Protecting a business, property or personal wealth is an important consideration for many people. At Anker, Reed, Hymes, Schreiber and Cohen, A Law Corporation, we pride ourselves on being a different kind of law firm – one that measures success by its value to clients. Since 1974, our firm has provided business law, real estate, estate planning and litigation services to individuals, families and businesses throughout Southern California.
Deduction Limitations of the Corporation and Individual
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This is the third section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding deduction limitations of the corporation and individual.
The corporation, on the other hand, is not affected by the § 67 limitation. A corporation will be allowed a one hundred percent deduction on itemized deductions. Therefore, in the foregoing example, the corporate taxpayer will be able to deduct the full amount of $50,000 without limitation. The corporation has effectively just saved the individual taxpayer approximately $4,000 in federal taxes and $1,000 in state taxes.
The subject of deduction limitations becomes more significant when addressing the issue of deductions allowed for medical expenses. An individual taxpayer can deduct the expenses for medical care of the taxpayer, his spouse, or a dependent to the extent that the expenses exceed 7.5% of the adjusted gross income. Using the previous example, if the individual had medical expenses of $25,000, they are not deductible because only those expenses that exceed 7.5% of the adjusted gross income are deductible. With an adjusted gross income of $500,000, the individual would need to have medical expenses of at least $37,500 before any deductions may be taken. In applying the applicable federal and state tax rates, the individual with $25,000 of medical expenses would pay a tax of approximately $12,500 ($10,000 to the federal government and $2,500 to the state government).
* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Los Angeles Business Attorney services page.
The Tax Benefits of Incorporation to the Entertainer (Part 1)
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This is the second section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding the tax benefits of incorporation to the entertainer.
“In general, the tax benefits available to loan-out corporations compare favorably with those available to individuals under their two unincorporated alternatives:
- providing services as a direct employee of the unrelated party consuming the services
- providing services as a sole proprietor
“(La France, 1995)
The concepts employed to determine a corporation’s tax liability are the same broad principles of gross income, deductions, assignment of income, timing, and characterization of the income employed by the individual taxpayer. Taxable income is gross income less certain authorized deductions. Gross income is all income from whatever source derived. Internal Revenue Code § 61 provides a non-exclusive list of sources of income which qualify as gross income under that section, including compensation for services, gains derived from dealings in property interest, and dividends.
From gross income, deductions are made if specifically allowed by the Internal Revenue Code as properly deductible. Such deductions include those ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, deductions on interest paid during the taxable year and ordinary and necessary expenses paid or incurred during the taxable year for the production of income.
* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Los Angeles Tax Planning Attorney services page.
Related articles
- How Tax Laws Impact a Sole Proprietorship Business (thinkup.waldenu.edu)
- Income Tax Filing Requirements (turbotax.intuit.com)
To Incorporate or Not to Incorporate? THAT is the Question (Part 4)
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This is part 4 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.
“The desire to avoid employee classification, and to obtain the benefits of the corporate form and independent contractor status, often motivates workers to create an employee loan-out corporation.” (La France, 1995)
Primarily, though, an entertainer will be considering the formation of a business entity for the purpose of creating a more beneficial tax structure. By filtering income through a business entity and with proper Tax Planning advice, different tax advantages arise. Yet, the structures of a limited liability company (“LLC“) and a partnership will not provide the desired tax benefit to an entertainer.
A partnership includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate.
* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Business Organization and Business Formation legal services page.
To Incorporate or not to Incorporate? THAT is the Question (Part 3)
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This is part 3 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.
Which Business Entity Should the Entertainer Choose?
The analysis of which business entity will be most advantageous for an entertainer is no different from the analysis done with regard to which business entity will be optimal in any other industry. An analysis of the benefits and detriments with regard to liability, tax consequences, and control issues all factor in the decision of which business entity to employ. Over time, though, this analysis has been refined in that attorneys and accountants have recognized that certain business entities are more favorable in certain industries while other business entities more appropriately pertain to other industries.
The general analysis of the benefits and detriments of the various business entities have led attorneys and accountants to conclude that incorporating is more advantageous to an entertainer than forming a limited liability company, partnership, or other business entity. This is because the purposes for the formation of a business entity by an entertainer will not be served by any of the alternative business entities. The other attributes of incorporation, namely liability protection and control issues, become irrelevant. Usually a corporation’s directors and shareholders will be shielded from liability in that a corporation and its owners are separate entities. This is untrue, though, when the shareholders have personally guaranteed the liability. This was a major teaching of the Basinger case, in that had Ms. Basinger signed the contract on her own behalf, this effectively would have been a personal guarantee of the contract. Additionally, the control issues are not important to analyze in that an entertainer is usually the sole shareholder of the loanout corporation.
* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Business Organization Formation legal services page.
To Incorporate or not to Incorporate? THAT is the Question (Part 2)
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This is part 2 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.
“The ‘loanout’ company is a ‘Hollywood’ term for a device that has received wide acceptance among doctors and lawyers-the personal service corporation.”(Klinger, 1986) “In the typical loan-out, an individual service provider forms a corporation in which she is the sole or majority shareholder as well as the sole or principal employee. The corporation then negotiates with a third party-the ‘borrower’–to ‘lend’ the services of the controlling shareholder-employee for a price.” (LaFrance, 1995) The third party will then pay the amount of the contract to the loan-out corporation, which will then pay a salary to the shareholder/employee. A studio or production company will usually not contract with the loan-out company unless it specifically expresses that the contract is for the services of the entertainer and the entertainer has signed the contract on his or her own behalf. A lawsuit involving Kim Basinger and the producers of the feature film “Boxing Helena” addressed this issue.
The contract for Ms. Basinger’s services was between the production company, Main Line Pictures, Inc. and Ms. Basinger’s loan-out company, Mighty Wind Productions, Inc. Ms. Basinger signed the contract as an agent for her loan-out company, but nowhere did she sign on her own behalf.’ The contract was between Main Line and Mighty Wind; Ms. Basinger, as an individual, was not a party.’ Therefore, it appeared that it was not Ms. Basinger who was obligated to perform on the contract, but it was Mighty Wind who was so obligated.
In an unpublished opinion by the California Court of Appeal, it was stated, “If the contract is only with Mighty Wind, then only Mighty Wind can be liable for breach of the contract.”
* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Business Disputes legal services page.
To Incorporate or not to Incorporate? THAT is the Question (Part 1)
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This is part 1 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.
This is the moment that you have been waiting for all of your life. The years of summer stock, off-off Broadway, and guest roles are over. You can smell it. You can taste it. Obscurity is a thing of the past-fame and fortune, here you come. Cha-ching! You are so close that you can see and smell the money and fame. A role in a television series or a part in a feature film. No more guest spots on “Friends” or “Home Improvement” or extra-work.
On those projects you were almost considered scenery. That was not really acting. One week of work; two lines of dialogue if you were lucky. Now you are going to be one of the stars. You have Emmy Awards and Oscars in your sights.
You have been around for a while in this business. You have made friends. And where there are friends, there is advice. Everyone has an idea. Everyone has a plan. Everyone knows the way to go. In the time that you have been a professional performer you have heard a lot of things. You have heard suggestions about hiring a personal manager or not hiring a personal manager. You have heard about this agent that is better than that agent. And you have heard about incorporating.
Everyone has been saying to incorporate. It seems that in Hollywood everyone in the entertainment industry has incorporated. One friend says to incorporate in California. Another friend says that Delaware is the place to incorporate. But what is the answer? Should you incorporate? What about other forms of business entities, such as a limited liability company or a partnership? And more importantly, what are the benefits and drawbacks to incorporating?
For answers to these questions you should see two people: an attorney and an accountant.
* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Business Organization Formation legal services page.
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