They’ve just cancelled their upcoming film “Coyote vs. Acme,” and everyone is calling it a tax write-off, just like they did with the cancelled Batgirl film.
Having spent so much on the production of these films, how is it beneficial to them to cancel the film outright? What is a tax write-off in that sense?
In: Economics
Warner Bros believed that the additional costs involved in releasing the movie would not be recouped.
So they had two options:
* Release the movie. They have already spent *A* money on it. Spend *C* on additional costs – that is, finalizing production, promotion, deployment to streaming platforms. Anybody who gets paid in residuals (a percentage of the profit) is included in *C*. Gain *P* profit, however that might be. Pay (*P* – (*A* + *C*)) x *T* in taxes on that profit, where *T* is the applicable tax rate. Overall, the outcome is *P* – *C* – *A* – (*P* – (*A* + *C*)) x *T*
* Don’t release the movie and claim it as a total loss. Businesses that take a loss don’t have to pay taxes on it. Their tax burden at the end of the year is reduced by *A* x *T*.
Warner Bros believed that *A* x *T* is greater than *P* – *C* – *A* – (*P* – (*A* + *C*)) x *T*
When you make money, you have to pay taxes on it. When you accept that you have lost money, you can use that loss to offset your profits from other films.
When you pay 30-40% in taxes then the loss is valuable to you because it saves you paying taxes on other income. With distribution and marketing costs representing half of the cost of some films, cancelling before you spend that is smart. Getting back 30-40 cents on the dollar for the money wasted on Coyote vs Acme is better than just flushing it away.
A “tax write off” is just a way of saying that you’re claiming that something is a business loss on your taxes. In this case, Warner Bros would be claiming that all of the money that they spent so far to produce this movie is a loss, that would offset that amount of profits that they make on other projects throughout the year. Maybe I earned $500 million in profit on movies this year. I decided to cancel a film that I’ve spent $50 million producing so far. That $50 million loss can be subtracted from my profits, so I’m only being taxed on $450 million in profits instead of $500 million.
The reason why they might do something like this is that they expect to earn so little money on this film that it’s not worth spending any extra money to finish, market, and distribute it, and it would just be more beneficial from a financial perspective to just cut their losses and get some of that money back via taxes. It’s not a magical money-making scheme, Warner Bros is still losing millions of dollars, the tax write off is just softening the blow of that a bit.
The eli5 is that it’s complicated.
There’s not really a way to “make money” with a tax write-off; at best, you’re negating some losses that otherwise would have occurred. Yeah, they’ll get some money they wouldn’t have had before, but there’s no way to turn a profit this way.
Basically, by ditching the movie and taking the write-off, they don’t have to pay as much in taxes as they would originally have done so. But they also forgo any profits they *could* have made. So, basically, they’re saying the $15m they will save on taxes will be greater than net profit they would have made had it been released.
In this case, Coyote vs Acme cost $72m to make. Probably cost another $72 to promote. Their tax write-off will get them about $15m. So someone, somewhere, is saying, rather than spend $150m on this movie and release it, we’ll write it off. We’re out $72m no matter what, but then we can salvage another $15m.
So:
Tax write off: Cost: $72m – $15m = $57m loss
Released, but bombs: Cost: $150m – revenue (say, $80m) = 70m loss
Released, but is a hit: Cost: $150m + revenue (say, $200m) = $50m profit
Someone, somewhere, doesn’t think this is a $200m movie but a $80m movie.
(Note that, again, this is complicated. Technically, they can release it *and* write it off, especially if it bombs, but it depends on how the rest of their business is doing and how they want to apply it.)
Because it’s Reddit and people keep parroting things they don’t understand.
A tax write-off is sometimes the lesser of two evils for a company, but you can’t make money on it, only limit losses.
Assuming a 20% tax rate, and that you have other profits to offset the write off :
You spend $100M on the movie and write it off as complete loss
You will reduce your taxes by -20% x 100 = $20M
The whole projet is still a $80M net loss for you.
They only do it when the alternative is spending more on marketing and distribution and earn even less
Warner Bros did not begin those productions with the intention of turning them into some kind of tax scheme. They are surely worse off financially for having produced and cancelled the movies compared to having simply done nothing. A tax write-off of this kind, by construction, reduces your tax bill by only a fraction of what you spent. Warner Bros spent about $70 million to make the movie, and writing it off saves them about $15 million in taxes. That means they’re still out $55 million.
Their decision to cancel the movie was about whether it made sense to take the extra step of releasing the movie. On the one hand, there’s all the money they could make from selling tickets, licensing to streaming services, etc. On the other, there are the costs of marketing and distributing it. Warner Bros decided that the costs likely outweighed the benefits, so they shelved the movie.
Releasing the movie would have led to even further losses, and the tax refund from those losses still would not have been sufficient to offset them. Suppose releasing the movie increased their losses to $100 million. Then they would have gotten a $21 million refund for a net $79 million loss, worse than before. Conversely, if they stood to make *any* money from releasing the movie, they would have. If they could reduce the losses to $50 million and get a $10 million refund, then they’re only out $40 million, better than before.
So the tax treatment of the loss has no bearing on the decision to release the movie. Warner Bros behaves exactly like you’d expect in a world where they somehow couldn’t apply this loss to their net operating revenue: release if and only if it is expected to generate more money than the cost to market and distribute. Granted, tax codes are complicated, so there could be *some* way tax considerations skewed the decision. We’ll likely never know the full story.
Companies get taxed on their profits. The basic explanation is if they make $1,000,000 and they had $800,000 in expenses then they had $200,000 in profit. So they get taxed on that, say 20% and pay $40,000.
But in reality, it’s not that simple. A company can’t claim all their expenses right away. Lets say $10,000 of that was for a movie camera, then the company isn’t worse off. They have $10,000 less, but also a $10,000 camera. So they are in an equal position. But a camera doesn’t last forever, so the government says you can add that cameras cost to your expenses over 5 years. After 5 years they assume it is either worn out or obsolete and has no value. But maybe you buy it and then it gets broken after 1 year, then you can say “Hey government, I know you think this would last 5 years, but it’s broken now, it has no value. I want to deduct it all from my income right now” and they ok.
So when they spend $70,000,000 to make a film, the company isn’t $70,000,000 poorer, since they should now have a film worth more than $70,000,000. They can deduct the $70,000,000 from their income over X years as the value of the film decreases. Or, they can say the film is utter garbage, it’s worth $0 and we are throwing it in the trash and we want our deduction now.
It’s better to take the deduction now if the cost of releasing the film will be more than it makes.
Hollywood accounting.
Films never make “net profits”. Money is made sometimes before even any filming is done or before the production starts, through opaque funding schemes.
As the accountant Bloom in Mel Brooks’ The Producers realises,
“Leo realizes that, as a flop is expected to lose money, the [IRS](https://en.wikipedia.org/wiki/Internal_Revenue_Service) will not investigate its finances, so a producer could earn more from a flop than from a hit by overselling interests and [embezzling](https://en.wikipedia.org/wiki/Embezzlement) the funds.”
[https://en.wikipedia.org/wiki/The_Producers_(1967_film)](https://en.wikipedia.org/wiki/the_producers_(1967_film))
The Producers scam isn’t as sophisticated as real Hollywood accounting but it gives some insight into what goes on.
When your options are:
* Continue to pour money into the production of a film we’re pretty sure will flop and be a net loss.
* Cancel production and take a deduction on our tax filing based on the amount we’ve wasted on production already.
Choosing the latter isn’t a bad idea, especially if the reduction in your tax burden is greater than the net loss you expect to take if you go ahead and finish production.
It’s because they’re in a bad position and cancelling production is the lesser of two evils. They’re not *making* any money, this just allows them to lose less in the long run.
In addition to what others have said, it’s also a timing thing. You can only recognize the expenses for making the film once it actually starts making revenue, if you just write it off you can book the expenses immediately.
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