Why Now is the Best Time for Actors to Form a Loan-Out Company
The Tax Cuts and Jobs Act (TCJA) has officially been the law of the land for a full year now and tax season is upon us – the first year in which your tax return will be prepared in accordance with the freshly overhauled Internal Revenue Code. Many actors (and other entertainment professionals) will be surprised to find that their tax bill will be higher than usual this year. Significant changes in the tax code put entertainment professionals at an initial disadvantage but the remedy is a simple one: form a loan-out company.
Perhaps the most catastrophic blow to entertainment industry professionals is the abolishment of miscellaneous itemized deductions. More specifically, the loss of the Unreimbursed Employee Expense deduction. The loss of this deduction is particularly damaging to actors due to the nature of their work and the expenses specific to their industry.
In general, actors that do not have a loan-out corporation are paid by production companies as employees. Before the TCJA, this did not pose much of an issue but the disallowance of unreimbursed employee expenses results in an excessive tax burden for actors and other entertainment professionals in this position. Actors generally pay anywhere from 15-40% off the top of their gross income to agents, talent managers, business managers, and lawyers in connection with their work. In addition, actors also incur other business-related expenses including: business subscriptions, work supplies, business equipment, certain insurance policies, and expenses for the business use of their home. To estimate roughly, because of this new provision in the tax code, actors without loan-out corporations will end up paying income tax on 100% of their income of which they only effectively receive about 50% of.
In years past, actors may have delayed forming loan-out corporations until their income or workload become substantial and steady. With tax reform, this threshold is much lower. Actors performing services through a loan-out corporation enjoy the benefit of deducting their ordinary and necessary business expenses. In light of this, entertainment professionals should consider forming loan-out companies much sooner in their career to avoid an excessive tax burden.