Question for FilmTVLaw.com:

I’m a freelance television producer and my wife is a casting director. Do we qualify for the 20% deduction for pass-through business income in the new Trump tax cuts? Been thinking about forming a company but not clear on how to do it right. Thanks in advance. 

Answer by Brandon Blake, Entertainment Lawyer:

It has never been a better time to form a loan-out company and getting the 20% deduction for pass-through business income under the new 199A deduction of the Trump tax cuts is just the start of it. Aside from the Tax Cuts and Jobs Act (TCJA) benefits, loan out companies are a great way to reduce tax exposure and to avoid the pitfalls of the alternative minimum tax and self-employment taxes.

A word of warning, all of the TCJA deductions are complex and the new 199A deduction is no exception. Before you file a loan-out, you will need to have an entertainment law firm like ours organize the company. You can also see other entertainment legal advice that I publish twice a month in my Entertainment Lawyer Q&A Forum at www.filmtvlaw.com.

Although there is not going to be a way to provide one answer to every different situation, I would say that in almost every case I have reviewed it has been substantially to the benefit of the client to choose loan-out status rather than employment status when being hired for entertainment freelance jobs, and that was before the new 20% deduction for pass-through business income under the 199A deduction.

TJCA 20% Deduction for Pass-Through Business Income

At the beginning of the year the big story was that there had been an attempt by Congress to prevent entertainment industry businesses from gaining full advantage of the 20% deduction for pass-through business income under 199A. However, in many ways that has been overstated and it comes down to the income level of the business owner and also the marriage status, since there is a marriage penalty built into this deduction. Tax planning is key, and I could not recommend someone file a loan-out without tax planning service from an entertainment law firm like ours being part of the formation, because there are many different ways to organize businesses, and many different choices of State jurisdiction as well. With proper tax planning done at the time of the formation of the loan-out company, all entertainment industry businesses should see substantial benefits from the TJCA section 199A deduction.

Elimination of Itemized Deductions

It is true that what the Tax Cuts and Jobs Act has given with one hand, it has taken away with the other. Employees with business costs are hard hit, and that effects many in the entertainment industry. When you are an employee you do not have the option of taking business expenses out of your calculation of income. The amount reported on the employee W-2 is your income and the only way to reduce your tax bill is through itemized deductions. Now under the Trump tax “cuts,” many of these itemized deductions are actually eliminated, such as unreimbursed employee business expenses, and a lot of others. Moreover, higher income employees will reach the alternative minimum tax, in which case most of the business deductions are then eliminated anyway, meaning that money spent on things like vehicles, business supplies, inventories, and office space is being paid for with after tax money. Essentially you are being taxed on your revenue, not on your profit.

Loan-Outs and Business Expenses

Aside from the new Tax Cuts and Jobs Act 20% deduction for pass-through business income, the original reason to file a loan-out company is still valid and comes down to business expenses. The loan-out company allows the individual to run in the same way that a company runs, which means the costs of doing business are taken out and the company only pays tax on the profits. This makes sense because no one expects a major corporation to be paying income tax on money it is paying out for office space or for the raw materials it uses in the course of business. So why should an individual be forced to pay tax on the materials that he/or she must purchase in the course of business? 

So, for the entertainment industry, the 20% deduction for pass-through business income in the new 199A deduction is a great incentive to start a loan out company, but the meat of the tax savings will come from switching from an employmee tax status to a business owner. That always provided tax advantages, and the new Tax Cuts and Jobs Act goes one step farther by eliminating employee itemized deductions, while at the same time tagging on a 20% pass-through business income deduction for entertainment business owners.

Remember that tax planning is key, and tax planning and business formation for an entertainment company is too sophisticated to trust to anyone other than a licensed entertainment law firm like ours.

Feel free to contact our office about rates for our tax planning and loan-out company formation services, and please do not decide about complex matters without consulting an experienced entertainment lawyer first. At BLAKE & WANG P.A. I have been representing feature film projects, television series, and recording artists for more than 18 years. Please feel free to contact my office at www.filmtvlaw.com about a quote.

- By Brandon Blake, Entertainment Lawyer