Making a Fake Movie to Understand Hollywood’s Shady Accounting

For years there has been a deliberate practice among Hollywood studios to use tricky accounting and tax loopholes to make it seem like many movies they make end up as losses. Exempting them from paying taxes on production costs, and getting them out of profit sharing deals with actors and directors. But how do these tax loopholes and accounting tricks work? And should we try to close them?

Subscribe to Morning Brew

Follow The Brew!

[syndromealphalord]

Soooo, fraud, they are committing fraud

[enilenis]

I worked for Hollywood for decades and we always had a saying: "The real movie magic takes place in accounting."

[Ricardo-yl]

Now I understand why actors and music artists start their own production studios or record labels...they're just tired of being cheated

[agilagilsen]

The fact that we live in a reality where rich people are allowed to run these kind of scams out in the open without any repercussions is wild.

[LogicalNiko]

This is actually something Robert Zemeckis had to explain to Tom Hanks on Forest Gump. Hanks tells the story from a slightly different perspective but the studio didn’t want to do several scenes like the running across the country. This was because it was too expensive. So Zemeckis tells Hanks were doing it anyway and you and I will pay for it all as producers so they can’t say anything about the money. What Zemeckis didn’t say is that he was already doing this for some other parts and just now cutting Hanks in on the deal. They loaned their own picture several millions of dollars at an ultra high interest rate through a shell company, and then made tons back when the studio had to pay off the loans.

A lot of this money went into forming Playtone productions to defer a lot of the tax burden on the two. This pool of money then financed the loans for Cast Away and Band of Brothers. Which in turn all netted big pay days and many more films.

It’s basically like betting to loose a fight, when you are the loosing fighter and you know you’re throwing the match.

[timmydrawing]

Another tactic I've heard of is raising salaries. The movie never becomes profitable because the executive producer's salary is "3 billion." great video

[FlashDriveFilms]

Corporate America picked up on this years ago. It's called Financial Engineering, where you show Profits to the Shareholders and Losses to the Taxman. ( see Enron, Worldcom, Tyco etc)

[AsherGrace]

Ed Solomon, the writer for Men Black says he has yet to be paid, because the movie "didn't make money". My favorite then he said was "It didn't make money, that's why they made 3 sequels and a tv show." But he also noted that the way they have a movie continue to lose money for years, regardless of dvd sales or streaming, is because they are constantly writing off random things towards the movie. For instance, the producers will go to a restaurant for lunch, right now in 2024, and claim it was a business meeting for Men in Black - writing off thousands of dollars throughout the year.

[tonyrodney]

I worked on a movie that never made it past preproduction. Director was hired, cast was hired and we were a couple weeks from starting principal photography. That whole time I heard the producers and coordinators talking about a rumor that it was all an accounting scam for the studio. Nothing was ever shot.

[yalocay]

Real accountant here. I don’t do the shady stuff as I find it morally reprehensible. But I know about it. When big business wants to dodge paying taxes in a high taxing country, here are a few ways of increasing costs to get that “profit” line to 0:
1. “management fees” of the high tax subsidiary always magically seem to roughly match the exact profit that subsidiary would have made.
2. If the parent company supplies the inventory of the subsidiary, they jack up the price of their inventory to make the business unprofitable.
3. Increasing royalties on sales to make the business unprofitable.

[SP-nyfk]

If they're unprofitable, I'm happy to continue pirating.

[KenLieck]

It's not just Hollywood, either. Here's a little story for you:

In 1980 I spoke with UK film producer Walter Shenson about a couple of films he had helmed in the mid-60s, and he told me that at the time he had been given a choice of taking a very small payday up front or signing a deal in which he would outright own the movies -- lock, film stock and barrel -- after fifteen years had passed. Shenson was proud of his work and went with the latter option. The studio was delighted with his choice.

Here's the thing. The two films had no big name actors attached; they were vehicles for cashing in on a new fad that was expected to burn out within a year or two and the stars were young kids with no track record -- and the youth demographic the flicks were aimed at would be adults in fifteen years. When word of the deal got out, Shenson was a complete laughing stock.

When I spoke with him, fifteen years later, he was in the process of getting very expensive restoration jobs done on the films, financed entirely out of his own pocket -- and to top things off he had just discovered that the original negatives had *not* been handled with care. In creating trailers to promote the movies in overseas markets, someone had decided to simply cut chunks out of the master celluloid and didn't bother to return the pieces afterwards.

However, people weren't laughing as loudly as they had before -- because Walter turned out to be smarter than they thought; his newly acquired rights to A Hard Day's Night and HELP!, both starring The Beatles, went on to make a great deal of money as theatrical re-releases, international television favorites and home video purchases. And he got every penny!

[BrianBeauchamp]

This is why the Brad Pitt’s, Adam Sandler’s, 4:42 and Ben Affleck’s have their own production companies. They were tired of getting ripped off.

[edbr]

I think this happens everywhere. I work at sea and most spare parts and supplies are bought from other companies owned by the same parent company at massive markups. "Need to paint the ship in drydock? Then you have to buy from the supplier we own and everything will be 50% more expensive than buying it directly. Also why are you now over budget? We will postpone the engine overhaul to save money and just wait till it explodes and then blame you for that as well."

[catdaddydonbrewer]

Spending millions to make a movie, having it make Billions in the box office alone, then saying it was never profitable, makes you really scratch your head on how why they keep making them

[Therealonetruejoe]

I can’t believe we’re calling this a “loophole”. I dont understand how this holds up in court. A company makes money after expenses and says they didn’t. How could this possibly not be fraud.

[Crushanator]

Presumably it also means every media company is functionally not paying taxes on billions in real profits because of imaginary losses

[jasonhurdlow]

This is what the IRS should be focusing on, not auditing people working at Wal-Mart.

[pennylane]

Really goes to show there’s greed absolutely everywhere. Thank you so much for making this video. Here’s hoping something gets done about this soon.

[msoldate]

There’s 174, 000 producers in the US workforce. The average pay is $70, 000. Thanks to this video you now know that is how much they get paid on a line item on the films budget as their profession. However all the companies they own that leased & sold items & loans at ridiculous costs means they’re other “businesses” give them access to buy alot of those crazy 25+ million dollar homes & exotic cars under their “paper cup” company. Just a note there’s still plenty of good honest producers that make no money too.