IRS Form 1040

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It is remarkable how many people in Hollywood are overlooking the potential use of some entirely permissible tax saving provisions, so here is a short “See Spot Run” summary of some common ones (all section references are to the Internal Revenue Code):
1. Pass-Through Entity Tax. In general, the California income taxes are (a) not deductible in calculating federal taxes and (b) the main reason people are leaving California. However, by the simple expedient of running the income through a partnership (including an LLC with multiple owners, which is treated as a partnership for tax purposes), the partnership can elect to pay the equivalent of the California income tax, and, presto!, the tax becomes deductible. An LLC owned by a married couple can elect to be taxed as a partnership to get this benefit. S corporations also qualify, but there are some technical drawbacks that limit the benefit for S corporations.
2. 3.8% Medicare Tax. There is a pesky additional 3.8% Medicare tax that applies to a broad category of service and business income, with no cap on the tax. However, there are now two possible ways to reduce this tax: One way is by running the income through an S corporation after taking “reasonable compensation.” The other road less traveled is to run the income through an LLC with multiple owners, which, as mentioned above, is treated as a partnership for tax purposes, and LLCs do not require the payment of “reasonable compensation.” This approach was recently approved by the Fifth Circuit, and although the case dealt with a “limited liability limited partnership,” the court repeatedly emphasized that a “limited partner” is simply a partner who is not liable for the debts of the partnership, stating, “limited partner requires limited liability.” The IRS is fighting the issue in other Circuits, so the issue may end up at the Supreme Court. If this approach is used, it is important to avoid the payments to the owners being treated as “guaranteed payments” for tax purposes, since those payments don’t qualify for the exclusion.
3. DISC. One low-hanging fruit for tax reduction is use of a tax subsidy for export activities called a “Domestic International Sales Corporation” (a “DISC”), which provides a tax savings of roughly 7% of net foreign income. It works for any company that is a pass-through entity for tax purposes (such as an LLC or S corporation) and that has gross income from sources outside the U.S. attributable to the sale, rent, or license of property (including a film or TV show) that is produced in the U.S. This benefit even applies to sales companies that sell films produced by third parties where all the sales activity is in the U.S. The DISC does not need any actual substance (such as employees), as the DISC rules are designed to avoid restrictions on export subsidies under the General Agreement on Tariffs and Trade with minimal impact on normal operations, so it is a paper tiger with real teeth.
4. Section 199A. Under Section 199A, married taxpayers that have up to $403,500 of income (for 2026) are permitted to deduct 20% of their net income that is effectively connected with a U.S. trade or business. For higher income taxpayers, the 20% deduction is capped at 50% of wages paid to employees, including payments through pass-through entities, and including salary paid to the taxpayers.
5. Loan-Outs. Employees are not permitted to deduct any business expenses, but running the services through a wholly owned corporation (preferably an S corporation) permits the corporation to deduct the expenses and pay the net out to the owner. In Hollywood, this approach is generally respected only for “above-the-line” personnel, since the IRS takes a dim view of it for anyone else.
6. Use an LLC for Film Production and Distribution. Start-up companies are often encouraged to be formed as C corporations due to the supposed benefit of a huge tax exclusion on a later sale of the stock under Section 1202. While this is true if the company later does an IPO (a rare event for film companies), the more usual exit is a sale, and most buyers want to buy assets, not stock, or they will discount the price by the amount of the tax savings. Meanwhile, the shareholders can’t deduct losses and are subject to tax at both the corporate and shareholder level. Thus, an LLC is usually a better choice for film production or distribution.
7. Section 168(k). Section 168(k) permits a deduction for the cost of producing a film in the U.S. to the “owner” of the film when it is commercially released. As long as the distributor only has a “limited license” of rights, the company producing the film will be the “owner” entitled to the deduction. However, the deduction does not work for tax shelters leveraged with debt.
8. Projections. Taking advantage of some of the benefits listed above comes at the cost of other benefits, and there can be a complex interaction between the 3.8% Medicare tax, the pass-through entity tax, and Section 199A. I find it useful to model out the results on an Excel workbook to find the sweet spot that maximizes the tax savings.