At the heart of the issue lies the concept of gross profit versus net profit. Gross profit for a movie is typically a measure of the revenue the movie generates in box office and other sales, minus the cost of shooting, production and other expenses involved with creating the film (typically the film’s budget). Net profit, on the other hand, is what is left of the profit after subtracting distribution costs, marketing expense and other payouts in the form of taxes and royalties. Companies in all industries routinely load expenses onto their books (like interest on debt) that legitimately decrease their bottom lines to reduce tax burden.
In other types of business, however, shell companies are typically used to hide losses to make a corporation’s profits appear greater to shareholders and investors. It’s the goal of hiding profits and not losses that makes Hollywood accounting unique. Assume Studio X has a new film that grosses $10 million against a budget of $3 million. After accounting for weighted average distribution fees of $3 million, the company makes a net profit of $4 million. The first job production accountants get will be an entry level role, where they’ll be required to wear many hats within the team.
- It’s important to point out that the IRS already took this to court and “lost” as it was found that tax evasion wasn’t behind it, just accounting practices to suit the way Hollywood does business.
- Hollywood accounting is the practice of big studios of making successful movies into what looks like a financial failures on purpose and through questionable accounting tricks.
- Especially when the production costs were less than a tenth of that, Paramount would later settle for $9000, rather than have their accounting methods scrutinized.
One big difference is the impact that tax incentives have had on production. With all the offers of rebates, grants and credits encouraging filmmakers to bring their shoots to different locations, shows hollywood accounting are now filmed around the world — wherever makes sense for the script and the budget. It is a great training ground for line producers, who manage daily operations of a production, Lintinger said.
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Second assistant accountants also work with the production’s accounting systems and start to learn about managing the costs of the production. Even Marvel’s Stan Lee, the co-creator of the character Spider-Man, had a contract awarding him 10% of the net profits of anything based on his characters. The film Spider-Man (2002) made more than $800 million in revenue, but the producers claim that it did not make any profit as defined in Lee’s contract, and Lee received nothing. Corporations in other industries use them all the time to play accounting tricks.
Warren Beatty, for example, shepherded the production of and played the lead role in “Bonnie and Clyde.” In addition to earning $200,000 upfront for his work, he also took 40 percent of gross profits. The movie was not expected to make much when the deal was struck, but it has since earned more than $150 million. That means he has earned about as much as Sandra Bullock would make on “Gravity” nearly 45 years later. Each movie is set up like a corporation that’s designed to lose money.
The specific schemes can range from the simple and obvious to the extremely complex. Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or creative set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in taxes and royalties or other profit-sharing agreements, as these are based on net profit. If the total payout to actors was 10% of net profits, the actors would receive $400,000 in total. But studios can also reduce the payout to actors while increasing their own collections. The studio could run an expensive marketing campaign which would boost revenue (an increased $5 million sales from a $3 million investment in our example) and add an expense that reduces net profit.
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Within the corporation are shell companies, those existing in name only, that are designed to siphon all of the profits from the movie and funnel them back to the studio. These shell companies handle things like advertising, marketing and distribution. They can even be set up to cover more general expenses for accountants, managers, travel and entertainment for studio heads, and so on. “Many former production accountants have gone on to earn significant roles within our industry, becoming successful producers and even heads of production at major studios,” Williams said. The scramble for production accountants stems from a couple of factors.
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If you’ve worked on the film, and are ‘in on it’ (and willing to co-operate), if the film is successful there’s a good chance you’ll receive some kind of surprise ‘bonus’ (who’s real purpose is to stop the film having to commence net-point payouts). See also Box Office Bomb where the movie makes low gross revenue for real, not just on paper, though the two have gone hand in hand a few times. Not to be confused with the Hollywood Style category of tropes like Hollywood Economics, Hollywood Law, etc.
The fact that streaming money will pale in comparison to box-office receipts makes the specter of Hollywood Accounting as great as ever. Theater chains are understandably up in arms (AMC announced a desperate equity offering to raise cash) — but industry talent is also worried. According to Business Insider, WarnerMedia’s decision to release its 2021 slate of big movies (e.g., The Matrix 4) simultaneously in theaters and on HBO Max is riling Hollywood folk.
Although this is perfectly legitimate, the studio could also employ Hollywood accounting to further trim its liability. For instance, in a superhero movie, the project might license the right to use the characters from a parent or subsidiary entity that holds the intellectual property for use of these characters. This creates the facade of a legitimate expense but is really just a related-party transaction. What happens with Star Wars is not the only time box office hit movies have never returned a profit.
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