Eli5: what are tax write off films, how it all works and isnt it a waste of money?
In: Economics
You don’t start out trying to make a tax write-off film. You realize a film isn’t going to be to be successful and pull the plug on it before investing more money.
Basically, it’s about avoiding the sunk cost fallacy and cutting losses. The tax code lets some of those losses be written off against profits made elsewhere.
The studio doesn’t “make money” with the write off. It just loses less by using the loss to reduce its existing tax burden. But it’s still a loss.
A company has spent 100 million producing a film. It turns out it’s rubbish. Not many people will want to see this disaster of a movie. If they write all that off as a loss, they can reduce their future tax bill by, say 20 million.
The other option is that they release it. This isn’t free. They may have to spend another 50 million distributing as marketing it.
So the company has a choice. They believe the film won’t make a profit, no matter what they do, but how can they make the smallest loss? They can write it off now and make a 80 million loss, or they can spend 50 million and hope that the movie generates 50 million for the company, after the cinemas and everyone else has taken their chunk of the box office income, and still make a 100 million loss, which they can write off for taxes and reduce to 80 million.
The first option is quick, guaranteed, and will only damage the company’s reputation amongst hard-core fans of whatever film got canned. The second option has the potential for an upside – maybe the film will be a shock success and generate an actual profit, but also has the risk of making a bigger loss, and damaging their reputation amongst the general public and film critics. If a film really is bad, you can see why they would go for the first option.
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