, and taxes. You can model the activity and sale of a business entity as part of the current plan, or as one of your recommendations. Keep in mind that NaviPlan is an individual planning tool, not a small business planning tool. Business losses are not accounted for when modeling business entities in NaviPlan. NaviPlan is however able to recognize a business loss for purposes of income tax without impacting your clients' cash flow. Learning objectives Upon successful completion of this module, you will be able to Enter different business entity types. Analyze effects on net worth, cash flow, and taxes. Sell a business entity as part of the current plan. Model business entity recommendations. Note: Each learning objective is identified with a puzzle piece icon. NaviPlan planning stages The following diagram shows the planning stages you can follow in NaviPlan Premium, from creating a client file to presenting results. The learning objectives in this module are part of the following stages: Enter financial data and Analyze goals and develop recommendations. 1
NaviPlan Premium Learning Guide: Business entities Client case This module includes practice exercises using one of the sample clients provided in NaviPlan. The exercises have been designed specifically for this module and assume that you are working with the original data in the plan named Business Entities in the Dixon, Jim & Maria client file. Figure 1: Enter Financial Data section Net Worth category Assets/Liabilities page (showing the Business Entities section) 2
NaviPlan Premium Resources Enter different business entity types You can enter the following different types of business entities in NaviPlan. Each will have a different effect on cash flow and taxes. C Corporation Separate legal entity subject to tax on activity. Distributions are paid as dividends to shareholders. S Corporation Separate legal entity not subject to tax. Income taxed directly to the shareholder or member. Distributions are generally tax free. LLC Combines the corporate advantage of limited liability with the partnership advantage of pass-through taxation. Partnership Entity formed by an association of two or more people who share ownership and control. Partnerships are not taxed as a separate taxable entity. All business entity types are entered in the Business Entity Details dialog box. The LLC, Partnership and S Corporation business entity types affect cash flow, net worth, and taxes in the same way. Income and expenses within a C corporation are not modeled in NaviPlan. Note: If the client does not own 100% of the business, enter only the portion that the client actually owns. Figure 2: Enter Financial Data section Net Worth category Assets/Liabilities page Details button under Business Entities Business Entity Details dialog box 3
NaviPlan Premium Learning Guide: Business entities In the next few pages, we will examine the following: A. Business Entity Details B. Activity tab details C. Return Rates tab details 4
NaviPlan Premium Resources Business Entity Details Figure 3: Business Entity Details dialog box (showing data-entry fields under Business Entity Details) Key points The Type field affects how income is distributed to the plan. For example, S corporation (flow-through) vs. C corporation (non-flow-through). Under Purchase Information, you can enter the original value of the business when purchased. The purchase date defaults to Dec. 31 of the previous year because NaviPlan assumes the client already owns the business. The Number of Units value corresponds to the Current Value (per unit) information. The value in this field can be left at 1, meaning that one unit would have the same value as the current value of the business entity. If more than one unit is entered, the business entity value is distributed across the number of units entered. This is for information purposes only and does not affect the plan. The Cost Basis field is used for future sale tax purposes. 5
NaviPlan Premium Learning Guide: Business entities Activity tab details Figure 4: Business Entity Details dialog box Activity tab Key points The Activity tab is not available for a C Corporation business entity type because the income and expenses within a C corporation are not modeled in NaviPlan. Any income or loss amount will appear in the Income Tax Details report. The effects of business income/losses will display in cash flow. (This can be seen in the Single Asset Detailed report.) The cost basis will increase or decrease depending on the difference between income and expense distributions. 6
NaviPlan Premium Resources Return Rates tab details Figure 5: Business Entity Details dialog box Return Rates tab Key points On this tab, you can enter a specified growth rate for the business entity. By default, the growth rate is 0%. For C corporations, you can also enter a dividend amount. You can enter a Standard Deviation value, but by default business entities are not liquidated so they are not included when calculating success using Monte Carlo simulations. To demonstrate the net worth, cash flow, and tax implications of modeling a business entity, we will assume that an S corporation has been entered using the following details: Purchase Date December 31, 2011 Number of Units 1 Market Value $1,000,000 Cost Basis $0 Income $50,000 annually Expenses $35,000 annually Distributions $10,000 annually Growth Rate 3% 7
NaviPlan Premium Learning Guide: Business entities Analyze effects on net worth, cash flow, and taxes In this learning objective, we will examine a few NaviPlan Premium reports that show the effects of the business entity on the clients net worth, cash flow, and taxes. Effects on net worth Using the Asset Details report for the S corporation that we entered, we can see the following details: The business entity will grow using the appropriate growth rate. If the result of Ordinary Business Income minus ( ) Ordinary Business Expense minus ( ) Distribution is a positive (+) value, the cost basis will increase by that amount. If the result is a negative ( ) value, the cost basis will decrease by that amount. Figure 6: Asset Details report (Reports menu Net Worth Assets Single Asset Details) The same effects would be seen for Partnership or LLC business entity types. For a C corporation, if dividends are set to Reinvest All, the cost basis will increase. If the dividends are set to Don't Reinvest, the cost basis will remain unchanged because the dividend will be paid out. 8
NaviPlan Premium Resources Effects on cash flow For S Corporation, Partnership, and LLC business entity types, the distribution amount is treated as a cash inflow in the plan. This is displayed in the Itemized Cash Flow Projection for Family report. Figure 7: Itemized Cash Flow Projection for Family report (Reports menu Cash Flow Details Itemized Cash Flow Projection for Family) If there are no distributions, the revenue (income minus expenses) does not appear as a cash inflow; instead the cost basis of the business entity will increase or decrease. For a C Corporation business entity type, dividends will appear in the cash flow reports as a cash inflow. If dividends are modeled to be reinvested, the cash reinvestment will appear as an outflow. 9
NaviPlan Premium Learning Guide: Business entities Effects on taxes For S Corporation, Partnership, and LLC business entity types, the business income will appear as Ordinary Business Income in the Income Tax Details report. Figure 8: Income Tax Details for <client> report (Reports menu Income Tax Income Tax Details) For C corporation business entities, the distribution amount will appear as Dividends in the Income Tax Details report. 10
NaviPlan Premium Resources Sell a business entity as part of the current plan If your clients have concrete plans to sell their business entity, you can model this sale as part of the current plan. You can choose to sell the business all at once, or over a specified number of years using the installment sale option. By default, NaviPlan will not sell the business entity. Figure 9: Enter Financial Data section Net Worth category Assets/Liabilities page Details button under Business Entities Business Entity Details dialog box Sale Information tab When selling the business entity, if the business is bought and sold within 13 months, all growth will appear as short-term capital gains. If the business entity is sold after holding the business for more than 13 months, long-term capital gains are triggered, as shown in the following Cash Flow Details report. 11
NaviPlan Premium Learning Guide: Business entities Figure 10: Cash Flow Details report (Reports menu Cash Flow Details Cash Flow Details) In this example, the business entity was bought in 2011 and sold in 2020. Since the business was held for more than 13 months, long-term capital gains are triggered by the sale. 12
NaviPlan Premium Resources Model business entity recommendations Using the Scenario Manager feature in NaviPlan, you can model the sale of and activity in the business entity and instantly see the effects of these strategies on multiple goals, cash flow, and net worth. You can also compare the clients current plan with the recommended plan on-screen. For more information about using the Scenario Manager feature, see the NaviPlan Premium Learning Guide: Analyze, compare, and create plan scenarios. In the Scenario Manager dialog box, when the Net Worth link is clicked, a Business Entities tab appears. Selecting the Override button on this tab allows you to make changes to an existing business entity such as the following: Add business entities. Override activity (such as income, expenses, and distributions). Model the sale of the business all at once, or over a specified number of years using the installment sale option. Change the return rates for the business entity (growth rate and standard deviation). Figure 11: Results section Analyze Goals category Scenarios page Edit Recommended Plan button Scenario Manager dialog box Net Worth link Business Entities tab 13
NaviPlan Premium Learning Guide: Business entities In the next few pages, we will examine the following: A. Business Entity Details dialog box Activity tab B. Business Entity Details dialog box Sale Information tab 14
NaviPlan Premium Resources Business Entity Details dialog box Activity tab details Figure 12: Scenario Manager dialog box Net Worth link Business Entities tab Details button next to the business entity Business Entity Details dialog box Activity tab Key points When overriding an existing business entity in an alternative scenario, you can only change the activity, sale information, and return rates. Within the Scenario Manager dialog box, you cannot change the initial business entity information you entered in the plan. Any income amount that exceeds the expenses amount will appear as Ordinary Business Income in the Income Tax Details report. Distributions will be paid into cash flow. This can be seen in the Single Asset Detailed report. The cost basis will increase or decrease depending on the difference between income and expense distributions. 15
NaviPlan Premium Learning Guide: Business entities Business Entity Details dialog box Sale Information tab details Figure 13: Scenario Manager dialog box Net Worth link Business Entities tab Details button next to the business entity Business Entity Details dialog box Sale Information tab Key points As in the current plan, you can choose to sell the business all at once, or over a specified number of years using the installment sale option. In the Scenario Manager dialog box, you can toggle between the Current Plan and the Recommended Plan - Alternative 1 tabs to see how your strategy affects the clients net worth and cash flow in the plan year and at death. 16
NaviPlan Premium Resources When selling the business entity as in the current plan if the business is bought and sold within 13 months, all growth will appear as short-term capital gains. If the business entity is sold after holding the business for more than 13 months, long-term capital gains are triggered. To analyze the effects of your strategy in more depth, you can generate reports within the Scenario Manager dialog box using the Reports menu. In this example, the business entity was bought in 2011 and sold all at once in 2025. Since the business was held for more than 13 months, long-term capital gains are triggered by the sale. Toggling between the Current Plan and the Recommended Plan - Alternative 1 tabs, we can see that the clients will have considerably more money to leave to their heirs when the business is sold (i.e., in Figure 2 below, the At Death value on the right is substantially greater than the At Death value on the left). Figure 14: Scenario Manager dialog box Modify Financial Data details (comparison of Current Plan and Recommended Plan tabs) Using reports from the Reports menu, you can analyze how selling the business might benefit your clients. You may find it helpful to see the Current Plan scenario and the Recommended Plan - Alternative 1 scenario side by side. To view multiple scenarios side by side in reports, follow these steps: 1. Generate the report. 2. Click the Duplicate button at the top of the report. 3. Click the Show Settings button at the top of the report. 4. Under Report Settings from the Scenario list, select Current for one side and Alternative 1 (Recommended) for the other. 5. Click Apply Settings. 17
NaviPlan Premium Learning Guide: Business entities Figure 15: Itemized Cash Flow Projection for Family report duplicated and generated for the Current Plan and Recommended Plan - Alternative 1 scenarios (Reports menu Cash Flow Details Itemized Cash Flow Projection for Family) In this report we can see the cash inflow that will result for the Dixons when the business is sold in 2025. To break down that information further, we could generate a Cash Flow Details report. Figure 16: Cash Flow Details report duplicated and generated for the Current Plan and Recommended Plan - Alternative 1 scenarios (Reports menu Cash Flow Details Cash Flow Details) 18
NaviPlan Premium Resources Exercises The exercises in this module were created using the Jim and Maria Dixon client file. Before starting the exercises, go to the Client Management section Client List category Clients page, and then open the Dixon, Jim & Maria client file. On the Plans page that opens, duplicate the plan named Business Entities, rename the duplicate with a meaningful name, and then use the duplicated plan to complete the following exercises. Answers and step-by-step instructions to the exercise questions are provided at the end of this learning guide. 1. If a business entity experiences losses, these will be tracked accordingly in NaviPlan. Is this statement true or false? a. True b. False 2. Which business entity type allows you to enter a dividend amount? a. S Corporation b. C Corporation c. LLC d. Partnership 3. On the Enter Financial Data section Net Worth category Assets/Liabilities page, under Business Entities, enter the following business entity: LLC corporation Purchased in 2009 for $750,000 Owned jointly Number of units 1 Current market value $1,000,000 Income $90,000; Expenses $50,000; Distributions $0 Cost basis $750,000 Growth rate 2% 4. What is the 2014 end-of-year cost basis for the new LLC corporation? a. $800,000 $900,000 b. $900,001 $1,000,000 c. Over $1,000,000 19
NaviPlan Premium Learning Guide: Business entities 5. Generate an Itemized Cash Flow Projection for Family report for the current year. Cash inflows from the LLC corporation are illustrated in this report because the annual income exceeds expenses. Is this statement true or false? a. True b. False 6. Go to the Results section Analyze Goals category Scenarios page. Click the Edit Recommended Plan button, and then in the Scenario Manager dialog box, click the Net Worth link. Go to the Business Entities tab. For the LLC corporation you just created, model a distribution of $20,000 a year. 7. Generate the Current Year Cash Flow report for 2013. The $20,000 distribution shown from the LLC corporation is taxed on a yearly basis. Is this statement true or false? a. True b. False 20
NaviPlan Premium Resources Conclusion Upon successful completion of this module, you are now able to Enter different business entity types. Analyze effects on net worth, cash flow, and taxes. Sell a business entity as part of the current plan. Model business entity recommendations. 21
NaviPlan Premium Learning Guide: Business entities Answers to exercises 1. b) True. The statement, If a business entity experiences losses, these will be tracked accordingly in NaviPlan is True. Business losses are tracked in NaviPlan for S Corporation, Partnership, and LLC. NaviPlan accounts for business losses for tax purposes only. A business loss will reduce the personal Income tax payable, but will not affect Cash Flow in the plan. Business losses will not be tracked for C Corporation since there is no flow-through to the individual. 2. b) C Corporation The C Corporation business entity type allows you to enter a dividend (per unit). 4. a) $800,000 $900,000 Generate a Single Asset Details report (Reports menu Net Worth Assets Single Asset Details), and then scroll down to the year 2014 to see the end-of-year cost basis. 5. b) False. Generating an Itemized Cash Flow Projection for Family report (Reports menu Cash Flow Details Itemized Cash Flow Projection for Family) does not show cash inflows from the LLC corporation because the distributions are $0. For S Corporation, Partnership, and LLC business entity types, the distribution amount is treated as a cash inflow in the plan. If the LLC corporation had distributions, they would show up in the report. 7. b) False. The statement The $20,000 distribution from the LLC corporation is taxed on a yearly basis is false. The $20,000 distribution from the LLC corporation shows up in the Current Year Cash Flow report (Reports menu Cash Flow Details Current Year Cash Flow Report) as Capital Received, indicating that there was a cash inflow but the $20,000 is not taxed because it is received capital. 22
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