A tax liability can be defined as the amount of money an entity owes to tax authorities. These include local, state, and federal governments and can even reach across borders. Every entity is required to pay their fair share of taxes, but not every entity is taxed the same. Depending on the type of entity, the calculation may be different. For example, the calculation of taxable income and the rates of tax are different for individuals, corporations, partnerships and trusts.
In the world of theater and entertainment, most organizations are built as Limited Liability Companies or Limited Liability Partnerships. These organizations do not pay taxes because income is passed through to the partners or members of the organization. The individual receives a K-1 with their portion of income from the entity and they are required to report it on their individual return.
Many organizations elect to calculate and pay the tax liabilities for their investors. The organization will create an asset on their books equal to the amount of taxes paid on behalf of members, and repay themselves out of the calculated distribution the investor would usually be receiving. If the entity does not expect to be paid back by the partner or member, it is considered a distribution, and the basis of which the investor has in the organization is lowered.
It is important to remember that all individuals and entities are responsible for fulfilling their own tax liability. For any help structuring a tax friendly organization or preparing your tax return, reach out to Withum Smith+Brown.
With over 30 years of industry experience, our Theatre, Entertainment and the Arts Group understands the challenges businesses face within the sector, and offers practical solutions for film and TV productions as well as specialist services for individuals and small business with creative talents. Our clients around the globe benefit from the expertise and continuity of their engagement team and the rapport which develops in time from this crucial business relationship.