Question for FilmTVLaw.com:
I run a craft services business and my tax bill was high this year, even though my rate was lower. Can I start getting hired as an independent contractor if I set up a company? Do you guys advise on taxes because my accountant isn’t that up on the entertainment business.
Answer by Brandon Blake, Entertainment Lawyer:
Thanks for a great question about tax planning for film and television companies. This question touches on a couple of areas, including independent contractor status, the new Tax Cuts and Jobs Act section 199A tax deduction (20% tax deduction), and studio and production company hiring policy. We handle all these areas for clients who retain our services. 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.
I. Independent Contractors and the Studios
The first step to better tax planning involves independent contractor status. From both a legal and tax perspective, it is better to be hired as an independent contractor. Ironically studios and production companies would also rather hire crew on an independent contractor basis, but in California the California Labor Commission has started a campaign to try to force studios and production companies to hire more crew on an employment basis. Generally, employment equates to higher taxes, while withholdings make it easier for both the State and the IRS to hold onto a larger part of income.
Because of this campaign, many studios and large production companies have adopted a rule that only “above the line” can qualify for independent contractor status. Mind you, this is not the preference of the studios, but is a defensive position taken due to confusion about who can legally qualify for independent contractor status.
In truth, most crew positions should be able to qualify for independent contractor status, provided that the term of engagement is limited to a single feature film or episode, and that the crew member is bringing his or her own tools and supplies.
However, every crew member hired as an independent contractor must sign a contract and our firm has been handling these agreements for nearly two decades, ensuring both sides get the tax treatment desired.
Talk with the companies you work for and layout your case for independent contractor status.
II. Setting Up a Proper Entertainment Loan-Out Company
The second step is to set up an entertainment loan-out company that will be approved by the studio or production company engaging your services.
A lot more goes into setting up a loan-out company than just a certificate filing with the Secretary of State. There are a number of tax elections that must be completed correctly to make you eligible for the optimal tax treatment.
You also want to make sure that you set up the right type of business entity. There are a lot of choices including corporations, limited liability companies (LLCs), limited partnerships and professional partnerships.
Finally, you need to make sure that the paperwork for the loan-out company is organized correctly for an entertainment business. Having no paperwork, or generic documentation that does not relate to your actual business could risk the loss of the tax treatment and tax deductions desired.
Our firm provides advice on choice of entity and jurisdiction, custom organizational materials for your specific business, and makes all tax elections and initial filings needed as part of our corporate services. We do not advise on companies if they have been set up through other services or accountants, because generally they will not be organized correctly and it is more time consuming to fix the problems than to start over.
III. File Your Taxes In 2020
The final step is to properly file your taxes next year to take advantage of the ground work you laid throughout this year. The rewards will be lower taxes through the following:
20% Deduction for Pass-Through Business Income
The biggest reward for many entertainment professionals with a loan-out company will be getting the 20% tax deduction for pass-through business income under the new 199A tax deduction of the Tax Cuts and Jobs Act (TCJA).
A word of warning, however, because 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.
Our clients who took advantage of corporate formation last year are today reaping the benefit from the 20% deduction for pass-through business income under 199A. Tax planning is key. 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.
Loan-Outs and Business Expenses
In addition to the section 199A 20% pass through tax deduction, 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 income 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 section 199A tax deduction is a great incentive to start a loan out company, but the meat of the tax savings will come from switching from an employee tax status to an independent contractor. 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 production companies and loan-out companies.
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.
The Down Side of Not Planning
For those who held off on setting up an entertainment loan-out company, this year they are literally paying the price. Employees with business costs are hard hit, and that effects many in the entertainment industry. The Trump tax “cuts” actually raised taxes on crew that relied on itemized deductions. 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.
Feel free to contact our office about rates for our entertainment production companies and entertainment loan-out companies, which include tax planning and consultation, 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 19 years. Please feel free to contact my office at www.filmtvlaw.com about a quote.
- By Brandon Blake, Entertainment Lawyer