IRVINE,
Calif., Aug. 6, 2024 /PRNewswire/ -- In
California, Loan-out corporations
are a common way of doing business, especially in the entertainment
industry. However, these types of corporations have recently come
under fire, and many are afraid that California lawmakers might take additional
steps to limit or even outright ban loan-out
corporations.
Why Should I Care if I don't live in California?
California law changes with
subsequent tax enforcement that raise revenue are commonly viewed
by other states in the union as an "awesome idea". Most states
raise a significant portion of revenue through W2 withholding which
comes in much faster through payroll withholding than through
quarterly estimated tax payments. Audits of loan out corps often
produce unsupported deductions which are rightfully viewed as
fraudulently lowering California's
revenue even where the independent contractor behind the loan out
corporation is employed and paid as an employee of the loan out
corporation.
A loan-out corporation is a business usually structured around
one person. The corporation essentially loans out the services of
the individual as an independent contractor. When clients pay for
these services, they pay the loan-out corporation rather than the
independent contractor directly. This is a very popular way of
doing business among people in California's vast entertainment industry.
Earlier this year, in 2024, several Hollywood guilds that represent many actors
and entertainers warned their members that loan-out corporations
might soon be banned in the entertainment sector. The California
Employment Development Department (EDD) has said this is not true,
and loan-out corporations will not be prohibited any time soon.
What Are Loan Out Corporations and How Do They
Operate in California?
A loan-out corporation is a way of structuring a business.
Generally, loan-out corporations are popular among people who work
as independent contractors. They are also very popular among people
in the entertainment industry who might provide work for all sorts
of clients. For example, an actor, singer, or another performer
might book a gig doing a commercial or a spot on a TV and be paid
through their loan-our corporation.
The way it works is that an individual formally starts a
loan-our corporation. The purpose of the corporation is to provide
services from the individual, whatever those services may be. When
clients pay for those services, they pay the corporation. Then, the
individual who runs the loan-out corporation pays their own salary
from the corporation. Essentially, a loan-out corporation allows
people to provide their services to others without having to become
someone else's employee.
These types of businesses are very popular in California in the entertainment industry.
Artists and performers may set up loan-out corporations, provide
creative work for numerous entities, and be paid through their
loan-our corporation. Our California tax lawyers can help you make sure
your loan-out corporation is in compliance with any tax laws.
Banning Loan Out Corporations in California
In 2024, the payroll agency Cast & Crew, which works
primarily with the entertainment industry, conducted an audit based
on a directive that the EDD would no longer be accepting loan-out
corporations. A notice from Cast & Crew stated that the EDD
would start requiring employers to pay for services directly to
contracted employers, not to the loan-out corporations. This would
have significant tax implications for independent contractors
working for loan-out corporations.
This information appears to be the result of a still unknown
miscommunication. The EDD has recently stated that loan-out
corporations will not be prohibited in California and will not take any action
against them. The EDD maintains that its commitment is only to
ensure taxes are collected per state law.
At this point, it is still unknown exactly where the notion of a
ban on loan-out corporations came from or what it means for the
future of these businesses and people working in entertainment.
Many people working with loan-out corporations enjoy certain tax
breaks and benefits. Whether these tax benefits are in jeopardy
remains to be seen.
The Pros and Cons of Loan Out Corporations in
California
Loan-out corporations are popular in the entertainment industry
as they provide many workers with tax breaks and benefits. However,
these tax implications can be a bit confusing, and it is not
unusual for people to make errors when doing their taxes. Call a
tax attorney to help you make sure you do not make any serious tax
mistakes.
Advantages
Having a loan-out corporation can help workers by providing
certain tax breaks. For example, an actor who works for a loan-out
corporation they established may deduct certain work and business
expenses, reducing their tax liability. If an actor must travel
because they are filming on location, they can deduct travel costs
as business expenses.
Loan-out corporations also provide a certain degree of liability
protection. If something goes wrong with a client and they want to
file a lawsuit, the corporation might be liable, but the worker is
not.
Disadvantages
Loan-out corporations come with certain downsides that you
should consider before you decide to set one up. First, loan-out
corporations can be expensive to establish. Simply creating a
corporation requires legal work and various fees along the way. The
corporation should also have its own assets, like business accounts
for accepting payment and distributing salaries.
While the individual person behind a loan-out corporation may
enjoy certain tax breaks and benefits, there are other tax
implications for the corporation itself. The corporation might be
liable for corporate income taxes, Social Security taxes, and
paying into Medicare.
EDD and IRS Worker Classification Audits / Payroll Audits of
Loan Out Corporations
California has outright
attempted to outlaw the use of independent contractors in
California as a revenue raising
measure through AB 5 and its progeny. If you find yourself facing
an audit by the IRS of California's Employment Development Department
(EDD) we can help. We have extensive experience dealing with state
and federal payroll audits of all types.
We Are Here for You
Regardless of your business or estate needs, the professionals
at the Tax Law Offices of David W.
Klasing are here for you. We are open for business and our
team will help ensure that your business is too. Contact the Law
Offices of David W. Klasing today to
discuss your business with one of our professionals.
In addition to our fully staffed main office in downtown
Irvine California, the Tax Law Offices of
David W. Klasing has unstaffed
(conference room only) California
based satellite offices in Los
Angeles, San Bernardino,
Santa Barbara, Panorama City, Oxnard, San
Diego, Bakersfield,
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Mexico, Austin Texas,
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& California Tax issues.
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