KROST Quarterly Magazine: The Sports & Entertainment Issue - Volume 2, Issue 4

VOLUME 2, ISSUE 4

KROST QUARTERLY M A G A Z I N E

THE SPORTS & ENTERTAINMENT ISSUE GAME-CHANGING

TAX MATTERS FOR ATHLETES

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TIPS FOR CHOOSING THE RIGHT BUSINESS MANAGER

M&A Trends

in the Media, Entertainment, and Gaming Industries

QUALIFIED BUSINESS INCOME DEDUCTION

Loan-Out Corporations:

Stacey R. Korman, CPA, MST, Brad Pauley, CPA, and Douglas A. Venturelli, Esq. lead the Sports & Entertainment Industry group at KROST

To Be or Not To Be? WWW.KROSTCPAS.COM

KROSTCPAs.com

Volume 2, Issue 4 / October 2019

CONTENTS

Offices Pasadena Headquarters Woodland Hills Office Valencia Office West LA Office Phone: (626) 449-4225 Fax: (626) 449-4471 Principals Gregory A. Kniss, CPA Managing Principal Lou Guerrero, CPA, MBT Principal - Tax Practice Leader Jason C. Melillo, CPA Principal - Assurance & Advisory Jean Hagan Principal - Business Management So Sum Lee, CPA Principal - Tax Douglas Venturelli, Esq. Principal, Estate Tax & Trust Richard Umanoff, CPA, MBA Principal - Tax Christopher H. Gaynor, CPA, MS Principal - Tax Production, Copy, and Design Bethany Wolfe, Editor-in-Chief Anna Chen, Editor Ellen Reynerson, Graphic Designer Diana Vu, Assistant Editor Mayra Silva, Assistant Editor Inquiries may be sent to: admin@KROSTCPAs.com

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Game-Changing Tax Matters for Athletes

By Brad Pauley, CPA

Lights, Camera, and Actionable Strategies for Long-Term Financial Planning

By Philip Clark, CFP®

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M&A Trends in the Media, Entertainment, and Gaming Industries: 2019 Q1-Q2

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Qualified Business Income Deduction and the Entertainment Industry

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By Paren Knadjian

By Ronique Davis, CPA

5 Tips for Choosing the Right Business Manager

By Stacey R. Korman, CPA, MST

Loan-Out Corporations: To Be or Not To Be?

By Douglas Venturelli, Esq. and Jonathan Louie, CPA

Stock Photography Adobe Stock - Used with permission Copyright © 2019 by KROSTCPAs.com All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

Avantax Wealth ManagementSM is the holding company for the group of companies providing financial services under the Avantax name. Securities oered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services oered through Avantax Advisory ServicesSM. Insurance services oered through Avantax Insurance AgencySM. 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000

THE SPORTS & ENTERTAINMENT ISSUE KROST Quarterly is a digital publication released by KROST CPAs & Consultants headquartered in Pasadena, California. Established in 1939, this full-service Certified Public Accounting and Consulting firm serves clients across a variety of industries. With a focus on recognizing opportunities and creating value, KROST equips clients with tools to make better business and financial decisions for the future.

KROST QUARTERLY VOL. 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE

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INTRODUCING

Pictured: Brad Pauley, CPA (Top Left) Stacey R. Korman, CPA, MST (Lower Left) Doulas A. Venturelli, Esq. (Right)

KROST’S SPORTS & ENTERTAINEMENT TEAM At KROST, we have vast experience in the sports & entertainment industries working with current and former major and minor leauge players, WGA, DGA, PGA and SAG members, as well as several Emmy and Academy Award nominees and winners. Our knowledgeable staff can navigate loan out corporations, Guild, and pension issues, and also has experience handling state withholding and corporate registrations for California corporations doing business in other states. We are also well-versed in multi-state/ residency issues as well as full-service business and wealth management services.

MEET THE SPORTS & ENTERTAINMENT TEAM

Our team produces regular KROST Insights posted to our website. This issue will highlight some of the hot topics in the sports & entertainment industry including tax issues for athletes, Loan-Out Corporations, Qualified Business Income

SUBSCRIBE

Deduction, and more.

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Receive KROST news right to your inbox! To subscribe, click here.

KROST QUARTERLY VOL. 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE

Greg Kniss, CPA Managing Principal

SPORTS & ENTERTAINMENT

Team at KROST 360° Service Model

Lou Guerrero, CPA, MBT

•

Accounting Services • Accounting and Bookkeeping • Accounts Payable – Bill Pay • Accounts Receivable • Budgeting • Business Management • Personal Accounting Management

•

Tax Services • Audit Support • Loan-Out Corporation • Residency/Multi State • Tax Controversy • Tax Planning and Strategy

•

Wealth Management • Financial Planning • Insurance and Risk Management • Investment Consulting

Principal - Tax

Douglas A. Venturelli, Esq. Principal - Estate Tax & Trust

Stacey R. Korman, CPA, MST Director - Accounting

Brad Pauley, CPA

Experience You Can Trust Our Sector Expertise •

• • • • • • • • •

Athletes and sports professionals, including minor and major league baseball, basketball, football, and snowboarders Sports entertainment Pre and post production Actors and comedians Radio personalities News and network Models Video bloggers (YouTubers) Producers (television and motion picture) Camera and set lighting

Director - Tax

Phil Clark, CFP® Director - KROST Wealth Avantax Wealth ManagementSM is the holding company for the group of companies providing financial services under the Avantax name. Securities oered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services oered through Avantax Advisory ServicesSM. Insurance services oered through Avantax Insurance AgencySM. 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000

“The experienced, multi-disciplined teams at KROST can provide tax, accounting, and consulting services for very specific needs relating to sports & entertainment, as well as a holistic approach to tackling multiple challenges as a true partner in the development of your profession.”

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GAME-CHANGING TAX MATTERS FOR ATHLETES

By Brad Pauley, CPA | Director - Tax

T

here were many deductions professional athletes were able to take under the old tax law, however, under the new law, deductions taken in previous years are no longer available. Some examples of expenses that are no longer deductible include contract negotiation (agent) fees, union dues, club house manager dues and tips, equipment, duplicate living expenses, travel, rideshare fees and taxis, vehicle shipping, training, rehabilitation, car rentals, etc. These expenses are no longer deductible for federal purposes because the new tax act did away with all of the 2% miscellaneous itemized deductions, which include unreimbursed employee business expenses.1 This significant change has severely impacted the taxes of professional athletes.

Under the old law, expenses could be bundled in one year (especially agent fees), thereby reducing the impact of the 2% adjusted gross income “haircut” given to these types of expenses. As long as the taxpayer didn’t fall into Alternative Minimum Tax (AMT), writing off 2 years of agent fees in one year was an extremely lucrative tax benefit, especially to athletes with long-term deals. Some states, such as California, still afford these types of deductions, but the tax benefit still doesn’t compare to that of previous years.

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“AFTER THESE CHANGES IN LEGISLATION, HOW CAN PROFESSIONAL ATHLETES STILL COME OUT WITH SIGNIFICANT DEDUCTIONS? ONE SOLUTION WOULD BE TO ALLOW ATHLETES TO FORM LOAN OUT CORPORATIONS.”

SCHEDULE A – STATE AND LOCAL TAX DEDUCTION Under the old law, taxpayers could write off 100% of state tax expenses as long as they didn’t fall into AMT. Under the new law, the SALT (state and local taxes) deduction is capped at a mere $10,000. The SALT deduction also includes property taxes, so most athletes reach the $10,000 limit just on that alone. This change renders the once lucrative state tax deduction practically worthless. For example, a ball player making $12 million a year has $1 million in state tax withheld from their pay check. Under the previous law, this $1 million deduction would turn into an enormous $400,000 reduction in tax, but with the new law, it is hardly worth a dime.

After these changes in legislation, how can professional athletes still come out with significant deductions? One solution would be to allow athletes to form loan out corporations. A loan-out corporation is an entity set up for the purpose of “selling” the personal services of its owner/employee to third parties. The IRS allows athletes and entertainers to form these types of companies, however, the collective bargaining agreements (CBA) of many professional sports leagues stipulate that the players are to be treated as employees and not allowed to form such entities. The MLB’s CBA is set to expire after the 2021 season and is therefore foreseen to be a trending topic in upcoming years. One can only hope that an amendment can be made before the expiration to limit the loss of expenses necessary to play successfully. According to Buster Olney of ESPN, “the current labor agreement has just about reached its midpoint – about two and a half years through a five-year deal – and despite the fact that there are incredibly complicated and difficult issues to negotiate, there are no active, on-going talks between MLB and the union.”2 Of course, there are many more issues than just tax deductions, but it sounds like nothing will be done on this front until the CBA expires.

Some advisors are recommending that their clients form corporations for their marketing and endorsement income so they can deduct both the agent fees associated with these deals and fees paid for contract negotiations. However, there are better remedies for this situation because upon audit, the fees tied to a player’s salary will be disallowed. This tactic could have unwanted consequences if the IRS chooses to audit, because it could lead to a significant underpayment of tax which would have to be paid back plus interest and penalties.

1 2

Publication 529 (2018), Miscellaneous Deductions - IRS Onley, Buster (@Buster_ESPN). Tweet.

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RESIDENCY AND MULTI-STATE ISSUES High income taxpayers such as professional athletes have always dealt with the temptation to establish residency in states where there is little to no tax. This temptation has greatly increased since the passing of the SALT deduction limitation, which further limits any tax benefit received by paying state tax. But is it worth it to establish residency?

“HAVING THE RIGHT TAX ADVISOR CAN NOT ONLY HELP ATHLETES NAVIGATE THE TRICKY WATERS OF FILING FROM STATE-TO-STATE, BUT ALSO SAVE SIGNIFICANT MONEY BY KNOWING THE INS AND OUTS OF THE PROFESSIONAL ATHLETE WORLD.”

There are many steps to establishing residency; the more that can be done, the better off a taxpayer will be upon audit. However, it is important to be aware that high tax states such as New York, California, Connecticut, New Jersey, and Illinois have become so aggressive in filling revenue gaps and loss of tax revenues that some tax experts believe that there is a 100 percent chance of state audit.3 In these instances, accountants need to help their clients collect as much data about their day-to-day whereabouts so they can prove that they have indeed moved and are spending the majority of their time in the state of established residency.

To determine if it’s worth establishing residency in another state, it is recommended that a multi-year, multi-state tax projection be run at the beginning of an athlete’s contract. This will determine the true tax savings of moving, giving the player the information needed to determine if it is worth doing so.

Another issue that comes into play for professional athletes who establish residency is the reapportionment of their wages that show up on their W-2’s. An example of this would be an athlete who lives in a no tax state but plays in a taxable state. If the athlete happens to go on the Injured Reserve list, they are most likely rehabilitating in either their home state or Florida (which happens to be a no tax state). If the athlete is on payroll, the head of payroll simply apportions the player’s wages to the state in which the Ball Club resides instead of where they physically are, resulting in unnecessary state taxes being paid. If the athlete keeps a well-documented paper trail of where they physically are, then there is an opportunity to reapportion their wages from the Ball Club’s state to the client’s state of residency, thereby resulting in a large state tax refund.

Professional athletes are facing more tax issues today than ever before.

Having the right tax advisor can not only help athletes navigate the tricky waters of filing from state-to-state, but also save significant money by knowing the ins and outs of the professional athlete world.  CONTACT BRAD  3

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4 Red Flags that can Trigger a Residency Audit - Accounting Today

KROST QUARTERLY VOL. 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE

LIGHTS, CAMERA, AND ACTIONABLE

STRATEGIES FOR LONG-TERM FINANCIAL PLANNING Guest Contributor: Phil Clark, CFP® Director - Wealth Management, KROST Wealth

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n entertainer’s team can be made up of several individuals working to ensure the success of the performer. This team helps bring aspirations and dreams to life by focusing on strategic objectives—be it job-based, or in this case, financial.

Having the right team members can have significant and lasting impacts on the professional’s career and personal life. This is particularly crucial when considering a wealth management advisor and developing a long-term financial plan.

Here are 5 strategies for entertainment professionals to consider when choosing a wealth management advisor and developing a long-term financial plan:

1

Make Sure the Plan(s) is Flexible

Traditional wealth management plans are great for traditional clients, but artists and entertainers are anything but traditional. Income is never consistent and can vary from year to year. A client can make 7 figures one year, then have to live off residuals and unemployment the next. An industry-experienced wealth management advisor takes into consideration the client’s long-term financial goals and works in partnership with the rest of the financial team to consider on-going cash flow needs with an eye toward the entertainment professional’s natural career highs and lows.

Planning for the long term requires proper cashflow planning and investment resources that a traditional save, invest, spend plan does not offer. In the entertainment industry, sometimes everything goes as planned and other times things do not work out as hoped. Having a team that can set up a flexible plan that will evolve and grow in cadence with this exciting career path can provide peace and often times more creative freedom knowing what options are available.

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Loan-Out Corporations — the Good, the Bad, and the Unknown

With the new tax law and elimination of all business deductions, establishing a loan out corporation may be imperative to the highly compensated individual who is currently paid on a W-form. But the loan-Out is not only set up for tax purposes. Once established there are several issues that must be considered and addressed, from wealth accumulation to risk assessment and protection. This is where the financial advisor, tax, and accounting team work together to establish a plan for growth and protection while providing a safety net for the individual and the individual’s family.

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Increasing Tax Deferred Retirement Contributions Through a Loan-Out Corp

Motion Picture and Guild Pension Plans are some of the best industry plans still in existence. Considering retirement expectations, a traditional IRA is not sufficient, and there are no tax deductions available for participation in the Guild pensions. A loan-out corporation can establish any number of plans that can shelter tax deductible savings for the future. These plans can be as simple or as complex as the situation requires. They can be voluntary or mandatory.

Utilizing strategies to aggressively save and minimize taxes while things are going well, can make all the difference.

Planning ahead means creating opportunities to stay focused on what matters most: developing a lasting career in the business.

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Know the Value of a Diverse, Experienced Team that Understands the Full Financial Picture

Just like a movie, television show, baseball team, or business unit, teams create the best outcomes for clients.

But not just any team, a specialized team focused on individual areas working as an ensemble. Consider a movie production with 100 members of the crew. While that is part of the team, production would halt without abovethe-line team members to guide the creative process.

The ever-changing landscape of tax, investments, and insurance can be complicated enough. Add to that, a non-traditional career in a dynamic, everchanging industry, and it becomes easy to get lost. A proper wealth management team should include individuals focused on specific areas of expertise such as estate planning, tax, insurance, investments, and retirement.

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Does Your Wealth Management Team Engage With Your Tax Team? Why Not?

Traditional money managers buy and sell assets with little to no regard for a client’s tax position. That is unwise and is not in the client’s best interest. A good financial advisor takes into account a client’s specific tax liability and designs a plan to help reduce that tax burden, something many financial advisors are not permitted to do based on license limitations, and perhaps a lack of expertise.

Consider working with a financial advisor that utilizes a tax-centric approach. In this model, the financial advisor and CPA work together throughout the year to monitor the individuals tax situation, find new opportunities for financial growth, security, and savings that lead to a better resulting plan that evolves fluidly with the entertainer’s career, life, and goals.

These strategies are just a few considerations to make when looking for a financial advisor and creating a comprehensive financial plan. The goal of wealth management is to provide security for clients so they can do what they do best. That’s only possible when the wealth advisor understands the business and industry, analyzes holistically the full financial picture and goals of the individual, and weighs the pros and cons of the complex and innumerable options that are available to create a plan that supports the individual, their family, and their career. 

Because it’s not what you make, it’s what you keep.

Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM Placing business through Avantax Insurance ServicesSM CA# 0M36260. Avantax affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.

CONTACT PHIL 

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QUALIFIED BUSINESS INCOME DEDUCTION AND THE ENTERTAINMENT INDUSTRY

By Ronique Davis, CPA | Senior - Tax

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he Tax Cuts and Jobs Act (TCJA) has had an impact on many industries since it was enacted in December 2017, and the entertainment industry is no different. The act, passed and signed into law on December 22, 2017 by President Donald Trump, is one of the largest changes to the tax code since the Tax Reform Act of 1986.1 Part of this tax law overhaul is the Qualified Business Income (QBI) Deduction commonly referred to as the Section 199A Deduction by tax professionals. But exactly what is the QBI Deduction and how does it impact the entertainment industry?

As of the 2018 tax year, the QBI deduction is available to individuals, certain trusts, estates, S corporations, and partnerships. These qualified taxpayers can get a deduction of up to 20% of income for a qualified trade or business.2 A qualified trade or business is defined as any business with a regular, continuous profit motive3 with the exception of businesses structured as a C corporation, the trade or business of performing services as an employee, and specified service trades or businesses (SSTBs). The SSTB exception does not apply for taxpayers with a taxable income below the threshold amount of $315,000 for married couples filing a joint return or $157,500 for all other taxpayers.2 The QBI Deduction for SSTB is completely phased out when the owner’s taxable income exceeds $415,000 for married jointfilers or $207,500 for all other filers. It is important to note that these threshold amounts will be adjusted for inflation in subsequent years.

EXACTLY WHAT IS THE QBI DEDUCTION AND HOW DOES IT IMPACT THE ENTERTAINMENT INDUSTRY? 10

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A specified trade or business is one where the principal asset is the reputation or skill of one or more of its employees or owners. Services in the fields of health, law, accounting, financial, as well as those in performing arts and anyone that is integral to the creation of the performing arts fall into this category. Individuals where the receipt of income stems from endorsing products or services, the use of the individual’s image, likeness, voice, or other symbols associated with the individual’s identity, appearances at events or on radio, television, or other media formats are all subject to SSTB limitations. Professionals such as cinematographers, lighting designers, set designers, make-up artist and other behind the scenes professionals also fall into the performing arts category under SSTB definition.4

“WITH ALL THE EXCEPTIONS AND PHASE-OUT PROVISION, THERE ARE STILL A HANDFUL OF PROFESSIONALS IN THE ENTERTAINMENT INDUSTRY WHO CAN STILL TAKE THE FULL BENEFIT OF THE QBI DEDUCTION.”

With all the exceptions and the phase-out provision, there are still a handful of professionals in the entertainment industry who can still take the full benefit of the QBI deduction. According to the final regulations of Section 199A (d)(2) paragraph (b)(2)(vi), “the performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts.” It also does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.5,6 Examples of these exclusions include film distribution companies, gaffers, grips, and best boys.

Section 199A can be a great tax savings deduction for those that are able to take advantage of it. It can be a bit complicated depending on individual circumstances, so it is best to consult with a tax professional for guidance. 

H.R. 1 – An Act to Provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 - Congress.gov 2 Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs - IRS.gov 3 Section 199A Rental Property Trade or Business Definition - Evergreensmallbusiness.com 4 IRC §199A Deduction Including Rental Safe Harbor - Spidell 5 Section 199A Final Regulations - Department of Treasury, Internal Revenue Service 6 “Non-Performing Artists” Wait on IRS Final Regulations Under Section 199A - Taxblog.dickinson-wright.com 1

LEARN MORE 

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80 YEARS

AWARD WINNING FIRM INSIDE Public Accounting

2019 BEST OF THE BEST FIRM 2019 Top 200 Firm SERVICES • Accounting • Assurance & Advisory • Business Management • Mergers & Acquisitions • Tax Planning & Consulting • Tax Specialty Services • Wealth Management

Your Success

is Our Bottom Line FULL-SERVICE ACCOUNTING & CONSULTING

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TIPS FOR CHOOSING THE RIGHT BUSINESS MANAGER

By Stacey R. Korman, CPA, MST | Director - Accounting

P

rofessional actors, athletes, authors, and musicians have one thing in common: they are all typically high-net-worth individuals with complex financial needs. As a person in high demand with a busy schedule, there is less time to manage the many financial aspects of income and investments. With the help and advisory services a business manager offers, entertainers can all but eliminate complicated financial affairs from the proverbial to do list.

There are several benefits to hiring a competent business manager. A trusted business manager will maintain financial records throughout the year making tax season less stressful and provide tax planning and strategic advice based on the individual’s specific situation or tax law changes. In addition, they can also assess and, if applicable, set up a loan out corporation, which is a commonly used tax strategy that offers benefits to entertainers, and comes with additional record keeping requirements and tax compliance responsibilities.

While there are innumerable benefits to hiring a business manager, there are also potential risks due to the nature of the situation. Financial records must only be given to a trusted professional that understands the unique tax, accounting, and financial planning needs of the entertainment and sports industry.

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To mitigate any potential risks, the following tips are recommended when choosing a business management professional:

1. RESEARCH

Find out if the firm is reputable and has the required industry expertise to manage finances for a high-net-worth individual in the entertainment and sports industry. Make sure they understand some of the many nuances to this industry including multi-state tax filings, various income sources, and allowable deductions. Ask for recommendations from trusted sources and inquire about what it is like to work with that business manager. Ask for references from the firm.

2. ASK QUESTIONS

Ask questions about the professional team and services provided. Be sure to know the contact information of key team members for when questions arise. Ask about other supportive services the firm may offer. Engaging with a business manager that can provide a holistic approach to an individual’s financial situation will add value. Look for services such as specialty tax and wealth management. What else can that firm do to improve the bottom line, create financial opportunities, and manage cashflow?

3. REVIEW

Review the engagement letter to understand the fee structure, whether it is a fixed fee or hourly fee, and how the services provided will be billed.

4. SET BOUNDARIES

Be friendly, but not friends. A business manager should remain objective and be able to have difficult conversations, such as saying “no” to purchases when they are outside of the current budget. They also need to be able to advise when spending is significant. These character traits will encourage overall financial health.

5. NUMBERS DO NOT LIE

Numbers do not lie. It is imperative to get regular financial reports to make sure there is enough cash to cover daily expenses and for future saving strategies and tax planning.

In effect, business managers can be seen as an individual’s personal Chief Financial Officer.

Often times, they are trusted completely and given full access and power over many financial decisions. A trustworthy business manager alleviates the burden of handling daily financial affairs to make it possible for high-net-worth individuals to focus on their career. Choosing the right advocate is essential for financial health.  1

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Mich. Comp. Laws §206.621

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“A TRUSTWORTHY BUSINESS MANAGER ALLEVIATES THE BURDEN OF HANDLING DAILY FINANCIAL AFFAIRS TO MAKE IT POSSIBLE FOR HIGH-NET-WORTH INDIVIDUALS TO FOCUS ON THEIR CAREER.”

CONTACT STACEY 

M&A TRENDS IN THE MEDIA, ENTERTAINMENT, AND GAMING INDUSTRIES: 2019 Q1-Q2

By Paren Knadjian Practice Leader - M&A and Capital Markets

M&A Trends in the Media, Entertainment, and Gaming Industries for the 1st half of 2019

A

s traditional media and entertainment companies try to develop content in the on-demand digital world, it is inevitable

As traditional media and entertainment companies try to develop content in the on-demand digital that M&A will play a significant part of this development. The first half of 2019 was a significant stperiod of M&A activity world, it entertainment, is inevitable that M&A will significant part of thisfor development.

The 1 compared half of 2019 in media, and gaming withplay $114abillion of capital deployed Q1 and Q2 combined, to thewas $270 abillion significant period of M&A activity in the Media, Entertainment and Gaming spaces with $114 billion of of capital deployed in 2018. capital deployed for Q1 and Q2 combined, compared to the $270 billion of capital deployed in 2018.

MEDIA, ENTERTAINMENT, AND GAMINGand TRANSACTIONS OF THE of LAST YEARS Media, Entertainment Gaming Transactions the10 Last 10 Years $300.00B $250.00B $200.00B $150.00B $100.00B

$191.59B

$209.80B

3,500

2,915

3,000

2,362 1,623

1,890 1,434

$63.40B $31.80B

$50.00B $0.00M

4,000

3,390

3,340 2,850

4,500

$269.15B

3,883

3,788

2008

2009

$49.66B

2010

$63.34B

$84.96B

1,941

$118.01B

$109.17B

2,500 $114.26B 2,000 1,500

$78.19B 463

2011

2012 2013 Capital Invested

2014

2015 2016 Deal Count

2017

2018

2019

1,000 500 0

Source: PitchBook Data, Inc.

KROST QUARTERLY 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE The biggest driving force in the entertainment industry at the present time isVOL. the battle between digital streaming services and Over-The-Top (OOT) versus the traditional content providers. As the sale of 21st

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The biggest driving force in the entertainment industry at Regardless of the type of distribution, content is still king. the present time is the battle between digital streaming This is evident with STX Entertainment, a producer of popular services and Over-The-Top (OTT) versus traditional content movie and TV content raising $700 million of development providers. As the sale of 21st Century Fox (a significant part capital from MWM (USA), Sony Capital, and TPG Growth of the Fox/Murdoch empire) to The Walt Disney Company in March. This occurred despite a string of disappointing closed in Q1 2019, several other transactions occurred as a box-office results, the latest being the animated movie knock-on effect. Comcast reached a definitive agreement Uglydolls, which came with a big production budget and the to sell its 30% stake in Hulu to Disney for $5.8 billion in voices of high-profile recording artists Pitbull, Janelle Monae, May and AT&T sold a 9.5% stake in Hulu to the same buyer and Kelly Clarkson. for $1.43 billion in April. These transactions enabled Disney to take full control of the streaming service. Hulu will be In the audio content and still-image vertical, Pandora Music operated alongside Disney's fellow OTT ventures Disney+ was acquired by Sirius XM Radio for $3.5 billion in February and ESPN+, with Hulu positioned as its streaming brand for and Getty Images did a $2 billion financing/re-financing of general entertainment outside of Disney's family-oriented their debt led by Credit Suisse. and sports content. The Hulu deals came less than a year after Comcast’s $38.8 billion purchase of European satellite In the gaming world, Small Giant, a developer of multiplayer content provider Sky (previously controlled by Murdoch) and mobile games was acquired by Zynga for $700 million in AT&T’s $85 billion purchase of Time Warner, both of which January, UK headquartered Gamsys, a developer and occurred in the second half of 2018. operator of online gaming, was acquired by JPJ Group for GBP € 490 million in June and Vivendi sold its 5.87% stake Another knock-on effect was the sale of the Yankees in French-based Ubisoft Entertainment for € 429 million in Entertainment and Sports Network (YES) to the Yankees March. (which already owned 20%), Amazon, Sinclair Broadcast Group, and Blackstone. A condition of the closing of the The combination of gaming, sports, and entertainment, which Disney/Fox deal was for Disney to divest itself from several is aimed at millennials and Generation Z, makes eSports a sports networks owned by Fox (as Disney already owns ESPN). hot sector for M&A and Capital Markets activity. eSports Even the free Internet television service provider Pluto TV provider Infinite Esports & Entertainment was acquired by got in on the action: it was acquired by Viacom for $340 another eSports platform, Immortals Gaming Club, for $100 million in January. million in June. Immortals itself raised $30 million of Series

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KROST QUARTERLY VOL. 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE

B venture funding from LionsGate Entertainment, Anschutz towards Baby Boomer and older audiences. According to Entertainment Group, and March Capital Partners in May. Variety, the five biggest U.S. pay-television providers saw The company had previously been backed by Meg Whitman. their traditional subscriber rolls shrink 4.2% in 2018 as they collectively lost around 3.2 million customers for the year, In 2018, a record high of $2.8 billion was invested in virtual compared to sector-wide declines of 3.7% in 2017 and 2% reality (VR) and augmented reality (AR) startups globally. in 2016.

Key deals in 2019 so far include Niantic, a developer of an AR platform designed to enrich mobile gaming experiences, According to Box Office Mojo, U.S. box office receipts are which raised $245 million of Series C venture funding in a down 6.5% year-to-date compared to the same period last deal led by IVP in January, putting the company's pre-money year, even with massive movie hits like Avengers Endgame valuation at $3.75 billion. Sandbox VR, a developer of and The Lion King. Both television and movie content also technology designed to offer VR based entertainment compete with YouTube’s dominance in the user-created services, raised $68 million of Series A venture funding in a content and vlogging space popular younger audiences. deal led by Andreessen Horowitz.

In addition to watching large amounts of video, consumers also listen to music and play video games as their preferred YEAR END OUTLOOK ways of digital entertainment. The former is now dominated With economists focus on the potential slowing of economies by streaming services, the latter continues to grow with the worldwide, the U.S. battling a trade war with China, and the advent of VR/AR and eSports. bond markets displaying inverted yield curves (a historical indicator of an upcoming recession), the media and For entertainment, media, and gaming companies small and entertainment space is being driven by the micro-economic large, the threats and opportunities created by changes in climate created by the changing landscape of consumer media consumption platforms will inevitably result in M&A and Capital Market activities. As long as the sources of capital desire for content delivery and consumption. don’t dry up and lending remains plentiful and cheap, we expect an equally robust conclusion of 2019 for this market Streaming services are quickly becoming the preferred way to consume professionally created video programming, vertical.  particularly amongst millennials and Generation Z consumers.

Traditional pay TV subscriptions are down and very skewed PitchBook Data

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LOAN-OUT CORPORATIONS: TO BE OR NOT TO BE?

By Douglas Venturelli, Esq. Principal - Estate Tax & Trust

Guest Author: Jonathan Louie, CPA Manager - Tax

W

ith the passing of the Tax Cuts and Jobs Act (TCJA) of 2017, many actors, writers, directors, and other professionals in the entertainment industry saw their taxes increase as of 2018. Entertainment professionals who earn wages are being hit the hardest because employee business deductions are no longer allowed. Prior to the passing of the new bill, entertainers receiving a W-2 were able to deduct the costs for their union dues, agent commissions, talent managers, accountants, attorneys, and other ordinary business expenses. Altogether, those business expenses typically added up to roughly 20 percent to 35 percent of an artist’s income but are no longer deductible as of 2018. The disallowance of these expense deductions had a particularly negative impact on the entertainment industry.

In light of the 2017 tax reform changes, many accountants are advising their entertainment clients to form loan-out corporations in order to deduct their business expenses. Under a normal employment arrangement, a movie, TV show, or theater production would hire the individual actor, writer, or director. Under a loan-out arrangement, the individual sets up and incorporates a loan-out company. The loan-out company employs the individual and KROST QUARTERLY VOL. 2 ISSUE 4 - THE SPORTS & ENTERTAINMENT ISSUE

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“IN LIGHT OF THE 2017 TAX REFORM CHANGES, MANY ACCOUNTANTS ARE ADVISING THEIR ENTERTAINMENT CLIENTS TO FORM LOAN-OUT CORPORATIONS IN ORDER TO DEDUCT THEIR BUSINESS EXPENSES.”

“lends out” their services to the movie, TV show, or theater production. Prior to the enactment TCJA, the main advantage of the loan-out corporation was the full benefit of the business expenses, otherwise limited on the personal returns, as well as avoiding alternative minimum tax. Under the new law, loan-out corporations remain unaffected whereas entertainers receiving a W-2 can no longer deduct any business expenses to offset their income.

While a loan-out corporation seems like a great alternative to mitigate the increased tax burden for entertainment professionals, it may not be the best solution for everyone. Entertainers must consider the costs associated with incorporating, which include attorney fees for entity setup, bookkeeping fees, corporate tax return preparation fees, a minimum $800 corporate franchise tax per year (for California residents), and additional payroll taxes which include the employer’s portion of social security taxes (as high as $9,800 or 7.65 percent of wages paid up to about $128,000) and $300 to $400 in Federal and State unemployment taxes. The additional costs of incorporating may offset any tax benefit received and government compliance can be an administrative burden for the entertainer. By forming a loan-out corporation, an entertainer is also forfeiting their opportunity to claim unemployment. However, higher-earning individuals can take advantage of a loan-out corporation to make tax deductible pension contributions, so the decision depends on the individual’s situation.

Many entertainers that were being paid as employees were hit with an increase on their taxes in 2018. For entertainers who are considering whether to set up a loan-out corporation, be sure to weigh the increased costs against the potential benefits. It may not make sense for lower to middle income earners. Since every entertainment professional’s situation is different, it is important to consult with a tax advisor before making a decision. 

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