Thread by @DavidHSteinberg

I'll bite, w the caveat that I'm not an accountant and although I did take tax law that was 30 years ago so my details COULD BE WRONG. I think I know the general gist of the answer but I'm less confident of my expertise than say which kind of M&Ms are the best (peanut butter) 🧵

https://twitter.com/NandiniBapat/status/1482413738267275269

Forgot the old days when you would create a C-corp at 200-200K per year+. That's irrelevant. Due to tax law changes the approach these days is to create an S-corp and the threshold is lower.

We remember from Corporations that a subchapter C corporation is just a regular corporation, also known as "corporations are people too!" They pay their own taxes on the corporate return. Pretty much all big companies are C corps.

Subchapter S covers small businesses, sole proprietors, etc., which most writers would opt for. The most important difference is the profits "pass through" to the individual. So if S corp makes 100k and has 80k in expenses, 20k goes on your individual taxes.

What's the benefit? A corporation, even an S corp, can deduct almost any legitimate business expense. Commissions, legal fees for absolute sure, but even (maybe) movie tickets, Netflix, etc. (ask your accountant, this is not legal advice).

The only practical difference for a write/actor between C and S is that S corps can't deduct medical expenses. So co-pays, deductibles, premiums are all deductions for a C but not an S.

Now let's compare the S corp to an individual without a loan-out. They have to declare business income on Schedule C. And deductions are somewhat more limited.

But the CRUCIAL difference is that if your expenses divided by your income ratio is TOO HIGH that triggers the AMT (alternative minimum tax), which essentially wipes out some of your deductions.

So big picture, doing is individually means fewer types of deductions and possibly an AMT "penalty." So why doesn't everyone create an S corp? What's the downside?

1. Cost of setting one up. Maybe several hundred dollars or low thousands depending who does it. 2. Minimum corp state tax in CA is $800. So even though all the profits pass through and you pay zero federal corp tax, you pay $800 CA tax every year no matter what.

3. Cost of extra accounting for two returns instead of one. 4. And this is a big one that really defines the threshold, a corp pays payroll taxes! Please explain. Will do...

If you make 100k as an individual writer/actor/whatever, they deduct taxes but also the studio pays payroll taxes on your income. That's if I remember correctly 6.2% social security and 1.45% for medicare. You also pay the identical amount but the key is it gets paid twice.

Once by the employer and once by the employee. When you're a corp, YOU PAY BOTH PARTS. So often the payroll taxes are the biggest tax bill you incur as a S corp.

So some smart person out there has crunched the numbers are determined that in 1999 you needed to make "about 200k" to justify the extra costs and payroll taxes versus the gains from more deductions and avoiding the AMT.

Now the smart people say it's lower, 80k, 100k, I don't know. It has to do with the AMT I think.

So there you have it. That's why artists with consistently significant income create loan-out corporations to avoid the AMT, deduct almost everything, and not worry about commissions being nondeductible. They pay more for accounting, CA corp tax, and payroll tax.

But it's still every writer and actor's dream, at least the one's I know, to create that fun in-joke name for their own corporation and maybe see it in the end credits one day!

Final caveat: This is all based on my memory and ancient knowledge of accounting and taxes and the DETAILS COULD BE WRONG! Ask a professional for the absolute correct answer.

Forgot a huge benefit: PENSION PLANS! A corp can set aside pre-tax dollars into a qualified pension plan. Essentially a 401k but better.