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If Donald Trump gets his way on tax reform, Hollywood actors, directors, and writers stand to be among the biggest beneficiaries. Understanding why takes some appreciation of the fact that the entertainment industry isn’t just five big corporations, but also thousands of smaller ones — almost all incredibly obscure even if their owners are quite famous.
As the tax code currently stands, the richest individuals pay almost 40 percent on individual income (or less after deductions). Businesses pay a separate rate, which Trump wishes to set at 15 percent. Most importantly, the proposal outlined by the Trump Administration has this latter rate being applied to all businesses, including “pass-through” organizations like S corporations that distribute a salary to employee-owners and count the rest as profits. Under the current law, personal income and business income is taxed roughly the same, but if Trump succeeds, many folks may aim to establish mini-corporations for themselves to get their taxes down to 15 percent.
Guess what? Many in Hollywood are largely set up already thanks to “loan-out” corporations that contract out services like acting and directing to production studios. Alas, alongside the 21st Century Fox’s and Time Warner’s come Kaling International (Mindy Kaling), Kimsaprincess Inc. (Kim Kardashian), Snooker Doodle (Emily Deschanel), Rogue Marble (Sylvester Stallone) and so forth.
“This is huge,” explains Evan Bell, a business manager who reps Bill O’Reilly, Steven Soderbergh and Cary Fukunaga. “My clients are calling me up asking about this. Especially once it was clear there would be no writers’ strike.”
Creatives in the industry are ahead of the tax avoidance game largely thanks to one thing. For most middle- to upper- income individuals, the ability to deduct routine expenses would be worth the fees associated with setting up an S corporation but for the disadvantage of losing employee benefits. But many in Hollywood have insurance and pension plans through their association with guilds like SAG-AFTRA, the WGA and the DGA. Thus comes the “loan-outs,” placing Hollywood stars on a footing with hedge funds and mom-and-pop stores rather than many working class professionals.
If the new tax plan goes through — a big if, admittedly — Hollywood players will have to decide how to most strategically take advantage of the new rules. That could entail taking lower salaries in the short run for the prospect of bigger business dividends down the line.
“We’re going to see a lot more professionals cheat on salaries because every dollar will matter,” predicts Bell.
Robert Strauss, an attorney at Weinstock Manion who advises high net worth individuals, cautions that the devil is in the details and that the eventual reform may adopt taxing at the distribution of profits to mitigate the impact of change. He also notes Trump’s other proposal to eliminate federal deductions for state and local taxes, which will hurt those — including many entertainment professionals — who live in high-tax states like California and New York. Still, he adds, “It’s kind of ironic that the one group who stands the most advantage from all of this is the very group that’s most vocally opposed to Trump.”
This story first appeared in the May 10 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.