In the John Carter thread in CS right now someone brought up the well known term Hollywood accounting, which is where costs on a film are fraudulently inflated so that no movie no matter how profitable ever makes a profit only degrees of loss. As a random example the Eddie Murphy hit Coming To America was mentioned, the film was made for $40mil and made $200mil and supposedly lost money(many more anecdotes like this abound).
Why is the IRS and California state tolerating this massive tax fraud? I mean its laughably absurd to believe no matter what the accounting shows that Hollywood is losing money year after year, sounds like some forensic accountants could have a field day(one fraud method mentioned is to split up a movie studio into many companies handling different aspects of the production each one owing inflated costs to each other. Thats outright fraud).
Hollywood accounting is about making individual movies look like losers for the purpose of avoiding royalties and other contractual payments; movies don’t pay taxes, studios pay taxes.
Well the point seems to be that the practice is so common that NO movie ever makes a profit, and therefore the studio makes no profit. Or are you saying they correctly report profits for the studio and affiliated companies when filing corporate taxes?
But wait even then they are committing fraud and perjury at the least if they show people owed contractual payments and the courts a different set of books.
I was under the impression that the goal of Hollywood accounting is primarily to stiff the creative staff who were promised royalties on the profits, not avoiding or evading taxes. If this is the case, then perhaps the creative accounting is done in such a manner that the taxes due (and ultimately paid) are more or less the same as if the accounting had been done straight. In this case the IRS is perfectly happy, and doesn’t consider the studios screwing their writers, actors, directors, etc. to be any business of theirs.
Hollywood accounting is for the movie and many of the deductions are not allowed by the IRS. For instance, “interest costs” are deducted from the movie’s gross, but they are not deducted when reporting taxes.
One possible aspect is that entertainment may be looked upon as necessary to have by the government and also that they have a large influence on the population.
The necessity of entertaining the population is often pointed out for ancient Rome and the coliseum so there is precedent. They are also influential on the population and the studios can and have influenced the minds of the viewers, started trends, etc. and it is in general the best interest of the government to be on the good side of the studios as the studios reach so many of the people directly and indirectly. The studios are a fairly powerful force that the government would seem to rather have on their side.
Plus: I’ve heard of this kind of sleazy accounting, but only in situations where someone was promised a percentage of the profits. My guess is that most movies do NOT have anyone getting paid that way, and they end up showing profits higher than actual, so that everything balances out in the end.
Here’s one example. Back when movies used to appear on network (or local channel) TV regularly, Hollywood would bundle a really good movie with several duds and sell broadcast rights as a package. The revenue would then be spread across the movies equally, even though everyone knows the majority of the revenue was to pay for the one movie - if that one was sold alone, it would bring in almost as much as the 5 combined.
The distribution was such that the other 4 in the package, which had lost money, still were losers - no points residuals to pay. The amount payable to the creative talent for the fifth was a lot lower. Legal? of course. Did the IRS get all the money it was due? Of course. Slimey? Well, it’s Hollywood after all.
Hollywood studios then pocketed the extra money as payback for expenses on dud movies. Free money.
(My local channel was so cheap, that having gotten the rights to 4 duds, they played those on the late show as often as the good one… Rather than buy something they would not use and pay extra for another, more watchable movie. )
a contractual system used for royalties, “profit participation” and other elements. THESE are the ones the OP talks about. They are indeed rigged so that virtually no film will ever show a profit. However, the people who would be owed money under these contracts agreed to the terms under which they would be paid. So you can’t call it fraud, and the IRS doesn’t care.
GAAP/IFRS-standard financials for use with SEC filings, bank financing, etc. There may be certain options chosen here, but they are not rigged to prevent films from showing a profit. (I suppose small studios might not follow GAAP, but they’ll have some other comprehensive basis of accounting.)
Tax-basis reporting to the IRS. Other than Sec 181 elections in the first year, most films are going to show a profit this way.
Tax-basis reporting to California (and other states, perhaps). Again, most films are going to show a profit.
These four accounting systems follow different sets of rules and will produce different results. There is no one single accounting system for these companies. If there’s tax fraud going on, it has nothing to do with the contractual accounting done in item 1, and there is no toleration of fraud.
The rules for accounting (GAAP) are designed to determine the financial health of an organization. GAAP is designed to allow, for example, most expenses to be handled several different ways because different industries live and work in different financial worlds. The method you chose for your business, or in this case, movie, only has to be a reasonable method that is consistantly applied.
When filing taxes you have to use the IRS’ rules. These are designed to determine the amount of your tax debt.
Two different systems to determine two entirely different things
After posting I see that dracoi pretty much said everything I wanted to say.
All the major studios are publicly held companies. In other words they have stock holders. They have to make a profit to please the stock holders. I really can’t think of any other industries that as so discussed in public about how much they make and spend. This actor got 20 million for this role, this movie made this much opening weekend. The story about Coming to America is part of a large law suit where it was claimed that the movie was based on Art Buchwald’s story and he was uncredited and unpaid. OF COURSE the company is going to claim no profits on that.
No studio is reporting only losses.
But here are some good examples
Star Trek. Ok so the first series was canceled. But in the 70’s they started the idea to reboot the series. Star Trek Phase Two. This series was in development. They made sets and costumes and did a lot of other stuff. Then Star Wars came out and they decided to make a Star Trek movie instead. So all of the cost that have been accrued for Star Trek Phase Two were put on the budget for Star Trek The Motion Picture.
Titanic, remember that movie that everyone hates? Well, to make the film Fox built a studio, (a production facility) down in Mexico. This had the very large water tank that Titanic needed. That studio is open and they make other films there, but the construction cost of that studio are on the “Titanic Books”.
So that may seem strange but it is how it works.
In the media, the cost to make a movie is often reported, as well as the money earned. Presumably the cost reported is the amount the studio spent to make (and I suppose promote) the film, whereas the money earned is the box office gross receipts.
So when the news reports that a movie cost $100M to make, and has earned $200M after so many weeks of being shown in theatres, how much of that $200M actually makes it back to the studio to cover their costs/profit, and how much of it is kept by the theatres to cover their own costs/profit?
Reading about this stuff makes me understand why Clint Eastwood started his own production company. It must make it a lot easier to get your cut of the profits when you own the studio.
Just to bear in mind that production company =/= studio. Many bigger names among actors and directors have their own production companies, but, my understanding is that they are still stuck with working with a major studio for distribution and other aspects of movie-making. Even George Lucas’s Lucasfilm (one of the biggest production companies, and privately held by Lucas, AFAICT) worked with Fox to distribute the Star Wars movies.
IIRC, much of the stuff they’d built for Phase Two got used in ST:TMP (with some tweaking for big-screen filming), so that bit of accounting was actually legitimate.
Of course Hollywood makes profits. But those profits are generated by a minority of huge blockbuster movies. These in effect pay for the majority of movies that don’t make a profit and generate enough revenue beside to keep the management and the shareholders and the IRS too very happy indeed. The losers are those whose movie deal gives them money on the back end (after all other deductions) rather than on the front end (before anything else is taken). Needless to say only the biggest stars and directors get the front end deal.
The reason to start a production company is so that you can get paid BEFORE anyone calculates profits. It’s a little like hiring a contractor to remodel your home before you sell it - he gets paid labor and materials whether you make a profit on the final sale or not. (And, since the fees to the production company are expenses to the film, the production company can rake in the dough even while showing everyone else that the film lost money.)