Loan-out corporations are widely used by sports and entertainment professionals as a tax and financial strategy. These corporations offer a wide range of benefits to individuals, such as tax advantages and enhanced financial flexibility. Actors, athletes, musicians, and other high-income earners become an employee of the corporation, and the corporation is hired with services rendered by said employee.
Understanding Loan-Out Corporations
A loan-out corporation is a legal entity established by an individual for the purpose of providing professional services to clients or employers. Instead of working as a full-time individual, the professional contracts with the loan-out corporation, which then enters into agreements with clients or employers to “lend out” their services to the productions of movies, TV shows, theaters, or other forms of entertainment.
The loan-out corporation acts as an intermediary for the performance and services. In addition, it also offers legal liability protection by allowing professionals to separate their personal income and assets from their business affairs. Professionals are shielded from personal liability for most business-related obligations and legal issues that may arise. This separation helps safeguard their personal wealth and provides a layer of financial security.
Benefits of Loan-Out Corporations
One of the primary advantages of loan-out corporations is the potential for tax savings. By operating through a corporate entity, professionals can take advantage of various tax deductions and strategies that are not available to individuals. Business-related expenses, such as union dues, agent commissions, talent managers, travel, equipment, training, and other ordinary business expenses under the corporation, can be deducted. These expenses were previously deductible under an individual’s itemized deductions but later became non-deductible since the passing of the Tax Cuts and Jobs Act of 2017.
Loan-out corporations also have the ability to make pension contributions that would currently be deductible for the corporation and not currently taxable to the employee. Furthermore, pension contributions limits for defined benefit plans or defined contribution plans can far exceed the limits of a general 401(k) plan, meaning it could provide significant tax savings as well as retirement planning opportunities for sports and entertainment professionals.
Professionals who utilize loan-out corporations have greater control over their finances and cash flow. The owner of the corporation chooses how much income to take as salary, dividends, and distributions within the corporation. While the corporation must pay the owner a reasonable salary for the service performed, which is subject to payroll taxes, the distributions and dividends paid to the owners are not subject to any payroll or self-employment tax when the corporation has an effective S election in place. This flexibility allows for tax planning, managing cash flow, and optimizing personal finances to meet individual goals.
Lastly, operating through a loan-out corporation can contribute to enhancing a professional’s brand and professional image. By presenting themselves as a separate entity, professionals can create a more professional appearance, negotiate contracts more effectively, and potentially attract more opportunities.
Considerations and Compliance
While loan-out corporations offer significant advantages, it is crucial to understand and adhere to the legal and regulatory requirements associated with their establishment and operation. Loan-out corporations do incur additional costs that may offset the potential tax benefits, such as bookkeeping, tax preparation, incorporation, business licenses, payroll service costs, and state tax liabilities.
It is advisable to consult with a qualified tax professional experienced in loan-out corporations to ensure compliance with all legal and financial obligations. Tax experts can provide guidance on the best structure for the corporation, help navigate tax regulations, and ensure ongoing compliance with changing laws.
Conclusion
Loan-out corporations have become a popular financial strategy for entertainment professionals seeking tax advantages and financial flexibility. By separating their personal and business affairs, sports and entertainment professionals can optimize their tax planning, protect their personal assets, and exercise greater control over their finances. However, it is crucial to understand the benefits and downsides of operating as a loan-out corporation before implementing such a strategy. As always, we advise you to contact our sports & entertainment tax professionals if you have any questions or want to know more about how to start your own loan-out corporation.
Authors: Alan Lo, CPA, MAcc & Randall Poe
About the Author
Alan Lo, CPA, MAcc, Manager
Tax, Sports & Entertainment
Alan is a Manager in the tax department at KROST. His areas of expertise include tax planning and compliance for small to medium size businesses – sole proprietorships, partnerships, corporations, as well as high-net-worth individuals. He specializes in real estate, sports & entertainment, and professional service industries. » Full Bio