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Not an American so a bit unsure, why does voluntarily choosing to destroy this IP create a tax advantage? If this is not the intended behaviour, why does the IR
by PebblesHD 3y ago
Not an American so a bit unsure, why does voluntarily choosing to destroy this IP create a tax advantage? If this is not the intended behaviour, why does the IRS not come out and say ‘we will not accept this loss, please revise your return’?
- illusive4080 3y agoI assume because they can claim the actual cost of the movie production as an expense, and they’ll have no income to offset that expense.
- PebblesHD 3y agoI’d have expected you would need to demonstrate an attempt to generate income from an asset before the government would effectively give you a write off of the whole value. Anyway, thanks, hadn’t thought of it that way.
- plasticchris 3y agoThis is not a problem if you are still making a profit and not an obvious tax shelter. After all, how would the IRS know which business expenses are intended to make a profit vs investments that didn’t pan out? There is obviously room for abuse there but it is for company ownership to deal with not the government.
- toomuchtodo 3y agoCould they not do the same if they donated it to the Library of Congress? They did intend to make a profit, but they are now destroying the value of the copyright by donating to the public domain due to updated market information.
- tourmalinetaco 3y agoPossibly, however, these are the same kinds of people who supported copyright length becoming 100 years. To them the public domain is a threat on their billions of dollars.
- p0ckets 3y agoThere is some value in not having a "Coyote vs. Acme" film released this year (either by Netflix or the Library of Congress) because they could try to make a profitable version soon but people may not give a new version a fair chance if a really bad version was released recently. They presumably value that option more than whatever Netflix et al. offered.https://www.theverge.com/2024/2/9/24067496/coyote-vs-acme-amazon-netflix-paramount-rejected-offers-theatrical https://www.theverge.com/2024/2/9/24067496/coyote-vs-acme-am...
- toomuchtodo 3y agoIf they want to delay release to wait for better market conditions, absolutely understandable. But if they’re just going to destroy culture out of tax code mechanics, doesn’t hurt to be noisy. At least give it a chance to be preserved with some sort of arrangement.
- p0ckets 3y agoWhat I mean is this movie is so bad it will ruin it for the next "Coyote" movie, so they don't want anyone to see this movie. Maybe the only compromise that works is to put it in a time capsule and not open it for 100 years.
- toomuchtodo 3y agoThat sort of long duration embargo seems reasonable vs destruction.
- BoiledCabbage 3y agoExcept the movie tested well with audiences
- dathery 3y agoBy this logic isn't it still better to make whatever profit they can by releasing it? Yes they would increase their net income (and thus tax burden), but they should still end up ahead (it's not like they're paying >100% marginal tax rate on those dollars). It must be more complicated somehow, right?
- bsder 3y agoNot necessarily. The writeoff is apparently immediate--they will book the writedown this quarter. Revenue, however, will stretch out across a couple of quarters. So, the accountants are making this quarter look better at the cost of future quarters looking worse.
- gruez 3y agoIt's slightly more complicated than that due to accruals/amortization. Suppose you started making a movie in January and released in in January the next year. The movie cost $1M to make. For accounting reasons you can't claim that in the first year you took a loss of $1M. Sure, that's what your bank statement says, but at the same time you're spending the money, you're also building up a movie, which has value. So your balance sheet would show you losing money from all the expenses in making a movie, but also gaining value from the movie being produced. If you expect the movie be worth more than $1M, your balance sheet might even show you turning a profit in year 1. If in year 2 you decide to shred it, you're technically not deducting the expenses paid into the movie, you're deducting the value of the movie on the balance sheet, built up from the previous year.
- amethyst 3y agoIt almost always has to do with the details of EBITDA [1], in this case depreciations/writeoffs and amortized costs, especially if/when a bunch of funding may have been subsidized by governments along with healthy tax breaks [2]. 1: https://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation_and_amortization https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe... 2: https://en.wikipedia.org/wiki/Movie_production_incentives_in_the_United_States https://en.wikipedia.org/wiki/Movie_production_incentives_in...
- williamcotton 3y agoEBITDA is nonsensical and it makes my brain implode when I realize how many investors utilize the metric. My brain turns into a black hole when I realize how many companies use it as an internal metric!
- gruez 3y ago>EBITDA is nonsensical and it makes my brain implode when I realize how many investors utilize the metric From wikipedia: "EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. " There's plenty of ways that EBITDA can be misleading, but so can net income. Same goes with other statistics like the unemployment rate or GDP. They have flaws, but that doesn't mean they're "nonsensical and it makes [your] brain implode"
- williamcotton 3y agoEBITDA ignores so much that it seems basically useless. I'm not the only one who is critical of this metric. See: Warren Buffet. It is also batshit insane to manage a company based on this metric.
- MilStdJunkie 3y agoYeah. It's a useful statistic in certain limited applications, but that is NOT how it's employed. It's grossly overused. Ignoring amortization and depreciation is like ignoring salaries, and the overuse of EBITDA can be directly traced to chronic and pathological underfunding of maintenance and supportability. A good red flag for a statistic is when you see a couple dozen variants of the statistic being used interchangeably. Often at each All Hands Meeting. Oh, this month they're using EBITDA. Next month we're talking up EBITDAR. Who knows what the Overlords will be talking up four months from now? Something that makes the line go up, doubtless. Hopefully no one notices that barring buybacks, EPS has dropped under the table like a soused homecoming queen.
- DragonStrength 3y agoThey haven’t paid for marketing yet, which can be a significant portion of a film’s budget (like half). You’re taking risk and at least fronting money, so a small win of taking the loss (expenses with no revenue) may look better to finance.
- roenxi 3y ago> If this is not the intended behaviour... That is a phrase that doesn't mean much when it comes to tax legislation. The only consensus position people have ever managed to come to consistently on taxes is "someone else should be paying". The tax office has to enforce the law as written. It isn't reasonable for the IRS to start making policy decisions like that [0] - it'd lead to the absolute worst form of central planning. Tax agents are not competent actors to assess whether IP policy objectives are being achieved. Any discretionary power given to the tax office is an open invite for corruption. Rest assured that if people can get out of their taxes by inviting tax assessors to dinner they're going to be quite plump. [0] They can probably get away with it in the most obvious cases, but this doesn't sound like one of them.
- autoexec 3y ago> Any discretionary power given to the tax office is an open invite for corruption. As opposed to the corruption, hollywood accounting, and tax dodging that goes on currently? A little bit of sanity in the system to close up loopholes and prevent tax avoidance seems like the ideal situation. What we have now is clearly broken. It should never be profitable to just burn money for a tax credit. I don't even see why it would need to be discretionary, it could be a fairly simple rule change to forbid exactly this kind of practice.
- avs733 3y agomy sense is that our society treats government corruption as significantly more problematic than private, individual, or corporate corruption. Not taking a position...just noting
- autoexec 3y agoThat doesn't seem entirely unreasonable since our government is explicitly supposed to work for the people while corporations should be expected to do everything and anything they can to exploit us if doing so will make them more money. It's for that reason companies will always need to be constrained by strong laws and regulations with teeth. When the government screws us over it's a betrayal. When a corporation screws us over that's just what they do (and a sign that we need stronger protections against whatever they just did)
- gnicholas 3y ago> why does the IRS not come out and say ‘we will not accept this loss, please revise your return’? Because the company never earned any money from the movie. The whole notion of a "tax write-off" is misunderstood, in part because journalists mention it casually and inaccurately. The company isn't "making" money by not doing anything with the movie. They are just taking the deductions attendant to creating the film, but then not bringing in any revenue along with it. If you lose money, you get to save on taxes. In rare circumstances, it can be advantageous to make slightly less money so that you don't trigger some tax disadvantage (e.g., phase-out of some benefit). But in general, it's better to make more money and pay taxes on it than to not make money at all. From reading the articles linked here, it seems like what happened was that there's a new executive team, and they decided not to release a film that was green-lit by the previous executives. Not really about taxes at all, IMO (I am a former tax lawyer, FWIW).
- kioleanu 3y agoI had a small business in Germany which I never managed to get off the ground and turned a loss three years in a row. And every year I would do a tax return saying “hey, this is what I spent, this is what I earned” and every year they would give back to me about a quarter of what I was in the negative with. I always saw this as a “hey we’re in it together, thanks for trying” and motivated me to try harder or try again
- toomanyrichies 3y agoReally good explanation here. [1] TL;DR- the studio is able to make a convincing case (and the IRS have a very low standard for making this case) that they had a for-profit motive for making this movie, therefore the expense of making it was a "business expense". If they never had intended to make a profit on it, then it would constitute a "hobby loss", i.e. the same kind of "loss" you incur when you spend money on a hobby, and the studio would not be granted a write-off on such a hobby loss. This, plus (as another commenter mentioned) the fact that about half a movie's expenses come as a result of promotional / marketing activities (performed after the production expenses have already been incurred), mean the studio likely thought that releasing the movie would cost more than it would be worth. 1. https://abovethelaw.com/2023/11/was-the-coyote-vs-acme-movie-canceled-for-tax-purposes/ https://abovethelaw.com/2023/11/was-the-coyote-vs-acme-movie...
- SkyPuncher 3y agoMovie is created, but not marketed. The whole tax break thing is way over blown. It changes the numbers slightly, but doesn’t help them come out ahead of never having made this. Using made up (but plausible numbers): Movie costs $100m to make. Plus $100m to market. You predict it will only make $120m. You haven’t spent that marketing money yet, so you have two options: * Throw the movie out, with the $100m it cost to make. A percentage of that reduces your taxable income by making you have less profit from your good movies. You loose $80m. * You take it to market. You have to do at least some sort of marketing, otherwise it will be a complete flop. You blow another $100m. Make $120m. You still loose $80m, but you tied up your capital for months and risked loosing it all if this actually went bust. Therefore, you choose option 1. It cuts the losses and allows you to immediately start on something else. ——- People love to throw around write offs like companies somehow make a profit off of a loss. In reality, a write off is only partially reducing a loss. It’s still a loss.
- tim333 3y agoI think your math is a bit off. Assume a 20% tax rate: Option 1. Write off $100m. Get 20m off the tax. Net loss $80m Option 2. Market it. Costs 100m+100m. Income 120m. Pretax loss 80m. Get 16m off the tax. Net loss $64m. So they'd be better off showing it. Apart maybe for the timing of cashflows.
- BoiledCabbage 3y agoYou left out the case where Netflix, Amazon and Paramount offer maybe $40m to buy it from them and they decline because they'd rather get the tax write off. That's the broken part. "Here's tens of millions of dollars for this project you're about to toss." "No I'd rather destroy it and get paid tens of millions from the govt instead".
- SkyPuncher 3y agoI this case, it doesn't sound broken. It sounds like the offers were less than the tax-savings. The market spoke, they didn't want to pay enough to make it more worthwhile than taking the loss. There's nothing nefarious with that.