Loan-Out Corporations

AuthorLionel S. Sobel
Pages155-200
155
CHAPTER 8
Loan-Out Corporations
What Is a Loan-Out Corporation?
Benefits of Using a Loan-Out Corporation
Nontax Benefits
Limiting Personal Liability
Satisfying Service Recipients
Tax Benefits
Saving for Retirement
Maximizing Deductions
Increasing Deductible Amounts
Deducting Additional Expenses
Delaying Tax Payments
Delaying Tax Withholding
Deferring Receipt of Income
Burdens and Risks
Nontax Burdens
Expense to Create and Maintain Loan-Out, and to Comply with Formalities
Possible Loss of Eligibility for Unemployment Insurance Benefits
Tax Burdens
Minimum State Taxes
City License or Business Taxes
Additional Tax Returns
Loss of Foreign Tax Credit
Personal Service Corporation Tax Rate
Personal Holding Company Tax
Required Use of Accrual Method Accounting
Risk of Failing to Comply with Deferred Compensation Rules
IRS May Refuse to Recognize Loan-Out
Consequences If Loan-Out Is Not Recognized or Income Is Reallocated
To Taxpayer
To Employer / Service Recipient
Grounds for Refusing to Recognize
Assignment of Income
Reallocation of Income
sob29807_08_c08_155-200.indd 155 1/30/15 11:55 AM
156 CHAPTER 8
Back in 1981, it could be said (and actually was) that “[s]uccess-
ful entertainers commonly furnish their personal services through
a vehicle known as a ‘loan-out corporation.’”1 In those days (and
before), entertainers used loan-outs because “there were significant
advantages to performing personal services through a corporation,
rather than having the entertainer provide his services directly as an
employee or independent contractor.”2
Most if not all of those significant advantages were related to sav-
ing taxes, and those savings could be substantial.
But then, in 1982, something happened that seemed to be a game
changer. Congress passed the Tax Equity and Fiscal Responsibil-
ity Act of 1982. TEFRA (as the Act was commonly called) “substan-
tially modifie[d] the [Internal Revenue] Code as it affects loan-out
corporations.”3 Those changes—and more that Congress made just four
years later in the Tax Reform Act of 1986—“substantially reduced”4 the
advantages of using loan-outs. Indeed, even before the 1986 changes
were enacted, the “new rules” led to speculation that they “may cause
many personal service corporations to contemplate liquidation.”5
But it didn’t happen. Mark Twain once said, “Reports of my
death are premature.” And reports of the death of loan-outs were
premature too. Knowledgeable sources report that entertainers, ath-
letes, and artists still use loan-out corporations “frequently,”6 and that
the use of loan-outs remains “prevalent”7 and “widespread.”8 Hence,
this chapter addresses these questions:
What is a “loan-out corporation”?
If the benefits of using them have been “substantially
reduced”—and they have—what benefits remain?
What burdens are imposed on those who use loan-outs?
1. George G. Short, The Loan-Out Corporation in Tax Planning for Entertainers, 44 L &
C. P. 51 (1981).
2. Paul A. Sczudlo, Tax Planning for International Entertainers and Athletes 5 (2008)
(ABA Tax CLE 0912011).
3. Short, supra note 1, at 74.
4. Thomas N. Lawson & Bruce M. Stiglitz, Tax Planning for Entertainers, Artists and
Athletes: The Continued Viability of Loan-Out Corporations after Tax Reform, 11/3 E.
L. R. 3 (1989), available at http://elr.carolon.net/BI/V11N03.PDF.
5. Short, supra note 1, at 78.
6. Howard J. Weiner, Tax Planning Considerations for Athletes and Entertainers at
ABA Forum on the Entertainment and Sports Industries 2 (2010).
7. Sczudlo, supra note 2, at 5.
8. Id.
sob29807_08_c08_155-200.indd 156 1/30/15 11:55 AM
Loan-Out Corporations 157
Each of these questions raises several issues, and each of those
issues has its own sub-issues, so answering these questions can get a
little complicated. You may find Figure 8.1 to be a helpful roadmap.
Figure 8.1
Loan-Out
Corporations
What is a loan-out
corporation?
Benefits of using a
loan-out corporation
Burdens and risks
Tax benefits
Expense
IRS may refuse
to recognize
Limiting personal liability
Saving for retirement
Delaying tax payments
Create
Maintain
Comply with formalities
Minimum state taxes
Additional tax returns
Loss of foreign tax credit
Personal service corporation tax rate
Personal holding company tax
Required use of accrual method accounting
Risk of not complying with deferred comp rules
Consequences
Grounds
To taxpayer
To employer/service recipient
Assignment of income
Reallocation of income
Actual “controltest
Formalities test
Required use of calendar year by loan-outs for
entertainers in the “performing arts” (“qualified
personal service corporations”)
Permitted use of fiscal year by loan-outs for
entertainers who are not in the “performing
arts”
35% rate on loan-outs for entertainers in the “performing arts” (“qualified
personal service corporations”)
15% to 35% rate on loan-outs for entertainers who are not in the “performing
arts” (e.g., athletes, directors)
Accrual method must be used by loan-outs for entertainers
who are not in the "performing arts" (e.g., athletes, directors)
if gross receipts are greater than $5 million.
Cash method may be used by loan-outs for entertainers who
are: in the "performing arts" (e.g., actors, singers); and not in
the "performing arts" (e.g., athletes, directors) if gross
receipts are $5 million or less.
Increasing deductible amounts
Deducting additional expenses
Delaying tax withholding
Deferring receipt of income
Maximizing deductions
Tax burdens
Satisfying service recipients
Nontax benefits
sob29807_08_c08_155-200.indd 157 1/30/15 11:55 AM

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