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’?
1: https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe...
2: https://en.wikipedia.org/wiki/Movie_production_incentives_in...
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"
It is also batshit insane to manage a company based on this metric.
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.
And for something as complex as making software it papers over almost any meaningful understanding of how well a firm is operated.
That's what I mean about my head turning into a black hole. Management using such metrics internally is basically saying that they don't give a rat's ass about how much anything really costs.
As we've seen over the last year and a half, the chicken's come home to roost at some point. Rosy pictures are ripped to shreds by the actual cash flows.
Financial accounting is about where you've been for the last three months. Managerial accounting is about where you're going in the next three years. Our industry is firmly set on driving while only looking out the rearview mirror. I expect this to be changing rapidly at most software firms.
No metric is perfect; in addition to asking how well a company meets a metric, take the time to ask what "meeting that metric" might mean and how that relates to your goals.
Does it matter? Realistically speaking the state only cares about the jobs that are created. Whether the movie is destroyed or not, the jobs have been created regardless. There's arguably the aspect of [famous movie] was made shot/produced/edited in [state], but I doubt many people care about where an animated comedy is produced.
This whole area of law seems utterly absurd.
Only if you don't understand it
> Did they just commit retroactive tax fraud?
That's not how fraud works and that's not what the IRS is trying to do
Fraud: you have to knowingly misrepresent your position aka lie about something. Making a mistake on your taxes is not fraud (source - I am a US citizen and have received letters from the IRS for making a mistake). It is definitely not fraud to be caught in unexpected IP theft.
IRS: they are not trying to get people in "gotcha" situations. They just want to collect the fair amount of revenue that people owe the federal govt and their punishment is proportional.
Presumably understanding it is the basis of its being referred to as absurd.
It's like a tax lawyer saying that computer programming is "absurd". No sir, computer programming is based on sound principles of mathematics and linguistics.
The hypothetical that GP comment posed demonstrated that they didn't understand how tax collection and the IRS works.
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.
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.
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".
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.
They presumably value that option more than whatever Netflix et al. offered.https://www.theverge.com/2024/2/9/24067496/coyote-vs-acme-am...
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.
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).
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
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.
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.
Not taking a position...just noting
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)
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...