Loanout Corporation?

Perhaps the tax attorneys among us could comment:

Hollywood as 'loan out corporations'... a movie star does not contract to do a movie, the star's loan out corporation agrees to furnish the services of the star to do the movie.

What about a gambler loaning his services to a corporate entity to make use of his skills in a disciplined and knowlegable manner. This could tax the income at a lower rate make a good many expenses a deductible corporate expense and present the IRS with an entity that pays taxes.

Flea,

Who would'da thought? What a great idea. Here's a link to a 1982 article by a Los Angeles tax attorney:

About Loan-Out Corporations

This article notes it was already out of date when first sent to the printer, so it has a postscript. Given its age, one probably needs to consult an expert who is current on what to do and how to do it.

If you want to track down the original author, here is a link to him now:

Link to Loan-Out Author, George Short

His list of publications shows one with the exact same name as the one referenced here.

You can't just play by the rules using the law without a lawyer. There's so much you could do, but can't do without spending on that lawyer muscle, in order to get your way. Pretty much the cost of lawyers must surpass your benefits. It would be nice if you could just walk in uncontested, but they prey on the weak, will exert their power over you just because they can and not because they're right.

So, anyhow...

I sent the original author, George Short, an email, asking him two questions, and (bless his heart) he responded almost immediately.

I asked if he was aware of any professional gamblers using the loan-out corporation format as a way to structure their business affairs. He replied that he is not aware of any, but it could be done. He indicates one would want to form an S-corporation.

I also asked if he could point me to more up-to-date sources of reliable information about loan-out corporations. His reply pointed me to this book: Taxation of the Entertainment Industry by Schuyler M. Moore. Specifically, he directed me to start reading at page 228. Amazon shows the table of contents for this book. As it turns out, page 227 shows the start of a section titled, "Tax Planning for Talent."

Unfortunately, nowhere on Amazon can I find any source for this book at any price. So, check your local law school library, if you have access to one, or search on your own.

Flea, many thanx for pointing this resource out. This probably has no relevance to me, but it sure has been fun running down this rabbit hole.

Sure, you could form an S-corp tax entity to run a professional gambling business, but then you'd have to pay taxes twice -- once when the revenue was realized by the corporation and again when it was paid to the employee(s) as salary. For actors who do movies, and they make $3M in one year and none the next, having a middle-man corporation control the money can smooth out personal income and take advantage of tax brackets, etc. Another reason is to prevent the movie company from having to pay the actor's payroll tax, which on $3M is a lot of money. If the studio hires the loan-out company, that company (controlled by the actor) pays both halves of the tax, just like any self-employed person does. But for an AP who makes (or should make) money on a regular basis, I don't see where the real advantage would be. You're not getting paid by anyone on a contract basis, you're just picking up dollars off the ground (as it were), so there aren't any payroll considerations at all.

I run an LLC, but it's a pass-through entity and I file business taxes on my personal Schedule C every year. I don't have any separate taxation entity that has separate funds or tax liabilities. For me, expenses come off the top anyway so that wouldn't change if I did an S-corp. I would assume most APs file as Schedule C sole proprietors without any business structure at all, but I really don't know. If you're an AP and you're wondering which tax structure is best, definitely talk to an accountant who works with solo businesses. It's really just a question of knowing your cashflow and expense timings, plus any tax rules applicable to your particular kind of income (and gambling definitely has them), then working from there. But I'm betting that Schedule C for an AP is all you'd need.

Doesn't payroll tax top out at a little over $100K?

Quote: billryan

Doesn't payroll tax top out at a little over $100K?

Does it? I thought that was social security. I'm not really a tax guy, I'm just good with numbers. :)

edit: I had to look. Turns out I was half-right: payroll tax *includes* social security (which is capped) but also Medicare, which isn't. Employers pay 1.45% tax on all money paid to an employee, plus they have to withhold 1.45% from all employee wages and an extra 0.9% on wages over $200k. I think the loan-out corporation prevents the movie studio from having to do any of that, it becomes the corporation's responsibility. So yeah, on a million-dollar movie star that can be the cost of a few interns. :)

Math,

Seems the Loan-Out Corporation is a vehicle that might possibly be worthwhile for a high-end poker pro who might win several million dollars one year and $70K the next. But, those folks probably have their own expert tax attorneys.

Thanx for your sober, but comprehensive, analysis. I think you hit the nail on the head.