Loan-Out Corporations in 2026: Still Worth It?

If you work in entertainment as an actor, director, writer, composer or musician, there is a good chance someone has told you to form a loan-out corporation. The idea is simple: instead of contracting with a production directly, you form your own company, the company "loans out" your services, and the production pays your company. The structure has been standard in the industry for decades. With several federal and California rule changes landing in recent years, it is worth asking whether yours is still doing the job you set it up to do.

A loan-out corporation is not a tax loophole. It is an ordinary business entity, usually an S corporation, that employs you and contracts your services to productions, studios and labels. Done well, it gives you a cleaner way to run a creative career as the business it really is. Done carelessly, it adds payroll filings, state fees and audit questions without saving you much at all.

Why the structure exists in the first place

Entertainment careers are expensive to run. Agent and manager commissions, attorney fees, coaching, headshots, reels, wardrobe that is not suitable for everyday wear, travel to auditions and gigs, home studio equipment and union dues can add up to a meaningful share of what you earn in a year.

If you are paid as a W-2 employee of each production, most of those costs do nothing for you at tax time. Unreimbursed employee business expenses were suspended as an itemized deduction by the 2017 tax law, and the 2025 tax law made that suspension permanent. A loan-out changes the picture because the expenses belong to your company. The corporation deducts its ordinary and necessary business costs before any profit reaches your personal return.

A loan-out can also open the door to a company retirement plan, such as a Solo 401(k), with higher contribution room than an IRA alone. It gives you a single entity to contract through, which keeps your paperwork organized when you are juggling several productions in a year. And it can provide some separation between your personal assets and business obligations, although a loan-out is not a substitute for proper insurance.

How the money actually flows

Here is a simplified example. Say your loan-out receives $400,000 in fees across a year of work. Your company pays commissions, legal fees, travel and other legitimate business costs of $80,000. It then pays you a salary, which runs through payroll with Social Security and Medicare withholding just like any other job. If your company is an S corporation, the remaining profit passes through to your personal return. It is taxed at your individual rates but is not subject to payroll tax a second time.

That last point is where many loan-outs earn their keep, and also where most of the risk sits. The IRS expects an S corporation shareholder who works in the business to take reasonable compensation for that work. Paying yourself an unrealistically small salary to minimize payroll tax is one of the most common issues the IRS raises with closely held S corporations. A defensible salary considers what a production would pay someone with your experience for comparable work, how much of the company's income comes from your personal services, and what you actually do day to day.

For most working professionals, the S corporation is the default choice. A C corporation can make sense in narrower situations, for example where you expect to leave profits inside the company for a long time, but the double layer of tax on money you eventually take out tends to make it a harder case.

Where the QBI deduction gets complicated

The qualified business income deduction lets many pass-through business owners deduct up to 20% of their qualified business income. The 2025 tax law made it permanent, which sounds like good news for an S corporation loan-out. The catch is that the performing arts are listed as a specified service trade or business. For specified service businesses, the deduction starts to phase out once taxable income passes an annual threshold and disappears completely at the top of the phase-in range.

For 2026, the threshold is $201,750 for single filers and $403,500 for married couples filing jointly. The phase-in range is now $75,000 for single filers and $150,000 for joint filers, so the deduction is fully gone at $276,750 and $553,500 respectively. Below the threshold, a performer can generally claim the deduction on pass-through profit. Above the top of the range, a performer gets nothing from QBI regardless of entity.

Two practical points follow. First, the salary you pay yourself is not qualified business income, so a higher salary shrinks the base the deduction is calculated on. Second, because the deduction turns on total taxable income, a strong year can move you from full benefit to none. That is why the salary decision and the QBI question should be modeled together, using your real numbers.

The California layer

Most loan-outs we see are based in California, which adds its own rules. An S corporation pays California franchise tax of 1.5% of net income, with an $800 minimum due even in a year with no profit. Your company also has to register as an employer with the Employment Development Department, run state payroll and withhold correctly on your salary.

California's elective pass-through entity tax can soften the federal limit on deducting state and local taxes. The state extended the election for tax years 2026 through 2030. Electing allows your S corporation to pay California tax at the entity level, where it is generally deductible federally, while you receive a credit on your California return. There are prepayment deadlines in June, and missing them reduces the credit, so this is something to plan early in the year rather than at filing time.

Common mistakes that cost loan-out owners money

The structure works best when it is run like a real business. The problems we see most often are avoidable:

• + Paying yourself too little salary, or none at all, in a year the company clearly earned money from your work
• + Contracts and payments that still go to you personally instead of the company, which undermines the whole arrangement
• + Mixing personal and company spending, so expenses are hard to support if the IRS or Franchise Tax Board asks
• + Keeping a loan-out open during several quiet years, paying the $800 minimum and compliance costs while earning little through it
• + Missing state payroll registration or filings, which can bring penalties that wipe out the tax benefit

So, is it still worth it

For most working entertainment professionals with steady income and meaningful business expenses, yes, a well-run S corporation loan-out still does real work. It recovers deductions you would otherwise lose, opens up better retirement savings and keeps your career organized.

It is a weaker case if your entertainment income is modest or irregular, your expenses are light, or you are already well above the QBI phase-out and paying yourself most of the profit as salary anyway. In those situations, the payroll, return preparation and California minimum tax can eat most of the benefit. The right answer comes from running your actual numbers for this year and next, not from what the structure did for someone else.

Frequently asked questions

Do I need a loan-out corporation to deduct my business expenses?

If you are paid as an independent contractor, you can deduct business expenses on your own return without a corporation. If you are paid as a W-2 employee, most unreimbursed work expenses are not deductible, and a loan-out is one of the main ways entertainment professionals recover them.

How much salary should I pay myself from my loan-out?

Enough to be reasonable for the services you provide. There is no single formula, but the IRS looks at what comparable work would pay, how much of the company's income comes from your personal effort and your role. Documenting how you arrived at the number is as important as the number itself.

Should I close my loan-out if work has slowed down?

Not automatically. It depends on whether you expect income to return, what the ongoing filings and California minimum tax cost you, and whether contracts still reference the company. It is worth reviewing each year rather than leaving it to run on autopilot.

How Kelly+Partners can help

Our Advisors work with entertainment professionals on exactly these questions: whether a loan-out still fits, what a defensible salary looks like and how QBI and California's entity tax election play into your numbers. A short review of your last return and this year's income is usually enough to tell you whether your structure is pulling its weight. Book a discovery meeting.

This article is general information only and is not tax, legal or financial advice for your situation. Speak with a Kelly+Partners Advisor before acting on it.