It is the one thing that could put you on the fast track to the top. A-list actors, international rock bands, name-brand athletes, successful business people and the uber-wealthy are the kinds of clients that turn your business into something special. Selling an actor’s home, consulting with the wealthiest people in the world and business planning with an athlete automatically changes the nature of your business. You are now working with the elite and that takes a proper mindset.

Having a name on your client list from the zeitgeist gives you instant credibility. People will want to do business with you when they know you work for a famous individual. Better still, once you manage to add one superstar to your client list it has a habit of growing into a larger list of famous names.

Brad Pitt in wax.

And the income isn’t bad either. Someone pulling $28 million a year needs more tax and accounting advice (using the author as an example in this post) and they pay more for it because much more issues are involved. In a way, having famous people on your client list makes you famous, at least in a small group comprised mostly of other superstars.

There are two levels to the process of adding well-known names to your client list. In the last twenty years my tax practice has added names from the NFL and other professional sports, rock bands even non-listeners would recognize, actors on the big and small screen and high net worth clients. Prior to that I had few rock bands and wealthy business people and professionals visiting me. Then something changed and my business was never the same.

The first level to dealing with superstars involves expectations, sort of like a list of do’s and don’t’s. Knowing this before you attempt to attract household names increases your chances of building a relationship with these uber-achievers and keeping the relationship for more than a month.

The second level is the behaviors necessary to acquire the desired client. Once you serve one household name it becomes easier, but only modestly so. These people work together and share information. They are looking for qualified professionals to handle their needs, same as you. It is hard to understand A-list actors struggling to find competent tax professionals, but they frequently do. And when they find a keeper they whisper among themselves. If you are game you will have an entire client list of wealthy, famous and successful people.

 

What Celebrity Clients are Looking For

Anybody can find a house for you or sell your home. Most tax professionals can pound out a tax return for an athlete. The basic service is a given no matter who the potential client is. Celebrities have needs well beyond these basics. In most professional services these clients spend more time consulting than in the actual process of the actual work. In short, I consult over 10 hours with a celebrity for every one hour I spend preparing their tax return. Sometimes more.

Some celebrity clients speak with me monthly; some once year at tax time. Celebrities are normal people just like you and me. Some want very detailed help while others want something straight to the point. The only difference is they are well-known due to their profession. Most of my celebrity clients speak with me 3-5 times per year outside tax season. The conversation lasts from a few minutes to several hours, depending on what is happening in the celebrities life.

Before you start your celebrity search (we’ll discuss that in a bit) you need to understand the unique characteristics of working with celebrities.

 

1. Confidentiality is of Vital Importance

Confidentiality should be common sense (and frequently the law) for professionals. This is also a two-way street. As an example: I had a famous family mention I was their accountant. Instantly my phone (I have a store front in my business so it isn’t hard to find my business number) and email exploded. People who could not contact this family through the normal channels hoped they could use me to get them a message. First, it is distracting as all get-out when someone does this (and unprofessional). And second, playing telephone between celebrity and the endless spam requests is a sure way to get fired.

Non-disclosure agreements are sometimes (always) necessary. I started using a special engagement letter with celebrities where I require the celebrity to not reveal publicly I am their tax professional. They can discuss the engagement with family and other professionals, of course. But stating on public television my position is a recipe for massive disruption in my office and so it is forbidden. 

Having celebrity clients does not allow you to use their name to promote (or brag about) your business! This isn’t about your ego; this is about serving a client with unique needs and with unique challenges. Don’t worry about missing out on new superstar clients. If you prove reliable and know how to keep your mouth shut and perform professionally you will find more referrals than you can serve.

Confidentiality also includes keeping a row of your client’s movies off the back shelf of your office if other clients can see them. Your home shelf is sufficient. A Realtor® listing the home of a famous person should consider asking the client to remove identifiers when the home is shown: family pictures, awards and other personal items that would reveal the current owner of the home. Realtors also want to consider an NDA and vetting buyers.

 

2. Celebrities are Normal People

Celebrities love when adoring fans acknowledge their work. Usually. The pressure of standing in the limelight can become tiring. And like all professionals, celebrities like to loosen the tie, sit back and test a cold one. 

Just because a lot of people know who you are and witness your work doesn’t mean you put your pants on any different than the next guy. (Okay, there is a story about this and it involves putting on pants a bit different than normal, but confidentiality forbids I discuss the details.) 

They talk normally; celebrities that is. They are interesting and interested in things. Believe it or not, they many times want to know more about you! How weird is that? But yes, famous people also like to work with people they like. Their public or stage persona is not what they are like behind the curtain in some instances; sometimes they are. Regardless, they are always genuine people with feelings, desires, fears and dreams. 

The worst thing you can do is act star-eyed. As said, celebrities love recognition. They don’t always like the endless demands of fame. As they say back at the farm, it’s all fun and games until somebody pokes an eye out. Well, the eye poke is turning a professional relationship into ogling. Respect your client! Treat them with dignity. You can admire their work and act professionally at the same time. And yes, they are a lot smarter than you think.

 

3. High Maintenance

Several years ago at a continuing education conference a tax professional said he hated working for doctors. He felt doctors were too high maintenance, always demanding things on the spot and flighty. I looked around the table as my peers broke bread. The entire group was nodding in agreement, except me.

I kept my mouth shut and kept eating. I love doctors as clients and have many on my client list. Sure, doctors have greater demands at times. They are under a lot of pressure and earn a large income in many cases. They need a tax professional who can be a powerful team member for them. 

Doctors are a lot like celebrities. Both earn a high income and are under constant stress. I would say celebrities earn more but that isn’t always true. I have more than one doctor cashing a seven figure income. 

Take this example: A famous client asked me to lunch and I accepted. I was in town so he picked the establishment. We never got a moment to discuss any business or even small talk during that meal as the interruptions were incessant. We conducted business in private afterwards. Imagine that kind of pressure in your life!

High maintenance is not a bad term in this instance. High net worth people, business people and entertainers, have more needs and a lot more to talk about. They like to get out, but need private time for mental health and to clear their mind. They relay heavily on their team of professionals to give their life a moment of sanity.

Taxes, money, investments and professional decisions take more time with celebrities. The numbers are bigger and the considerations more involved. Whereas, your friendly accountant typing this can live normally in the backwoods of NE Wisconsin, many famous people would have serious issues doing the same. Scam artists find the wealth of these people irresistible. Often times I am called to determine the correct course when something doesn’t feel right. Other than their attorney or fellow celebrities, I might be the only disinterested third-party they can count on to give an honest answer. And since I tell you exactly what I think, my advice is highly valued. 

 

4. Know Your Client

This goes without saying for any professional. In this case it goes much deeper.

Knowing your client when they are famous takes more time and effort than for other clients. Don’t assume they are what you see in entertainment outlets. Also, there are more celebrities than you can possibly have knowledge of. I have had several bestselling authors who I never heard of prior to them contacting me. In one case I still haven’t blocked out a week to digest even one of her tomes. 

I watch no TV. None. Actors who contact me need to know I have no idea who they are unless they are Brad Pitt, and truth be told, could not pick Mister Pitt out of a crowd. I’m not much of a stargazer which helps if you want several celebrities on your client list. When it comes to music I listen to Chumbawamba, a rock band long since disbanded. But it is great music to work to. . . for me. Every other rock star will have to accept I have no idea who they are (unless they were big around 1980).

This means I must dig deep, hard and long to know my client at the level required to do an extraordinary job. It requires time and several meetings before a full picture develops. And lots of questions, even some that seem really dumb (So that is a science fiction movie? No? Rom com? Ooooooo. I see.)

Knowing your client also includes expectations. I tend to check in with celebrity clients periodically to make sure they are okay. Normally they contact me more than typical clients. It is common for a celebrity to ask me to “just” prepare their tax return and before the first consultation is over they have 15 more things they would love me to help them with. 

Knowing your client means speaking with them and asking engaging questions. Taking an active interest is the best way to serve your client best.  Example: Once a celebrity is a client I watch them online, checking to see if there is anything they forget to tell me that would help them. I once got a big non-cash tax deduction for a celebrity for a trip he didn’t keep receipts for. When you are my client I take an active interest in serving at the highest level possible.

 

5. Part of the Team

Always know you are part of a team of very successful professionals. As an accountant I have worked with hedge funds (was hired to advise a very large one, too), investment advisors, attorneys, and yes, even other tax professionals. 

If a celebrity is on your client list know that you are not a one-horse show. There are other players and you need to work with the team. Also, the high needs of celebrities means they frequently need a referral. Recommending an investment house, attorney or doctor is not unusual. 

Celebrities can have very tight schedules. While some want more face time, many work remotely, communicating via email and social media messaging. For some celebrities it is a quick answer before they have to run. Don’t worry about it; it is nothing personal.

Always be clear and think out your answers. Your client depends on it. Celebrities can do strange things sometimes, but that is the world they live in. I have listened to tears and celebrated successes with household names. Every one of them is driven. That is how they became successful. They built a team that you are now a part of. Carry out your role at the highest level of professionalism and you will have a great client relationship.

 

Mrs. Accountant and I are standing with Mark Green (left) and Speaker of the House, Newt Gingrich (right). In the lower right hand corner I’m shaking hands with Zig Ziglar, the motivational speaker.

 

How to Find Celebrity Clients

Now that we have a basic understanding of what celebrities need and want we can turn to the activity of adding these wonderful people to your client list.

 

1. Meet the Team

Cold calling is a brutal business at the best of times, but with celebrities you will starve before you land the account. Celebrities have people trying to contact them non-stop. I have a celebrity on my client list who decided to mention I handled her work and instantly my email and phone exploded with people wanting me to give the celebrity a message. That is not the way to do it. The gatekeepers are brutal (or fired). 

Depending on the service you provide determines how you approach the celebrity. Using my practice (tax, accounting, business and personal planning) as an example, the direct approach rarely works, especially if the celebrity is very popular. 

Sometime you can get face time with an acquaintance of the celebrity as a way to meet, but again, this is usually the wrong approach.

I find if you want to get a celebrity to take your call you need to work with the people they already trust and work with. This means they (the celebrity’s team of professionals) are the contact, not the actual celebrity. If you are interested in working with a specific celebrity you can attend an event they have informed the public they are attending. When the crowd crushes in to get an autograph or a few words, you stand back. Around the edges will be the team members supporting the celebrity. They are usually easy to spot. They stand just far enough back to be outside the crowd, but close enough to lend assistance if necessary and they are always watching closely. Your job is to strike up a conversation with one of these fine people because if you are hired by the celebrity you will need to work with them so you may as well start early. It is these professionals already working with the celebrity that can get you an audience with the celebrity.

 

2. Speaking Engagement

This idea appeals to me the most and works for the type of client I most enjoy working with: business owners.

But how do you get even a few seconds with some of the top business executives in your community? What I have successfully done many times is find a listing of where these high performing executives in the community meet. If the social event allows I will give a presentation. 

The nice part about this strategy is that the celebrity comes to you. Imagine you know several executives of a local business with nearly $1 billion in annual sales will be attending a community event. I will prepare something very social and community oriented for one of the sessions and speak with the organizers to get a slot. It doesn’t work every time and it does take work. If you are persistent you will eventually get the chance to give a 15-30 minute presentation. Bring your A-game! You can approach the high net worth executives, but it is always much nicer when they come to you after your presentation. They are already finding value in working with you before you even shake hands. It’s the easiest close ever!

The same works for entertainment celebrities. Large social events are difficult, but the community and non-profit events are different. These venues frequently love the extra help. If you can provide a powerful presentation for improving the community you have a better chance of getting a face-to-face with the entertainment celebrity. Professional sports players, popular music groups and A-list actors attend these events on a regular basis. It is part of their program to build their reputation and meet people to help them with their career. Be part of that and they will need you on their team. Which means you increased your chance of adding the celebrity to your client list.

 

3. Political Events

Back in the 1990s I wanted to take my practice in a different direction. I wanted fewer, but bigger, clients. A letter came across my desk that informed me of a political event in Green Bay, a 40 minute drive from my home. The Speaker of the House, Newt Gingrich, would be there. So would several starters for the Green Bay Packers and business leaders of the community.

This strategy did require an investment. The event was free. However, for $2,000 I would get a private meeting the Speaker of the House and several other leading political leaders of the republican party. In the same meeting were about a dozen people, including two Green Bay Packers starters, Mark Green (running for Wisconsin governor — he lost) and top business leaders of NE Wisconsin. I still have the picture in my office of Mrs. Accountant and me standing with Newt Gingrich and Mark Green (see image above). 

I still have a celebrity client to this day from that event. 

 

4. Small Events

The small event is the best of all worlds as it allows for more opportunity to speak with the celebrity. These can include religious or civic retreats. Many times these are several day getaways where you get the chance to work closely with the celebrity.

It is never a good idea to run up to a celebrity screaming how much you love them and then unload a business proposition. Remember, you might know who they are, but they have no clue who you are. Think how you would act if a complete stranger attending a social or civic event did that to you. Yeah, you would be just as freaked out.

Take your time. Treat the celebrity like a human being. They enjoy that. Celebrities are being sold at every turn. Acting professional and learning about who the celebrity really is instead of their public persona will work much better than the bull approach. A celebrity rarely hires you right out of the gate. It is a process. If they feel comfortable with you, that there is a fit, they will ask you if they can be a client. That is always preferable. I hate selling. If I can prove my value by providing it even before hired, everyone involved is happier.

 

5. Blog

This blog has brought in its fair share of celebrities. Speaking on podcasts has done the same. 

I’m not recommending you go out and start a blog, podcast or start planning an appearance on a podcast. That takes a lot of work and time. Without the commitment of a regular writing schedule a blog requires, you can write something for a social or civic event celebrities will attend. 

It’s always about visibility! The group you want to serve needs to see you. Be present where your desired clients gather. Celebrities are normal people like you and me, only with bigger issues to solve. They buy and sell bigger homes. Their tax returns have bigger numbers. But the issues are still the same. Celebrities are just as in need of good tax advice as the guy working at the mill. I hear this stuff all the time from household names. It blows my mind. How can these people struggle to find good tax, legal, or financial advice? But they do. And if you can provide the service in a professional manner you will be a lifelong friend and confidant. 

Yes, you heard that right. Celebrities are unique in that they want someone they can trust because they meet so many questionable people. They want long-term relationships. Forget what you read in the tabloids. When the curtain is pulled they just want to let down their guard and know somebody has their back. 

Celebrities are a unique challenge. They are also some of the best people I have ever worked for. With rare exception, I have found celebrities are the highest quality people you will ever meet. They are hardworking and smart. They are NOT an easy big commission check or fee. 

 

As we wrap this up, there are a few more things I want to share. Once you have a celebrity client or three you will get new celebrity clients by default just from their referrals. Celebrity clients are a lot of work because of the issues at stake. Don’t take on a new client just because they are a celebrity. It is your job as the professional to know if it is a good fit.

My client list includes NFL starters, a world top 10 ranked tennis player, rock bands, New York Times bestselling authors, actors and more. Every one of them is different in a good way. They are challenging clients due to their unique status. I am not a star-struck person. Most celebrities I work with I never heard of before they contacted or approached me. I watch almost no TV and only a few movies. I don’t listen to recent music releases or watch sports. My celebrity clients enjoy my business approach to their account without the fan behavior. My job is to protect and help these people when the world is always trying to crash their party. That is my goal, my job. To make a difference in the lives of the people who are forming the world we all live in. And if you want one of the few jobs in the arena you will need to follow the advice above.

I look forward to working with you serving our clients

 

.

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

The Tax Cuts and Jobs Act (TCJA) passed in late 2017 heralded lower tax rates for businesses and individuals. There were a few tax increases as well. The elimination of unreimbursed employee business expenses caused problems for sales people, truckers, entertainers and more, but was easily resolved with an accountable plan.

And then there is the most hated tax increase of all, the limitation of state and local taxes (SALT) deduction. While the standard deduction did increase, the SALT deduction limited to $10,000 caused many taxpayers pain, especially in high tax states.

Before the ink was dry states offered up plans to circumvent the SALT deduction limit. The IRS shot each attempt down in order. The new tax rule was in place and states could do little to provide tax relief for their taxpayers. Even so-called low tax states heard from disgruntled taxpayers. The pain was felt widely. 

But that has changed for some taxpayers.

Partnerships, S corporations and LLCs treated as such are pass-through entities. For years states have assessed tax at the entity level for non-resident owners of pass-through entities. In those situations a tax payment is made at the entity level and the member or owner gets a credit on their state taxes for the payment made by the entity. This is not considered an actual tax payment by the entity, however; it is considered withholding on the profits, distributed or not.. The entity does not get a deduction; the taxpayer does on their personal federal tax return if they itemize and are not over the new SALT limit.

The idea several states came up with was similar to the required withholding on profits for non-residents. They proposed allowing entities to pay the actual state taxes at the entity level, which allows a deduction on the entity’s federal tax return, without consideration for the $10,000 SALT limit on personal tax returns. In effect, the taxes paid at the entity level are in addition to whatever SALT deduction a member has on her personal federal tax return. Like the tax withholding on profits, the tax payment would be a credit on the state tax return of the entity’s member. 

The best part is the current IRS interpretation allows taxes paid at the entity level to be deducted by the entity on it’s federal income tax return. This isn’t a perfect solution to the SALT deduction limits, but it helps taxpayers in states where the pass-through entity tax has been enabled. 

Seven states (Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin) have passed legislation allowing pass-through entities to pay their tax at the entity level as of this writing and more are considering it. 

We will briefly review the laws for each state that has legislation allowing for taxes to be paid at the entity level. This is a state level tax issue so the rules will be different between states. Once we complete our review we will turn to strategies to maximize this new tax benefit. There are a few instances where a taxpayer might not want to make the election to pay their state tax at the entity level. But many more taxpayers will want to use this new tax strategy even if they do not itemize or are affected by the SALT limits and even if the SALT limit were removed. 

We will start with the author’s home state of Wisconsin and progress from there.

Wisconsin

The Wisconsin pass-through entity program is elective and is available to S corporations and LLCs treated as such effective January 1, 2018 and for partnerships and LLCs treated as such effective January 1, 2019. 

  • The tax rate for entities making the election is 7.9%. Note that this is higher than the individual tax rate (7.65% in 2020) and may not always be the best course, depending on the situation of each owner on their individual tax return. 
  • To make the election over 50% of owners of capital and profits must consent. The consent is required annually.
  • The election must be made on a timely filed return (by the due date, plus extensions). 
  • Revoking an election must be done by the due date, plus extensions. 
  • Income taxed by other states do not count unless also taxed by Wisconsin.

Wisconsin has multiple credits available to businesses which can require some adjustments to the pass-through credit and income on the personal tax return. The benefits of taxing income at the entity level can be significant, but for some businesses it can be a complex calculation on Wisconsin returns. Here are more detailed rules from the Wisconsin Department of Revenue for S corporations and partnerships.

 

Connecticut

Connecticut is the first state to enact pass-through entity tax legislation and is mandatory for tax years beginning on or after January 1, 2018. This applies to sole proprietors, partnerships, S corporations and LLCs. 

  • Connecticut uses a multiplier which reduces the value of the credit.
  • Connecticut has modified this multiplier to further reduce the value. The state’s actions indicate that this is considered a tool to raise revenue from businesses whenever the state desires. There is no reason to think Connecticut will not continue reducing the multiplier to the state’s benefit. Since it is mandatory there is no way for businesses to avoid the increased tax bill.

You can read more about Connecticut’s pass-through tax here

 

Louisiana

Louisiana’a pass-through entity tax is effective for tax years beginning after January 1, 2019 and covers S corporations and all partnerships, except for entities filing a composite partnership tax return. The pass-though tax allows electing entities to be taxed as a C corporation.

The election for a pass-through entity to pay tax as a C corporation must be made in writing by the the 15th day of the fourth month following the end of the tax year. Then election can be made in the preceding year as well. Electing and revoking the election requires partners or members with over 50% of ownership consenting.

Shareholders and owners may exclude this income from their personal Louisiana return as long as the entity filed their corporate tax return properly.

The pass-through tax is calculated on a graduated scale:

  • 2% for income from $0 to $25,000
  • 4% for income from $25,001 to $100,000
  • 6% for income over $100,000

 

Maryland

Maryland passed entity pass-through tax legislation May 18, 2020. The law is effective for tax years beginning January 1, 2020 and after. Detailed regulations on the legislation are still forthcoming as of this writing.

The Maryland pass-through tax works similar to the other states where the state tax is paid at the entity level and deducted on the entities federal return without consideration for the SALT limits on personal tax returns. The pass-through tax rate is set at the top marginal tax rate for individuals, plus the lowest applicable county tax rate or the corporate tax rate for corporate owners of the pass-through entity.

Some additional issues to consider:

  • Regulations will probably require the deduction be added back on the personal return to be allowed a dollar-for-dollar credit.
  • The maximum tax allowed by the entity is capped at the distributable cash flow level of the entity.

 

New Jersey

In New Jersey pass-through entities can elect to pay the Business Alternative Income Tax (BAIT). Pass-through entities for tax years beginning on January 1, 2020 or after with at least one least one member liable for New Jersey income tax can elect to pay the BAIT. This applies to S corporations, partnerships and LLCs with 2 or more members. The tax rate is graduated with rates from 5.675% to 10.9%.

Facts to consider with the New Jersey’s BAIT:

  • No retroactive elections allowed.
  • The election must be made by the 15th day of the third month following the close of the tax year and must be made annually.
  • All members must consent to the election or by a member authorized to do so (officer or manager).
  • Revoking the election must happen by the due date of the tax return, excluding extensions.
  • The credit by electing the BAIT can not reduce the individuals tax below New Jersey’s minimum tax. Unused credits are carried forward up to 20 years.

 

Oklahoma

Oklahoma enacted legislation allowing the pass-through entity tax for tax years beginning on or before January 1, 2019. Once again sole proprietors and disregarded single member LLCs are not included. S corporations, partnerships and LLC electing to be treated as such are included in the Oklahoma legislation only.

The type of member determines the tax rate and is based upon the highest tax rate for the type of member:

  • 5% for individuals (the highest 2020 tax rate), and for corporations
  • 6% applies, the corporate tax rate.

Important points:

  • The election is made by filing Form 586 and can be filed in the preceding year through two months and 15 days after the close of the tax year.
  • The election is binding until revoked.
  • To revoke the election fill out Part 2 of Form 586.
  • The election revokes any election to file an Oklahoma composite return.
  • Oklahoma is similar to Louisiana in that a credit is not provided to the member. Members instead subtract items of gain and add items of loss on their personal return, the opposite of what happened on the entity’s state return. 

 

Rhode Island

Details involving the pass-through entity tax for Rhode Island include:

  • Effective for tax years beginning on or after January 1, 2019.
  • Eligible entities include S corporation, partnerships, LLCs, trusts and other entities not taxed as a corporation for federal tax purposes.
  • The tax rate is: 5.99% for individuals in 2019 and 2020 (the highest individual rate), but lower than the 7% corporate rate.
  • To make the election Form RI-PTE must be filed by the 15th day of the third month following the tax year.
  • With the election the pass-through entity will not be required to comply with non-resident withholding.
  • Member receives a tax credit.
  • Rhode Island does not address revoking the election.

 

Applying the Pass-through Entity Tax

As you can see by the details of the states that have some form of pass-through entity tax that the rules vary widely between states. Many use a credit to pass-through the benefit while others adjust income on the member’s personal tax return.

Many considerations need to be taken into account. Even if the SALT limit were eliminated there would still be instances where the pass-through entity tax would be beneficially to entity members. Even if you don’t itemize there can be a tax benefit as the entity’s state taxes are now deductible on the entity’s federal return, giving the member the state income tax deduction before it hits their federal income tax return, plus the standard deduction.

There are also reasons not to make the election (except in Connecticut where it is mandatory). The pass-through entity tax can affect the Qualified Business Income Deduction, Earned Income Credit, Saver’s Credit, Premium Tax Credit and more.

The tax professional preparing the entity income tax return and that of all the members will have an easier time determining the best course of action.

Let’s use Wisconsin, my home state, as an example. Most taxpayers in Wisconsin are currently paying 6.27% tax on their top dollar with high incomers paying 7.65%. The pass-through entity tax is 7.9% and is treated as a credit on the individual tax return. However, if there is no other income for the individual it is possible to create a larger tax than necessary. 

If all members can deduct the state tax attributable to the entity without hitting the SALT limit it probably does very little good to make the election while making the tax returns involved more complex. Likewise, those hit by the SALT limit and even those who do not itemize will normally get otherwise unrealized value.

Special attention has to be taken as it affects other areas of the tax return. The amount of state tax paid by the entity is deducted on the entity’s federal tax return. This will lower the value of the Qualified Business Income Deduction in virtually all cases. 

Using Wisconsin again, electing the pass-through entity tax can increase complexity of the tax return on the entity and individual returns. If, for example, the Manufacturer’s Credit is taken, adjustments need to be made on the Wisconsin personal income tax return. Manual calculations will be required.

There is a balancing act with this tax strategy. It appears many, even most, members of pass-through entities will benefit from the pass-through entity tax. However, the cost to prepare the returns will undo some of the gain and the loss of tax credits or deductions elsewhere on the return might make this a less appealing tax strategy.

There are numerous small businesses where the complexity will not be an issue and the benefit will effectively side-step the SALT limitations. Complex returns will require a seasoned tax professional. Talk to your accountant! Determine if the pass-through entity tax will lower your taxes and what it will take to prepare the return with the election. The pass-through entity tax is probably here to stay regardless where future federal tax laws go. And for those holding an interest in a pass-though entity it can add to serious tax savings.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.