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
They made Batgirl for, let’s say $5. Before they ramp up the marketing machine, some market research comes back. Everybody is sick of superhero movies, even the MCU doesn’t sell tickets anymore.
Their fancy data analysts say that Batgirl probably only makes $3 at the box office. There’s a very low chance they’ll make any money even if they only spend $2 on marketing, and if they spend more than $3 they’ll almost definitely lose money. At that point, it’s not worth spending the $2. The marketing department could be promoting other movies that will do better. The theaters only have X amount of screens and a better movie might bring more people to watch it. So they just throw it in the vault. They get to write the $5 it took to make the movie as a business loss.
End of the tax year, they make $10 profit on a different movie that replaced Batgirl in the schedule. They tell the government they lost $5 on Batgirl and made $10 on Movie X, they only profited $5 and that’s what they get taxed on.
It can get a little more complicated because sometimes making a project to throw it away on purpose could make sense for the shareholders/industry. For example, they have no movies coming out (pandemic?), but the bigwigs at Warner actually own a lot of smaller production companies that, obviously, get a lot of work from Warner. Those companies can’t just go without work, so maybe an exec at Warner starts a little side project to give Superhero Prop Co. and Gotham Makeup LLC some business. Again, the movie doesn’t make sense to release. Warner will harvest the tax losses to offset some of the profit they made earlier in the year, and the prop company gets some business and makes money for Warner Bigwig #1, and keeps their makeup artist and prop master employed.
It means that they didn’t turn a profit and are able to reduce their tax basis by the amount of money that they lost on the project.
For example, let’s say that I am a business and I spend $1000 on project A and $2000 on project B. Project A is a success and earns $1500 in revenue. The $500 in profit is taxable. Project B is a failure and only earns $1700 in revenue, with a net loss of $300.
Because I lost $300 on project B, I can deduct that amount from my income, giving me an adjusted gross income of $200. If my tax rate is 30%, then that means I pay 30% of $200 (instead of $500), giving me a total tax burden of $60 (instead of $150).
The end result is that losing $300 allowed me to save $90 in taxes. It’s still a net loss of $21`0, but it’s not as bad compared to if both projects were treated as individually taxed entities.
As a CPA, a tax write-off is literally just a term people use for “deduction” to make it sound bad. Your standard deduction on your 1040 is a “write off.” Generally a company developing a movie cannot expense the costs immediately. Rather, if they spend $10 million on it, they are forced to recognize that expense over a period of 5 years, the idea being to recognize the expenses over the useful life of the film (so 2 million deduction per year). If cancelled though, you can just deduct the whole amount at once, because the useful life is now over. End of day though, you’re still losing money. You still spent 10 million dollars and wasted it. There is no crazy “tax avoidance” here.
With that stated, even though I’m not a film CPA, I believe in many cases you can immediately expense film costs now; so it is also highly likely that the cancellation of this film had zero tax impact whatsoever.
Random additional commentary, ever since TCJA, a lot of the crazy international loopholes companies used to have set up for tax avoidance were closed. Tax burdens have been lowered somewhat on corps, but there really aren’t many “tricks” that can be played nowadays that aren’t skimming the line of illegal. The companies most likely to do shady things are small
Cancelling the film outright means they don’t have to spend any more money on marketing, packaging, distribution. Since they aren’t going to release it, all the money spent on making it so far is pure loss and therefore a write-off.
Say you have a soap business running out of your home. You make a couple dozen different types and you let your kids get involved. One of them is enthusiastic and makes dozens of bars before you get around to QCing them and you realize the soap is hopeless — it smells nasty, leaves a sticky residue, whatever but you realize you’re never going to be able to sell it. Instead of spending more money on bags and labels, you just toss it all in the trash. That’s essentially what WB is doing here — they don’t think they can make money on this film and would rather dump it than spend any more money on it at all.
In addition to tax benefits, studios have various insurance policies in place to protect themselves against loss. One type of policy protects against films not being released. If they think the film will make less than the insurance payout, they don’t release it.
Well, let’s say they did order some costumes for the movie two years ago. For $100k.
They cancel the movie, destroy everything and “we needed to destroy those costumes. They would be worth roughly… $500k”. They write off the $500k as losses now…
So here’s the quick and dirty.
WB spent about $70MM making the film. That’s their cost *so far*.
If they want to release it to theaters, they have to effectively put money forward for cinema slots. Theaters would rather put a movie in place that they know will drive ticket sales than one that won’t.
They have to advertise. And dumb as it sounds, that’s generally 1.5% the cost of the film. So now you need to make $170MM to break even.
Except that’s not considering the part the theaters take. They make some money on every ticket, so you may have to make it to $200MM to come out ahead.
Well, was the director promised 20% of gross domestic ticket sales? That’s $40MM. So you need more like $250MM to pay that gross percentage.
But if they reduce their profit by $70MM for the year by just writing it off, they save $14.7MM in taxes. That makes the cost of the movie only $55MM.
If they market it and release it, they have to pull about $195MM to only lose $55MM. And that might be a gamble on other projects.
If there’s another movie with the same demographic focus that they want to market instead that they think will do better, then they can focus more resources on that movie and pull a better win than the write-off.
Made up numbers for the idea.
$20m movie, $20m marketing, but movie is expected to only make $10-20m. In the exec’s head it’s better to cut your losses and just take the $20m loss and take whatever tax credits you can then lose $30-40m.
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.
Spending money for a tax write-off shows how financially illiterate someone is.
I remember years ago my FIL did my taxes (he was a retired CFO so he needed projects) and said “too bad you didn’t have more write-offs”. I responded “ok, let’s play this game: you give me $1, and I’ll give you back 35 cents. We’ll continue this game as long as you feel you’re coming out ahead”.
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