The tax environment in the United States is continuously evolving, and many entertainment professionals are looking for novel methods to lawfully reduce their tax obligation. While the ordinary taxpayer has relatively minor unreimbursed business expenditures, entertainers often have unreimbursed business expenses that surpass 25% of their income. The inability of entertainment professionals to deduct unreimbursed costs under existing tax rules has significantly raised their tax obligation.
A Loan Out Corporation, sometimes known as a Loan Out Company, is a legal corporation formed in the United States by entertainment practitioners. The entertainment expert becomes an employee of the business, and the corporation “lends out” the shareholder. Loan Out Companies allow entertainment professionals to deduct all of their business-related expenditures.
Why are Loan Out Corporations Appealing?
Loan Out Corporations are appealing because “W-2 only” entertainment professionals may no longer deduct unreimbursed business expenditures; but, if the entertainment professional worked via a Loan Out Corporation, all business-related expenses for the corporation would be deductible.
Another benefit is the option to make pension contributions that are now deductible for the business but not taxed to the employee. When properly monitored, pension contribution limits can considerably surpass those of a 401(k); thus, this can be a wise financial move for entertainment workers. Loan Out Corporations also provide shareholders the option of making the S Election, which can help to reduce the self-employment tax burden.
Are there any Downsides to Loan Out Corporations?
While Loan Out Corporations may appear to be a “no-brainer” for entertainment professionals, they may have additional expenditures that may outweigh the tax gain. Additional expenditures may include, but are not limited to, all fees connected with annual accounting/bookkeeping, including annual tax preparation, potential state tax liabilities, business licenses, employer payroll-related taxes, and supplementary insurance coverage.
Professionals in the entertainment industry who believe a Loan Out Corporation is the best solution for them must assess the expenses against the benefits achieved. Each situation is unique, and tax professionals could help assist you in making the right option.