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
Think about embarking on a long project like making a movie. It costs money to do the initial work. It costs money to film. It costs money to promote it. You only make money at the end, after you pay all of those other phases.
Now imagine you get to the end and you’ve paid $1,000 to do the initial work, $1,000 to do the filming, and you think it’s going to cost $1,000 to promote it. But you do some research and you worry that the film is only going to make about $2,800.
That means you’ve already spent $2,000, but to get any money at all you have to spend another $1,000 and you expect you’ll lose $200 if you go through all that effort.
But you have an option on the table: if you agree to *never* pick up the project and make money from it again, you can take all of the $2,000 and turn it into a tax deduction. Now instead of spending $3,000 and losing $200, you have the option to save $2,000 in taxes. You still spent $2,000 you can’t get back. You’re not really *making* $2,000. It’s just now you get forgiven for a different $2,000 bill so you sort of break even.
Depending on the company’s financial state, it might be more advantageous to save money on taxes than it is to spend $1,000 on the project. If they have a $1,000 bill this month but can’t or don’t want to pay it, this is a way to avoid that bill.
Long-term, maybe they could’ve made a profit off this movie. That they took the write-off is an indicator they don’t feel like spending a lot of money *right now*, and are willing to sacrifice some future profits to avoid that. It’s a cautious move. Technically they get to keep a little more money since this is a tax deduction, but when you put all the numbers on paper it’s not as good for them as if the movie had released and made a lot of money. This isn’t a good way to “make” money, it’s more about “not losing as much money” in bad times. And if you’re doing it a lot, it can cheese off your customers or spook your shareholders, which can cause problems.
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