Hollywood accounting is a bit of a myth these days. Yes, we’ve all heard the shocking stories from the 80s like Empire Strikes Back not being profitable. But Hollywood talent has very highly paid agents who take 10% of their clients’ comp. So these people are highly knowledgeable and motivated to negotiate for the right profit definitions.
These days it’s never “oh this entity lost money but our other shell company took all the profits.” The arguments are “this film made $105M. We thought it would break even at $100M but the contract says the studio can charge a 10% marketing fee to itself so the film just didn’t break even”. When a hit is a hit the backend pays out. Sometimes handsomely like RDJ on Marvel movies.
So yeah, if you’re a freelancer without an agent, I would mentally write down all contingent comp to $0. But the main talent (actors, writers, directors) are not getting stuffed like they were in the 80s
What are you talking about? On Wikipedia Infinity War made $2 billion and cost $400 million…what’s the Hollywood accounting version? Like the add on 50% for marketing thing?
These are publicly traded companies, and the overall profit and loss numbers cannot be faked. The overall amount of profit and revenue and expenses of the firm is accurate.
What you can do, is shift amortization and depreciation costs around.
So like, here’s a dumb made-up example:
You are filming two movies this year. Movie A has the leading star take a small amount of fixed salary, but he gets a share of the profit. Movie B has the leading star take a big fixed salary, but nothing else.
Thus, it would make sense for you to shift all your profit from movie A to movie B wouldn’t it? So what do you do? Let’s say you need to buy a bunch of cameras or something, so you say “These cameras cost $1 million, we’ll put it under the movie A budget, and say that the cameras depreciated 80%, so we count $800k towards Movie A’s budget. Movie B gets to use these cameras for free, since we already have them.”
So what ends up happening is that Movie A makes less money, and Movie B makes more money. But over the long term, the overall profit the studio makes is roughly the same.
It’s funny to me that “Hollywood accounting” gets such a bad rep but the exact same principles are used in every industry. Hollywood makes shell companies that are legally unprofitable so they don’t have to pay anyone who gets a cut of profits. But guess what, tons of other companies do the exact same thing to avoid paying taxes on profits! Apple USA technically makes no profit either and as a result pays no taxes. And I’m much more worried about that than any nonsense from Hollywood.
Well, it is these days. Every project has people overcharging, and squandering resources and the price of production is huge. Perhaps unnecessarily so.
If your per minute expenses are so extraordinarily high that you are in the hundreds of millions of dollars, perhaps you need to reconsider how you are going about things.
Because to be sure, Producers are not taking a hit, writers are not taking a hit, actors are not taking a hit, special effects are not taking a hit. So who is? Investors who front the money for a particular project.
So really current movie making is a bit of a scam. Watch a few low budget non-tyeatre release movies. They are pretty good. They are overlooked for theatre release because the budget for advertising can be as prohibitive as actually making the movie.
Hollywood accounting is right. Movie making is a suckers game. Every leech in town is after your money.
That’s why I liked this scene so much in the movie “Shakespeare In Love”, set in the 1590’s; it implies that creative accounting was old over 400 years ago:
Hugh Fennyman: How much is that, Mr Frees?
Frees: Twenty pounds to the penny, Mr. Fennyman.
Hugh Fennyman: Correct.
Philip Henslowe: But I have to pay the actors and the author.
Hugh Fennyman: Share of the profits.
Philip Henslowe: There’s never any.
Hugh Fennyman: Of course not.
Philip Henslowe: Oh, oh, Mr. Fennyman. I think you might have hit upon something.
society is moving to eliminate those in the middle that do not contribute to the final art, yet continue to get stronger and richer and more powerful off the backs of the artist
Revenue made from the movie less the direct costs of making the movie equals gross profit.
Gross profit less all other expenses except tax equals net profit before tax.
The movie takes $100 M to make, that is all costs that can honestly be attributed to directly making the movie, this includes actors’ pay, set workers’ pay, construction, rentals.
The movie makes $300 M, then the gross profit is $200 M. If an actor negotiated a % of GP then it is a % of this $200 M.
The company that made the movie has heaps of other expenses, HQ rental and staff, marketing, accountants, researchers for movies that don’t get made. These expenses include depreciation, interest costs, amortisation and other costs that do not get directly accounted for in GP. These expenses are the allocated to the GP, say these costs add up to $250 M in the year that this movie was released, and it is the only movie released that year, then the simple sum would be 200 minus 250 equals a loss of $50 M.
My point here is that it is very simple, and perfectly legal, to ensure that this movie lost money.
Why do this? Because depreciation and such like are not actual monetary costs now. Yes, it is a method for legitimately ensuring that you have the reserves to replace infrastructure that degrades over decades etc., etc., but until that happens the company directors and managers have received their bonuses and moved on.
Further, the movie company itself legally loses money, but the company that owns the movie company makes money. And that leads to the next point…
Movie companies do more than make movies.
Warner Bros makes more from their Movie World then they do from their actual movies. In this sense the movies are just marketing to get you to go to the park and do the Jurassic Park ride. So the movie production loses money, and that loss is a damned good tax deduction for the company that owns the movie production company, and that owning company makes money from other areas.
Example from another jurisdiction.
I am an accountant in Australia*, so I don’t know the US taxation law that well, but I do know the Australian law – and the Australian Taxation Act, Section 10 BL allows a 150% tax write-off for loses making movies because the government thinks that movies are a great advertisement for the country and lead to increased tourism. So if I have a company that invests $100 M into a movie and it very specifically does not make any profit, then I get to write off $150 M of my real company’s revenue.
(*Qualified accountant, masters degree, worked as an analyst mostly, now retired since once I turned 50 no-one would employ me, but not allowed to get a pension until reach 60. So my tax knowledge is going to be dated.)
If Hollywood accounting were a person, it would be the friend who always insists they lost money on the pizza night but somehow still ends up with the biggest slice!
I mean I would probably say that yes more movies would be bombs than most people would realize since most people don’t realize that a film needs to at least double budget.
However I would argue that still films like the Avengers are clearly profitable. And even if they weren’t on box office then certainly home release, product ties ins and toys would definitely make up the rest of money.
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I found it amusing that snow white had a budget of 200mil. Acting was mid cgi, trash. Yet somehow it cost 200mil to produce that dumpster fire?
Nothing short of creative money laundering.
No, they are not.
Jack Nicholson was only paid in profits for Batman, and he made bank.
Spielberg regularly used a percentage of the profit for salaries, and he made sure everybody was paid.
Yeah, that’s not true. They’re mostly publicly traded companies, which means they’re audited and their books are open to public review
Edit: y’all, Hollywood accounting is just accounting, it’s all GAAP.
Why would there even be such an industry if this were actually true?
typically investors get paid off the back end so, no profit means no payout. Watch “the Producers” if you’d like an entertaining tutorial.
They’re doing God’s work; entertaining the masses while operating at a loss, bless their hearts. /s
Hollywood accounting is a bit of a myth these days. Yes, we’ve all heard the shocking stories from the 80s like Empire Strikes Back not being profitable. But Hollywood talent has very highly paid agents who take 10% of their clients’ comp. So these people are highly knowledgeable and motivated to negotiate for the right profit definitions.
These days it’s never “oh this entity lost money but our other shell company took all the profits.” The arguments are “this film made $105M. We thought it would break even at $100M but the contract says the studio can charge a 10% marketing fee to itself so the film just didn’t break even”. When a hit is a hit the backend pays out. Sometimes handsomely like RDJ on Marvel movies.
So yeah, if you’re a freelancer without an agent, I would mentally write down all contingent comp to $0. But the main talent (actors, writers, directors) are not getting stuffed like they were in the 80s
I thought I was in r/confidentlyincorrect for a minute
What are you talking about? On Wikipedia Infinity War made $2 billion and cost $400 million…what’s the Hollywood accounting version? Like the add on 50% for marketing thing?
That’s not true.
These are publicly traded companies, and the overall profit and loss numbers cannot be faked. The overall amount of profit and revenue and expenses of the firm is accurate.
What you can do, is shift amortization and depreciation costs around.
So like, here’s a dumb made-up example:
You are filming two movies this year. Movie A has the leading star take a small amount of fixed salary, but he gets a share of the profit. Movie B has the leading star take a big fixed salary, but nothing else.
Thus, it would make sense for you to shift all your profit from movie A to movie B wouldn’t it? So what do you do? Let’s say you need to buy a bunch of cameras or something, so you say “These cameras cost $1 million, we’ll put it under the movie A budget, and say that the cameras depreciated 80%, so we count $800k towards Movie A’s budget. Movie B gets to use these cameras for free, since we already have them.”
So what ends up happening is that Movie A makes less money, and Movie B makes more money. But over the long term, the overall profit the studio makes is roughly the same.
It’s funny to me that “Hollywood accounting” gets such a bad rep but the exact same principles are used in every industry. Hollywood makes shell companies that are legally unprofitable so they don’t have to pay anyone who gets a cut of profits. But guess what, tons of other companies do the exact same thing to avoid paying taxes on profits! Apple USA technically makes no profit either and as a result pays no taxes. And I’m much more worried about that than any nonsense from Hollywood.
Well, it is these days. Every project has people overcharging, and squandering resources and the price of production is huge. Perhaps unnecessarily so.
If your per minute expenses are so extraordinarily high that you are in the hundreds of millions of dollars, perhaps you need to reconsider how you are going about things.
Because to be sure, Producers are not taking a hit, writers are not taking a hit, actors are not taking a hit, special effects are not taking a hit. So who is? Investors who front the money for a particular project.
So really current movie making is a bit of a scam. Watch a few low budget non-tyeatre release movies. They are pretty good. They are overlooked for theatre release because the budget for advertising can be as prohibitive as actually making the movie.
Hollywood accounting is right. Movie making is a suckers game. Every leech in town is after your money.
That’s why I liked this scene so much in the movie “Shakespeare In Love”, set in the 1590’s; it implies that creative accounting was old over 400 years ago:
Hugh Fennyman: How much is that, Mr Frees?
Frees: Twenty pounds to the penny, Mr. Fennyman.
Hugh Fennyman: Correct.
Philip Henslowe: But I have to pay the actors and the author.
Hugh Fennyman: Share of the profits.
Philip Henslowe: There’s never any.
Hugh Fennyman: Of course not.
Philip Henslowe: Oh, oh, Mr. Fennyman. I think you might have hit upon something.
Yeah, it’s funny how that works. A movie can make a ton of money, but the studios still act like it didn’t turn a profit.
Don’t we often only see the US sales rather than full global (plus merchandising)?
society is moving to eliminate those in the middle that do not contribute to the final art, yet continue to get stronger and richer and more powerful off the backs of the artist
100% true. They call it creative accounting.
There are two separate points here.
Revenue made from the movie less the direct costs of making the movie equals gross profit.
Gross profit less all other expenses except tax equals net profit before tax.
The movie takes $100 M to make, that is all costs that can honestly be attributed to directly making the movie, this includes actors’ pay, set workers’ pay, construction, rentals.
The movie makes $300 M, then the gross profit is $200 M. If an actor negotiated a % of GP then it is a % of this $200 M.
The company that made the movie has heaps of other expenses, HQ rental and staff, marketing, accountants, researchers for movies that don’t get made. These expenses include depreciation, interest costs, amortisation and other costs that do not get directly accounted for in GP. These expenses are the allocated to the GP, say these costs add up to $250 M in the year that this movie was released, and it is the only movie released that year, then the simple sum would be 200 minus 250 equals a loss of $50 M.
My point here is that it is very simple, and perfectly legal, to ensure that this movie lost money.
Why do this? Because depreciation and such like are not actual monetary costs now. Yes, it is a method for legitimately ensuring that you have the reserves to replace infrastructure that degrades over decades etc., etc., but until that happens the company directors and managers have received their bonuses and moved on.
Further, the movie company itself legally loses money, but the company that owns the movie company makes money. And that leads to the next point…
Warner Bros makes more from their Movie World then they do from their actual movies. In this sense the movies are just marketing to get you to go to the park and do the Jurassic Park ride. So the movie production loses money, and that loss is a damned good tax deduction for the company that owns the movie production company, and that owning company makes money from other areas.
Example from another jurisdiction.
I am an accountant in Australia*, so I don’t know the US taxation law that well, but I do know the Australian law – and the Australian Taxation Act, Section 10 BL allows a 150% tax write-off for loses making movies because the government thinks that movies are a great advertisement for the country and lead to increased tourism. So if I have a company that invests $100 M into a movie and it very specifically does not make any profit, then I get to write off $150 M of my real company’s revenue.
(*Qualified accountant, masters degree, worked as an analyst mostly, now retired since once I turned 50 no-one would employ me, but not allowed to get a pension until reach 60. So my tax knowledge is going to be dated.)
If Hollywood accounting were a person, it would be the friend who always insists they lost money on the pizza night but somehow still ends up with the biggest slice!
I mean I would probably say that yes more movies would be bombs than most people would realize since most people don’t realize that a film needs to at least double budget.
However I would argue that still films like the Avengers are clearly profitable. And even if they weren’t on box office then certainly home release, product ties ins and toys would definitely make up the rest of money.