By: Eddie Bradford, Jr., CPA, CGMA
The U.S. tax landscape is constantly changing and many entertainment professionals are trying to find creative ways to legally minimize their tax liability. While the average taxpayer has very modest unreimbursed business expenses, entertainers frequently have unreimbursed business expenses that exceed 25 percent of their income. Not being able to deduct those unreimbursed expenses under current tax law has drastically increased the tax liability of entertainment professionals.
What is a Loan Out Corporation?
A Loan Out Corporation, sometimes referred to as Loan Out Company, is a U.S. entity that is generally created by entertainment professionals. The entertainment professional becomes an employee of the corporation and the corporation “loans out” the services of the employee/shareholder. Loan Out Corporations enable entertainment professionals to maximize the deductibility of all of their business-related expenses.
What are some advantages of Loan Out Corporations?
Loan Out Corporations are attractive because “W-2 only” entertainment professionals can no longer deduct unreimbursed business expenses, but if the entertainment professional operated through a Loan Out Corporation, all business-related expenses would be deductible for the corporation.
Another advantage is the ability to make pension contributions that would be currently deductible for the corporation and not currently taxable to the employee. Pension contribution limits can far exceed the limits of a 401(k) plan when supervised properly, so this can be a smart financial move for entertainment professionals.
Loan Out Corporations also provide the shareholder with the option of making the S Election, an election that could help to minimize the self-employment tax burden. S-Corporations must pay their owners a reasonable salary, but distributions/dividends paid to the owners are not subject to self-employment tax.
Are there offsets to the advantages?
While Loan Out Corporations may seem to be a “no brainer” for entertainment professionals, they do have additional costs that may offset the tax benefit received. Additional costs include, but are not limited to, all costs associated with annual accounting/bookkeeping, incorporating, annual tax preparation, potential state tax liability, business licenses, employer payroll related taxes and potential additional insurance coverage.
Entertainment professionals who think a Loan Out Corporation may be the best option for them must weigh the costs against the benefits gained. Each circumstance is different and the tax advisors at Frazier & Deeter are here to help you make the best decision.
About the Author
Eddie Bradford is a Principal in Frazier & Deeter’s tax department and one of the leaders of the firm’s Entertainment practice. He works with athletes, entertainment professionals, and business owners to develop tax strategies tailored to each client’s unique goals. More info here.