Anthracite’s answer is on target. Often as not, when people talk about tax write-offs, they are getting ready to talk nonsense. There comes to mind the old Seinfeld episode where Kramer tells Jerry that doing something-or-other won’t cost the post office anything because they will “just write it off”. The U. S. Post Office, of course, does not pay income taxes.
Nevertheless, there was a time when it made financial sense for Hollywood producers to release films which lost money.
From time to time people find anomalies in the tax code which cause the tax system to work contrary to economic sense. For instance, there was a time when a person could donate a phonograph record to a public radio station and deduct the cost of the record from their taxable income as a charitable deduction. There seems nothing wrong or misguided about that, but it turned out a person could also make a recording of their phonograph record, donate it, and deduct the cost of their phonograph record, which they kept. This was upheld in a sort-of-famous case called Orchard.
I was in public accounting while this was still good law, and a perverse twist occured to me. Public libraries often have extensive libraries of videotapes which are in the public domain, such as The 39 Steps and The Third Man. Could one not check out the tapes for free, copy them, and then deduct the catalogue prices when donating the copies to a public TV station? The IRS representatives with whom I spoke said you could, but I never had the heart to try it. The rules for assigning value to charitable contributions have since been revised.
Two Steve McQueen movies, Bullitt and the original version of The Thomas Crown Affair, were written by a tax attorney named Alan R. Trustman. In the late 1970s he wrote a cover story for The Atlantic Monthly in which he described how he had come up with a tax shelter for movie producers; using it, one could lose money on a movie and then deduct more money than one lost (in fact, considerably more) from one’s taxes. For the next couple of years I couldn’t look at ads for movies which looked bound to flop without wondering if they weren’t released with the idea of helping the studio save the money it made on a far more successful film which they would otherwise have to pay out in taxes.
Most movies which flop, of course, were probably made in the sincere hope they would succeed. Ed Wood, it will be remembered, was serious about Plan 9 From Outer Spaceand his other epics. The same appears to be the case with the hapless independent film maker profiled in the documentary American Movie. If these earnest, sincere people can turn out bombs unintentionally, why can’t callous, shallow movie executives who decide to cast John Wayne as Genghis Khan?
On the other hand, I once read a tax court ruling that held the producers of a low-budget horror movie were not entitled to a deduction. No kidding: the court held that the film was so lousy there was no evidence they had ever had any expectation of making money with it.