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
You’ve heard the term “don’t throw good money after bad?” The studio has spent who knows how much money already but now believe that the film won’t be successful. In order to promote and distribute the film they will have to spend additional millions of dollars which they already know they won’t be seeing back. Rather than spending more money, they kill the film and take the already spent money as a loss and can use that loss as a tax benefit to recoup at least some of the money that’s already gone.
When you are a business you write off everything you spend to earn revenue. If you spent $10 to make $20 in revenue, then you only pay tax on $10. They get to write off what they’ve spent making the film.
From what i gather, the write off is simply more valuable to them then anyone is willing to give them for the film. They’ve reportedly spent $72m to make it and wanted 75-80 for it. nobody will give them that and they want to get the film off of their balance sheet.
They save $30m in taxes just to cancel it.
Let’s remember that WB is a public company and has to report their earnings to shareholders. So even though they are losing money, they must feel like it benefits their balance sheet for the upcoming quarter and long run more than continuing to explore options for the film does.
No one seems to have got this right so I’ll take my crack at it.
The government believes that you have to spend money to make money. You aren’t taxed on the money you spend to make things. Those are called expenses and they can be a various forms from physical hardware to paying people salaries. Governments only want to tax you on what you have earned from what you made, which is called profit. Expenses are used to reduce profit and that’s okay with the government.
In this particular case Warner Brothers chose to not release a product because it feels it will not perform well on the market. However there is still a tremendous amount of expense that is accrued while making the product. Since the belief of Warner Brothers is at this won’t sell well, they won’t even creating additional expenses of distribution and post-release marketing because they feel that would be spending good money after bad.
So in the eyes of the government with regards to taxable income, since Warner Bros won’t make any money on this film, and it cost roughly 70 million to make, Warner Brothers gets to write off or reduce their taxable burden by that 70 million and therefore will pay less taxes in 2024 fiscal year.
Others have explained what a tax write-off is very well, but what’s often misunderstood is that a tax write-off isn’t something you really want, it’s just the better alternative to having spent huge sums of money on something without gaining anything from it, you can at least salvage a small part of that back in tax savings.
But no one with any modicum of intelligence seeks out to reduce taxes this way on purpose, you would rather spend $500 in taxes than $5,000 avoiding that tax.
So far I haven’t seen the correct answer.
First, pretty much all expenses that WB has are “write offs.” So, if they spent 20mil making the movie, they already wrote off that money in the tax year they spent it.
So what’s this new “write off” everyone is talking about?
Well, when WB had the idea for the movie they created an ASSET on their balance sheet comprising of intellectual property, good will, future licensing, etc. of lets say 50mil.
When the scrapped the movie that ASSET is now worth ZERO. So subtract 50mil from assets, and it’s now moved to their income statement as a loss of 50mil.
If you find out you’re digging a hole instead of building a hill you need to make sure you can climb out of it before you’re stuck.
Let’s say you own a lemonade stand. You sold $2,000 of lemonade, minus $500 of lemons&sugar, minus $500 it cost to build the stand equals a $1,000 profit. You owe a 21% tax on that profit, so $210.
Let’s say you own a second lemonade stand, but this one only sold $500 of lemonade. Minus the $500 of lemons you bought, minus the $500 to build the stand it balances out to a $500 loss.
$1,000 profit minus the $500 loss = $500 overall profit when you file your taxes and a $105 tax bill.
“Writing something off” is slang for cutting your losses and stopping a project. At that point someone does the accounting and declares the final profit/loss. As far as WB writing off those movies, they essentially decided that it would cost more time/money to complete the projects and market them than they’d make back at the box office. Movie studios regularly spend more marketing movies than they do making them so even though the projects were close to finished going forward would be doubling down on a bad gamble.
Forget the whole tax write-off for a bit. That’s a distraction. The real point is that they’ve decided to not market the movie because they don’t think it will make enough money to recoup the cost of completing, distributing, and promoting it.
The thing about the tax write-off is that they have to declare it as kaput and never to see the light of day to be able to take that tax deduction right now as opposed to amortizing some of it over time or having to wait altogether for a later date if there was the possibility that they might still release it. I don’t know the mechanics of tax law for filmmaking, but that’s how other businesses deduct their expenses from income. And ultimately, pretty much all business expenses can be deducted – it’s just a question of when and that’s the key bit to them doing this stuff over the past several months. They want to just be done with it all for these affected titles.
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