What Is A Loan-Out Corporation? Should An Athlete Consider Forming One?

What is a loan-out corporation? Should an athlete consider forming one?

As an athlete earning non-playing income (think: NIL deals), you may have heard that you should incorporate to save on taxes. But what does this mean? Can it really help you save money? Is it even worth the hassle?

The below is a brief guide on what incorporation is, so you can begin considering if it’s for you.

What is a loan-out corporation?

A loan-out corporation is a business entity (usually a corporation, often taxed as an S-Corp) that may provide legal and financial protection. The corporation acts as an intermediary between the individual (here, the athlete) and a third-party interested in the individual’s services, such as a company hiring the athlete for endorsement deals. We’ll discuss more on what this means in the next section.

What are the benefits of having a loan-out corporation?

There are two main benefits of having a loan-out corporation: liability protection and tax savings.

First, let’s explore liability protection.

By utilizing a loan-out corporation, third-parties enter into contractual agreements with the corporation, not the individual. When run correctly, in the event of an incident or debt that results in legal action, the individual’s assets may be protected from the claim.

Here is a broad-based example. Let’s say that Alicia is a college athlete with an NIL deal with Starbucks to promote its sweet cream vanilla cold brew. If Alicia doesn’t have a loan-out corporation, she would be entering into the deal individually with Starbucks. This means that Alicia as an individual would risk legal and financial liability should something go wrong with the deal. However, if Alicia has a loan-out corporation, for instance “Alicia LLC,” the deal will be made between Alicia LLC and Starbucks. Then, Alicia LLC–the business entity, and not Alicia the individual–will hold the legal and financial risk under the deal.

Despite this shift of risk, the loan-out should also have insurance policies in place as added coverage.

As for tax savings, loan-out corporations can take advantage of the pass-through entity (PTE) tax, limit self-employment tax, and deduct expenses related to their income.

With the Tax Cuts and Jobs Act in 2017, individuals were no longer able to deduct more than $10,000 in state and local taxes on their personal federal tax return. If an individual has a loan-out corporation and their state has a pass-through entity tax (most high-tax states do), the individual can bypass this $10,000 limit by effectively paying a portion of their personal state income tax through the corporation. This can result in significant tax savings!

Next up is the self-employment tax. Consider this: athletes that engage in NIL deals off of the playing field will need to pay over 14% of their net earnings in self-employment tax (up to the first $168,600 of net earnings
in 2024). This pays for Social Security and Medicare. Those with an S-Corp can pay themselves a “reasonable wage” out of these earnings, while the remainder of income will flow through, and not be subject to self-employment taxes. The wage is subject to self-employment tax; the flow-through is not.

The final way to save on taxes using your loan-out corporation is by deducting expenses related to off-the-field income.

Did you pay a commission to your agent for booking an endorsement deal? Did you incur travel costs en route to a commercial shoot? Items like these can be deducted to lower your taxable income. If you are paid as an employee (W2 wages), these expenses cannot be deducted.

So, should I incorporate?

Well, it depends.

While these savings can be significant and the protections can be valuable, there are also many costs and responsibilities associated with incorporating. Startup costs, additional tax returns, insurance costs, accounting and bookkeeping fees, payroll costs, and continued annual due diligence are required once a corporation has been set up.

It is important to consult a professional who has experience in this area before making the decision to incorporate. Some great resources to ask for guidance on this decision include sports and entertainment business managers, lawyers, and CPAs.

Disclaimer: Any advice contained in this communication (accounting, tax or other), is not intended to be an in-depth analysis of specific issues, does not substitute for a formal opinion, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending to another person any transaction or matter addressed herein. If you need tax help, reach out to a certified tax professional in your area. This article is also not legal advice and does not establish an attorney-client relationship. If you need legal counsel, please reach out to a licensed attorney in your state.