What is a Loan Out Corporation?
A loan out corporation, also referred to as a loan out company, is a business entity created by entertainment professionals.
Rather than being paid directly as an employee, entertainment professionals use a loan out corporation to conduct all of their business activities.
Who Are Loan Out Corporations For?
Loan out corporations are created and utilized by professionals in the entertainment industry. These professionals include:
- Actors and Actresses
- Director and Producers
- Musicians and Bands
- Professional Athletes
- Other TV and Film Professionals
It’s important to note that a “loan out” corporation isn’t a specific type of legal entity. “Loan out” is just a colloquial term used to describe an entertainment professional’s use of a business entity.
A loan out company is generally a Personal Service Corporation. The entertainment professional becomes an employee of the company and the company “loans out” the services of the professional.
Business Entity Types
Generally speaking, a loan out company could choose to operate as any business entity type available in their state. These typically include:
- Sole Proprietorship
- Limited Liability Company (LLC)
- Corporation (C-Corp or S-Corp)
For those working in TV and Film, selecting an entity type can be more restrictive.
The production companies responsible for paying the talent generally require that loan out corporations be regarded entities for taxes purposes. They also generally require that loan out companies are owned by a single member or shareholder.
Effectively, that means that loan out companies in the TV and Film industry will need be taxed as a corporation (C or S).
Most production companies will allow loan out companies to be an LLC, however, they will require proof that the IRS has accepted an election for the LLC to be taxed as a corporation (C or S).
Loan Out Corporation Benefits
1. Limited Liability
A corporation is a completely separate legal entity from its shareholders. Because of this, loan out corporations benefit from the protections of a “corporate veil.”
Effectively, this means that the corporation itself is on the hook for its own liabilities and the shareholder is not.
So, when a production company hires talent through their loan out corporation, they are in contract with the corporation, not the talent themselves.
Assuming that the corporate veil is properly maintained, any potential judgments or legal liabilities would be the sole responsibility of the corporation.
In addition, the shareholder will generally not be personally liable for any debts of the corporation. For instance, business loans or credit cards.
Put plainly, using a loan out corporation allows entertainment professionals to protect their personal assets.
2. Cash Flow Management
Many entertainment professionals work on multiple different projects throughout year. More often than not, these projects will have different production companies.
One of the major benefits to having a loan out corporation is the ability to more closely manage cash flow.
Generally, entertainment professionals without a loan out corporation are paid W-2 wages.
The problem with this is that since the professional is on numerous payrolls with irregular pay periods, the tax withholdings can be extremely aggressive.
For example, I once had a client that did not have a loan out corporation. He had signed a deal for a one-time payment of $55,000.
Unfortunately, the production company would not pay him as an independent contractor. They also would not allow him to claim more than one exemption on his W-4.
The result? After tax withholdings and agent commissions, the client’s gross payment of $55,000 came through as a net of about $15,000.
My client had plans to live off of that money for a period of time. But, without a loan out corporation, he was at the mercy of the production company’s payroll.
3. Tax Planning
By receiving compensation through a loan out corporation, shareholders could choose to defer income by adopting a fiscal year.
Some corporations are eligible to select a fiscal year end. This means that the corporation’s tax year does not line up with the calendar year.
For instance, a corporation selecting a fiscal year end of January 31st would collect income and record expenses between February 1st of the previous year through January 31st of the current year.
With proper planning, utilizing a fiscal year could potentially enable entertainment professionals to defer personal income for almost an entire year.
Another tax benefit of utilizing a loan out corporation is the ability to take advantage of Qualified Pension and Benefit Plans.
In the case of an S-Corporation, certain shareholders are able to deduct health insurance premiums.
In addition, pension contribution limits can be more than double that of a standard 401(k) plan when administered properly.
4. Tax Savings
Perhaps one of the biggest benefits of using a loan out corporation is the potential to save money on taxes. The S-Corporation election is one of the ways to reap immediate benefit.
Entertainment professionals can save money on FICA taxes by receiving a “reasonable salary” from the corporation and allowing the remaining profit to pass-through to their personal tax return.
S-Corp profits are taxed to the shareholder at ordinary income tax rates and are not subject to FICA taxes.
Taxpayers should consult an Entertainment CPA to help decide on a “reasonable salary.”
With a loan out corporation, entertainment professionals are able to deduct their ordinary and necessary business expenses.
Traditionally, service providers that were paid as an employee (W-2 wages) were only allowed to claim business expenses as itemized deductions, subject to a 2% AGI floor.
Under the Tax Cuts and Jobs Act of 2017 the itemized deduction for employee business expenses has been eliminated.
There is no limit on business deductions for corporations assuming that the expenses are ordinary, necessary, and not specifically disallowed by the Internal Revenue Code.
Entertainment professionals that pay a percentage of their income to managers or agents must have a loan out corporation to deduct such payments.
Loan Out Company Drawbacks
While there are a number of benefits to operating as a loan out corporation, it’s not all roses.
To put it plainly, maintaining a corporation is a lot of work. It is more expensive and more time consuming than simply working as an employee.
Proper and meticulous record-keeping is of the utmost importance. Otherwise, you may miss out on the tax planning and savings benefits of using a loan out.
Entertainment professionals with a loan out corporation will almost certainly need to work with an Entertainment CPA for tax services, if not a full-blown business manager.