By James C . Counts , II , CPA , CFTA

Loan-out corporations in California are a common way of doing business , especially in the entertainment industry . However , these types of corporations have recently come under scrutiny , and some are afraid that California lawmakers might take additional steps to limit or even ban loan-out corporations .

Loan-out Corporation Explained 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 businesses pay for these services , they pay the loan-out corporation rather than the independent contractor directly .

For example , an actor , singer or other performer might book a gig doing a commercial or a spot on TV and be paid through their loan-our corporation . This is a popular way of doing business among people in California ’ s vast entertainment industry . Then , the individual who runs the loanout 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 .

EDD Thoughts Earlier this year the payroll agency Cast & Crew , which works primarily with the entertainment industry , conducted an audit based on information that the California Employment Development Department ( 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 the EDD will not take any action against them . The EDD maintains its commitment is only to ensure taxes are collected per state law .

At this point , it is still unknown 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 . On May 28 , the EDD issued the following statement regarding loan-out corporations :

“ We understand the great importance of California ’ s film and television industry and are proud of our work to support California ’ s employers and industries . We have received various inquiries highlighting questions about loan-out corporations ’ ability to operate in California . As we have previously stated , EDD is not taking action to ban these companies in California .

“ We are one of the nation ’ s largest tax collection agencies and work closely with businesses to collect payroll taxes that fund vital Unemployment Insurance and State Disability Insurance benefits for workers . Our commitment is to ensure these taxes are collected according to state law .

“ We will continue our communication with industry representatives to ensure their concerns are heard and understood . We are optimistic that this dialog will help bring further clarity and information for the benefit of everyone who works in one of California ’ s most iconic industries .

“ We understand taxes can be complex , and we are here for those who have questions . We are committed to providing excellent service to California employers , communicating with industries , and supporting a fair payroll tax system for the benefit of all Californians . Our Office of the Taxpayer Rights Advocate is responsible for protecting the rights of taxpayers during all phases of a tax administration process .”

If the EDD , in its normal audit selection process , does select a loan-out corporation for audit it will also look at how the corporation is run and whether they are following the requirements such that it is doing things correctly for a loan-out corporation . If something is not being done correctly , then the EDD will make assessments as required under the law .

Loan-out Corporation Advantages Many people working with loan-out corporations enjoy certain tax breaks and benefits . Whether these tax benefits are in jeopardy remains to be seen .

However , these tax implications can be a bit confusing , and it is not unusual for people to make errors when doing their taxes .

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

10 CALIFORNIA CPA NOVEMBER 2024 www . calcpa . org