5 ms·

Why though? I thought Hollywood had their own accounting rules which always meant movies made a loss. What are they paying the tax on?

by noja 2mo ago

throwup238 2mo ago
Hollywood accounting rules are regular accounting rules (GAAP). The only reason “Hollywood accounting” is a thing is because of a bunch of actors who didn’t know the difference between “gross” and “net” points got screwed over. Everyone involved still pays their taxes, but the special purpose vehicle used to organize the production is essentially a passthrough entity.
- dcrazy 2mo ago
  If you’re not a name, you’re not getting gross points. There’s a wide swathe of participants (actors, writers, directors…) who need to demonstrate risk by taking net points to get signed, and they are routinely screwed by tactics like artificially inflated self-dealing distribution fees that cause the “production” itself to show a paper loss while the IP has generated hundreds of millions of dollars more than has been invested into it.
- schlauerfox 2mo ago
  Movie Money Understanding Hollywood's (creative) Accounting Practices 9781879505865 This is THE book on the subject. There's a lot more to it than that. Sometimes productions get creatively charged by the studios costs that may not be directly related to shift losses. Sometimes contracts redefine common terms so your points structure is completely misleading.
- WalterBright 2mo ago
  I presume that what happens is if a movie is too profitable, other business expenses are shifted to the ledger to reduce the profits. This works because a movie is not a separate accounting entity.
  - jasode 2mo ago
    >This works because a movie is not a separate accounting entity. Each movie is set up as a separate legal business entity (LLC). That's the SPV (special purpose vehicle). https://www.google.com/search?q=each+hollywood+movie+is+a+separate+llc https://www.google.com/search?q=each+hollywood+movie+is+a+se... There's also a separate LLC for the parent production company. The production company LLC can also send invoices to the individual movie LLC for services. People can get creative with production companies "overcharging" for various expenses back to the movie's LLC but whatever creative accounting they want to do still needs to ultimately satisfy IRS scrutiny if there's an audit. There are entertainment attorneys that specialize in movie LLCs.
    - lotsofpulp 1mo ago
      Why would that matter if it's all still a subsidiary of Apple/Amazon/Disney/Comcast/Netflix/Sony? The relevant taxing authorities would be concerned with the parent companies' financials, not the subsidiaries. Moving money from right hand to left hand doesn't change one's tax liabilities. "Hollywood accounting" only refers to civil disputes due to insufficiently defined contracts between two businesses (usually actors and producers).
      - dcrazy 1mo ago
        The benefit of “Hollywood accounting” isn’t necessarily tax avoidance; that’s what the tax credits are for. Rather, “Hollywood accounting” provides a way to avoid paying profit-based compensation.
    - labcomputer 1mo ago
      > whatever creative accounting they want to do still needs to ultimately satisfy IRS scrutiny if there's an audit. Well, yes, but avoiding taxes is not the point of "Hollywood Accounting", rather avoiding paying actors. The IRS can collect taxes from whichever business entity makes a profit, but, critically, actors cannot. They signed a deal with one entity, and are only payed a share of net profits if that one particular entity makes a profit. Hollywood Accounting, then, is the process of shifting costs around so that the legal entity responsible for paying the actors never makes a profit. The SPVs never own anything and never have any expertise in anything. So they have to pay the parent company for a wide range of services, from advertising and marketing to distribution to prop and equipment rental. That makes it easy to shift costs into the SPV as necessary.
- nikanj 1mo ago
  Movies like Forrest Gump, Return of the Jedi, Men in Black or Harry Potter 5 all managed to lose money, according to "GAAP". If that's not creative accounting, I don't know what is.
  - gamblor956 1mo ago
    Those movies didn't lose money under GAAP. However, the specific legal entities that the talent made their profit deals with did not earn profits due to the way that revenues and expenses were allocated between the companies involved in making and distributing those films. For each of those films, at least one company was and is earning $$$, but the talent doesn't get to make a revenue sharing deal with those companies.
    - thaumasiotes 1mo ago
      > For each of those films, at least one company was and is earning $$$, but the talent doesn't get to make a revenue sharing deal with those companies. That doesn't sound right. Traditionally, and in particular in the case of Forrest Gump, the distinction is between people who contract for a percentage of net profit (always zero) and people who contract for a percentage of gross revenue. The revenue is measured at the same point either way; it's just about whether you got suckered or not.
      - gamblor956 1mo ago
        The revenue hasn't been measured at the same point in our lifetimes. It was never just about net and gross but also which entity you had points with. A lot of talent had gross deals with the wrong entities.
- stephen_g 1mo ago
  That seems an incredibly generous description (or breathtakingly naive, but I'm giving the benefit of the doubt because hopefully most people aren't that credulous). The point of Hollywood accounting is to intentionally create enough inflated expenses (billed from companies controlled by the studios or related parties of the producers etc.) to ensure that the net profit is zero or less, even when the film actually generated a lot of income. It's true that tax gets paid eventually (and somewhere, maybe a tax haven) but it is intentionally creative accounting designed to minimise tax and screw people out of their royalties.
wahern 2mo ago
Tax incentives these days include transferable tax credits. Even if your net tax rate was 0%, you can sell the credit to someone else, typically a bank. IOW, states and countries give you money, not simply give you a tax rate break.
- qingcharles 1mo ago
  What kind of dystopian fuckery is that? It reminds me of the eBay market in bulk lots of used scratch-offs harvested from the trash: https://www.forbes.com/sites/robertwood/2016/01/14/powerball-losers-make-lemonade-by-selling-losing-lottery-tickets/ https://www.forbes.com/sites/robertwood/2016/01/14/powerball...
  - wahern 1mo ago
    I'm not sure of the exact history, but it may have been copied from how affordable housing projects are subsidized at the Federal and state levels: https://sgp.fas.org/crs/misc/RS22389.pdf https://sgp.fas.org/crs/misc/RS22389.pdf Affordable housing tax credits are contingent on a tremendous amount of regulations and stipulations, including who ends up holding equity in the property (it's not easy to use these as passthrough vehicles to get personally rich), so the private lenders tend to be repeat players, often banks, who understand how to navigate the process. Among other things, I guess it's a way to outsource oversight, so that the government doesn't need to maintain a huge bureaucracy to police each and every development project. OTOH, the financing complexity comes at a cost; a significant fraction of the value of the tax credits pays for lawyers and accountants, rather than to actual construction. I don't know if filmmaking subsidies are more lax or easier to game. Also, I think using tax credit schemes, instead of direct payments, might be a way to obfuscate the cost of these programs from a legislative and political perspective; not unlike the Earned Income tax credit. Nominally speaking, tax credits reduce government revenues rather contribute to expenditures; the latter draws far more attention.

Why though? I thought Hollywood had their own accounting rules which always meant movies made a loss. What are they paying the tax on?

by noja 2mo ago

Why though? I thought Hollywood had their own accounting rules which always meant movies made a loss. What are they paying the tax on?

throwup238 2mo ago

Hollywood accounting rules are regular accounting rules (GAAP). The only reason “Hollywood accounting” is a thing is because of a bunch of actors who didn’t know the difference between “gross” and “net” points got screwed over. Everyone involved still pays their taxes, but the special purpose vehicle used to organize the production is essentially a passthrough entity.

dcrazy 2mo ago
If you’re not a name, you’re not getting gross points. There’s a wide swathe of participants (actors, writers, directors…) who need to demonstrate risk by taking net points to get signed, and they are routinely screwed by tactics like artificially inflated self-dealing distribution fees that cause the “production” itself to show a paper loss while the IP has generated hundreds of millions of dollars more than has been invested into it.
schlauerfox 2mo ago
Movie Money Understanding Hollywood's (creative) Accounting Practices 9781879505865 This is THE book on the subject. There's a lot more to it than that. Sometimes productions get creatively charged by the studios costs that may not be directly related to shift losses. Sometimes contracts redefine common terms so your points structure is completely misleading.
WalterBright 2mo ago
I presume that what happens is if a movie is too profitable, other business expenses are shifted to the ledger to reduce the profits. This works because a movie is not a separate accounting entity.
- jasode 2mo ago
  >This works because a movie is not a separate accounting entity. Each movie is set up as a separate legal business entity (LLC). That's the SPV (special purpose vehicle). https://www.google.com/search?q=each+hollywood+movie+is+a+separate+llc https://www.google.com/search?q=each+hollywood+movie+is+a+se... There's also a separate LLC for the parent production company. The production company LLC can also send invoices to the individual movie LLC for services. People can get creative with production companies "overcharging" for various expenses back to the movie's LLC but whatever creative accounting they want to do still needs to ultimately satisfy IRS scrutiny if there's an audit. There are entertainment attorneys that specialize in movie LLCs.
  - lotsofpulp 1mo ago
    Why would that matter if it's all still a subsidiary of Apple/Amazon/Disney/Comcast/Netflix/Sony? The relevant taxing authorities would be concerned with the parent companies' financials, not the subsidiaries. Moving money from right hand to left hand doesn't change one's tax liabilities. "Hollywood accounting" only refers to civil disputes due to insufficiently defined contracts between two businesses (usually actors and producers).
    - dcrazy 1mo ago
      The benefit of “Hollywood accounting” isn’t necessarily tax avoidance; that’s what the tax credits are for. Rather, “Hollywood accounting” provides a way to avoid paying profit-based compensation.
  - labcomputer 1mo ago
    > whatever creative accounting they want to do still needs to ultimately satisfy IRS scrutiny if there's an audit. Well, yes, but avoiding taxes is not the point of "Hollywood Accounting", rather avoiding paying actors. The IRS can collect taxes from whichever business entity makes a profit, but, critically, actors cannot. They signed a deal with one entity, and are only payed a share of net profits if that one particular entity makes a profit. Hollywood Accounting, then, is the process of shifting costs around so that the legal entity responsible for paying the actors never makes a profit. The SPVs never own anything and never have any expertise in anything. So they have to pay the parent company for a wide range of services, from advertising and marketing to distribution to prop and equipment rental. That makes it easy to shift costs into the SPV as necessary.
nikanj 1mo ago
Movies like Forrest Gump, Return of the Jedi, Men in Black or Harry Potter 5 all managed to lose money, according to "GAAP". If that's not creative accounting, I don't know what is.
- gamblor956 1mo ago
  Those movies didn't lose money under GAAP. However, the specific legal entities that the talent made their profit deals with did not earn profits due to the way that revenues and expenses were allocated between the companies involved in making and distributing those films. For each of those films, at least one company was and is earning $$$, but the talent doesn't get to make a revenue sharing deal with those companies.
  - thaumasiotes 1mo ago
    > For each of those films, at least one company was and is earning $$$, but the talent doesn't get to make a revenue sharing deal with those companies. That doesn't sound right. Traditionally, and in particular in the case of Forrest Gump, the distinction is between people who contract for a percentage of net profit (always zero) and people who contract for a percentage of gross revenue. The revenue is measured at the same point either way; it's just about whether you got suckered or not.
    - gamblor956 1mo ago
      The revenue hasn't been measured at the same point in our lifetimes. It was never just about net and gross but also which entity you had points with. A lot of talent had gross deals with the wrong entities.
stephen_g 1mo ago
That seems an incredibly generous description (or breathtakingly naive, but I'm giving the benefit of the doubt because hopefully most people aren't that credulous). The point of Hollywood accounting is to intentionally create enough inflated expenses (billed from companies controlled by the studios or related parties of the producers etc.) to ensure that the net profit is zero or less, even when the film actually generated a lot of income. It's true that tax gets paid eventually (and somewhere, maybe a tax haven) but it is intentionally creative accounting designed to minimise tax and screw people out of their royalties.

wahern 2mo ago

Tax incentives these days include transferable tax credits. Even if your net tax rate was 0%, you can sell the credit to someone else, typically a bank. IOW, states and countries give you money, not simply give you a tax rate break.

qingcharles 1mo ago
What kind of dystopian fuckery is that? It reminds me of the eBay market in bulk lots of used scratch-offs harvested from the trash: https://www.forbes.com/sites/robertwood/2016/01/14/powerball-losers-make-lemonade-by-selling-losing-lottery-tickets/ https://www.forbes.com/sites/robertwood/2016/01/14/powerball...
- wahern 1mo ago
  I'm not sure of the exact history, but it may have been copied from how affordable housing projects are subsidized at the Federal and state levels: https://sgp.fas.org/crs/misc/RS22389.pdf https://sgp.fas.org/crs/misc/RS22389.pdf Affordable housing tax credits are contingent on a tremendous amount of regulations and stipulations, including who ends up holding equity in the property (it's not easy to use these as passthrough vehicles to get personally rich), so the private lenders tend to be repeat players, often banks, who understand how to navigate the process. Among other things, I guess it's a way to outsource oversight, so that the government doesn't need to maintain a huge bureaucracy to police each and every development project. OTOH, the financing complexity comes at a cost; a significant fraction of the value of the tax credits pays for lawyers and accountants, rather than to actual construction. I don't know if filmmaking subsidies are more lax or easier to game. Also, I think using tax credit schemes, instead of direct payments, might be a way to obfuscate the cost of these programs from a legislative and political perspective; not unlike the Earned Income tax credit. Nominally speaking, tax credits reduce government revenues rather contribute to expenditures; the latter draws far more attention.