The Tax Benefits of Incorporation to the Entertainer (Part 1)

Tips in Applying for Business Tax ID
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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:

  1. providing services as a direct employee of the unrelated party consuming the services
  2. 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.

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To Incorporate or Not to Incorporate? THAT is the Question (Part 6)

This is part 6 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.

The tax implications for an LLC (limited liability corporation) are identical to that of a partnership. ” For federal income tax purposes, the LLC is not a separate taxpaying entity and is not subject to tax at the entity level. Instead, the LLC’s members report their respective distributive shares of LLC income, gain, loss, and deduction and credit on their individual federal income tax returns.” (Continuing Education of the Bar of California, 1999)

The tax treatment of an LLC by the state of California may also be problematic to the entertainer. Whereas the LLC and partnership will pay the same annual franchise tax that a corporation pays ($800), an LLC will be charged, pursuant to California Revenue & Taxation Code § 17942(a)-(b), an additional fee if there is net income exceeding $250,000. The additional fee is specified in the California Revenue and Tax Code and provides for the fee to be graduated at specified levels of income. Taking our earlier example of the partnership that has $1,000,000o taxable income, should this partnership be an LLC, there would be an additional fee of $5,190 assessed.

Other popular business entities include sole proprietorships, general partnerships, limited partnerships, and limited liability partnerships. It is not important that we analyze each of these entities with regard to the tax effects. What is important, though, is that we note that over time these entities have been regarded as being inappropriate for application to the entertainer. For example, the sole proprietorship provides no tax benefit insofar as taxes are assessed on the sole proprietor at the individual rate.

Furthermore, the purpose of this blog series is to assess the benefits and detriments of incorporation to the entertainer. An examination of all of the business entities and their utility to the entertainer would be of no use, for attorneys and accountants have long-held that an entertainer’s decision is solely whether to incorporate or remain a non-taxpayer. Therefore, the main consideration will be whether incorporation is beneficial to the entertainer as taxpayer.

* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Los Angeles Business Attorney services page.

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