Why though? I thought Hollywood had their own accounting rules which always meant movies made a loss. What are they paying the tax on?
Everyone involved still pays their taxes, but the special purpose vehicle used to organize the production is essentially a passthrough entity.
Each movie is set up as a separate legal business entity (LLC). That's the SPV (special purpose vehicle). https://www.google.com/search?q=each+hollywood+movie+is+a+se...
There's also a separate LLC for the parent production company. The production company LLC can also send invoices to the individual movie LLC for services. People can get creative with production companies "overcharging" for various expenses back to the movie's LLC but whatever creative accounting they want to do still needs to ultimately satisfy IRS scrutiny if there's an audit. There are entertainment attorneys that specialize in movie LLCs.
The relevant taxing authorities would be concerned with the parent companies' financials, not the subsidiaries. Moving money from right hand to left hand doesn't change one's tax liabilities.
"Hollywood accounting" only refers to civil disputes due to insufficiently defined contracts between two businesses (usually actors and producers).
Well, yes, but avoiding taxes is not the point of "Hollywood Accounting", rather avoiding paying actors.
The IRS can collect taxes from whichever business entity makes a profit, but, critically, actors cannot. They signed a deal with one entity, and are only payed a share of net profits if that one particular entity makes a profit.
Hollywood Accounting, then, is the process of shifting costs around so that the legal entity responsible for paying the actors never makes a profit.
The SPVs never own anything and never have any expertise in anything. So they have to pay the parent company for a wide range of services, from advertising and marketing to distribution to prop and equipment rental. That makes it easy to shift costs into the SPV as necessary.
I wasn't saying avoiding taxes was the purpose. Instead, I'm saying whatever "bogus" or "inflated" expenses that the production company LLC is charging to the movie LLC still has to be somewhat plausible. A simplistic example of what they can't do:
- Tom Cruise TC Productions LLC sends an invoice to MissionImpossible8 movie LLC with a single line item that says "script advisory service for $1 billion dollars" which then conveniently causes the movie's balance sheet to be negative $1 billion dollars and thus never make a profit.
The point is the production LLC, the distributor entities, etc all charging the movie LLC so that it shows zero profits ... still need to play their financial accounting games with more sophistication than that. Yes, go ahead and fabricate various costs to avoid paying actors on "net profit points" but it still needs a veneer of plausibility. Otherwise, the IRS comeback will be, "Is the $1 billion fee the real market rate for script advisory services? Do you have evidence of that amount ever being paid? etc etc"
If that's not creative accounting, I don't know what is.
That doesn't sound right. Traditionally, and in particular in the case of Forrest Gump, the distinction is between people who contract for a percentage of net profit (always zero) and people who contract for a percentage of gross revenue. The revenue is measured at the same point either way; it's just about whether you got suckered or not.
The point of Hollywood accounting is to intentionally create enough inflated expenses (billed from companies controlled by the studios or related parties of the producers etc.) to ensure that the net profit is zero or less, even when the film actually generated a lot of income.
It's true that tax gets paid eventually (and somewhere, maybe a tax haven) but it is intentionally creative accounting designed to minimise tax and screw people out of their royalties.
It reminds me of the eBay market in bulk lots of used scratch-offs harvested from the trash:
https://www.forbes.com/sites/robertwood/2016/01/14/powerball...
Affordable housing tax credits are contingent on a tremendous amount of regulations and stipulations, including who ends up holding equity in the property (it's not easy to use these as passthrough vehicles to get personally rich), so the private lenders tend to be repeat players, often banks, who understand how to navigate the process. Among other things, I guess it's a way to outsource oversight, so that the government doesn't need to maintain a huge bureaucracy to police each and every development project. OTOH, the financing complexity comes at a cost; a significant fraction of the value of the tax credits pays for lawyers and accountants, rather than to actual construction.
I don't know if filmmaking subsidies are more lax or easier to game.
Also, I think using tax credit schemes, instead of direct payments, might be a way to obfuscate the cost of these programs from a legislative and political perspective; not unlike the Earned Income tax credit. Nominally speaking, tax credits reduce government revenues rather contribute to expenditures; the latter draws far more attention.