Understanding Film Tax Write-Offs & Some Solutions
Also: OpenAI's Sora & Process, Finishing Work, and English Teacher
I wanted to understand how tax write-offs work when people discuss films/media being cancelled. So, I wrote a summary of what I learned and thought I would have fun with some interesting solutions.
We’ve all been there. A show we love doesn’t get renewed. Oh, I would’ve loved more seasons of The OA or Raised By Wolves. But, it’s been getting worse. In some cases, the show gets entirely removed, never able to seen again (RIP Willow) and in the most egregious cases, the media is not even released. Sorry Batgirl and Coyote vs Acme.
While the streamers/studios do this to avoid things like continued residuals, another reason is the oft-repeated: ** tax write-off **
Film studios capitalize film production and can only write off the expenses against income when the asset (the film) is producing revenue. Thus, it’s amortized over the lifetime of the film (expenses is claimed year over year from the asset and deducted from revenue). However, this asset can produce an expense in its current year by estimating its value and then expensing an “impairment charge”. It’s saying that: the film isn’t as worth as much as went into its production. If it never gets released, the impairment can sometimes cover the value of the entire film. Thus, taxable income is decreased today vs taxable income being decreased over several years.
Releasing a film *can* induce extra costs (marketing, distribution, residuals) that ends up being more costly even if there’s income/revenue. And due to the time value of money (money today is more useful than money tomorrow), the calculation can be advantageous for the business to simply not release the film and do an impairment on the value of the asset (the finished film).
But more recently, especially since streaming became more popular, write-downs and write-offs have garnered more attention—and, at least in the eyes of many consumers, have gotten less defensible.
Earlier this year, Walt Disney Co. removed approximately $1.5 billion worth of content from its Disney+ streaming service and recorded a corresponding impairment charge. In 2022, Warner Bros. wrote off between $2 billion and $2.5 billion in impairment charges (including a Batgirl movie that people are apparently still very upset about).
In the case of the Disney+ removal, the content already was completed and available for viewing, so the market distortion of these practices is clearer: Owing to tax planning, the value of a completed work already available to the public may be higher as a total loss than it is remaining on the service.
This is just sometimes a choice of accounting and costs on the output side, but it gets even more advantageous when film production is subsidised in the US at the state level. They can claim *some* expenses during production.
Georgia is a prototypical example of a state film incentive program, where studios that choose to film there get up to 30% of qualified expenses back in the form of tax credits. Most studios owe little in state taxes, so they opt to sell the credits through private brokers at a discount of about 10%, on average.
Let’s say, for example, $50 million in qualified expenses is returned to the studio as a credit for $15 million, which is then sold for $13.5 million—a substantial reimbursement for the movie studio. In exchange, Georgia would receive whatever economic benefits accrue.
So, film studios get tax credits (which is a reduction on the eventual tax owed) and then subsequently sells these tax credits (in some cases).
As Andrew Leahey concludes:
When intertwined with public funding through state and federal tax incentives, the practice of movie and television write-downs represents a troubling exploitation of taxpayer funds. Coupled with rapidly expanding state tax incentives, it represents a multibillion-dollar Rube Goldberg machine that culminates in a nickel being pulled from your pocket, strapped to an Acme rocket, and fired directly into the bank accounts of movie studios.
Another incentive added to the pile is that especially in the case of Warner Bros. Discovery, David Zaslav’s (and other executives) bonuses are tried to increasing cash flow and debt reduction. In the short-term, paying less tax today is better for cash flow (and thus, executive pockets).
Solutions?
Regardless, while this practice isn’t new (impairing intangible assets for short-term tax benefits), the public is more frustrated by it given that in the world of digital access: if it gets removed, it’s gone forever.
Matt Seitz points to the Visual Artists Rights Act in the US that expands the artist’s moral rights to claim against the destruction: a “right to prevent distortion, mutilation, or modification that would prejudice the author's honor or reputation”
While VARA doesn’t expand to film rights, the idea of working on a feature film and having it shelved, never to see the light of day does in some way impact the reputation of those involved. It’s a lost opportunity to prove their mettle and in some cases might also be seen as negative due to the perception that the studio might write it off because the studio thinks it is bad. Such moral rights can be expanded and come into play here.
Andrew Leahy suggests that scrutiny in auditing should ensure that any expensible credits should not form part of the eventual capitalization (and subsequent write-off):
Further, increased scrutiny may be called for through allocation of audit resources to ensure production write-down and write-off losses aren’t reflecting any credits received at the state level—careful attention must be paid to the claimed carrying costs of a given work.
It does make me wonder if there are more radical ideas to consider. The harder part of any more radical idea is to enforce laws to force a company to do anything with the film asset (eg, forcing it to distribute something is still costly for the business). It’s also difficult to draw lines on what something is.
The simplest action, without changing any laws, is to use consumer power.
Avoid studios/streamers that remove media forever without alternative means of access. Hard to do in practice.
IF studios do physical releases, fans must show their support for it and make sure they buy it.
If it’s work-for-hire teams, they (actors, writers, directors, etc) could use labour bargaining power to include a clause that *some* form of access must be made available if its officially removed.
Buy-Out Patrons. Give the public the option to buy out rights for public access of a removed piece of media by giving them the ability to add their name/names as buy-out patrons to the film. “You are able to watch Willow due to a gracious donation from Arts for All Foundation”.
The following ideas get more complicated and require new legislation (most likely).
IFRS/GAAP accounting standards change that only allows a full impairment a few years after production, which means that the film/media asset sits unexploited without the option of claiming any expenses unless it’s released. This is technically true, in that, while the film sits un-released or had-been-released and then removed, it’s still a potentially productive asset, but because it can be advantageous to write it off for tax benefits, it’s productive lifetime is artificially shortened. There are *many* fans that never got to see various media because they waited to see it later. And now it’s gone forever.
The tax credits earned from production is only usable if the film is actually released.
If a piece of media is unavailable for public access after a few years, the timeline to public domain release can be shortened with a statutory right to open an auction to buy out its timeline of copyright protection from the current owner.
In a similar vein, if a piece of media is entirely impaired to never be released, the public can buy distribution rights at any price (through auction) while still allowing the firm to retain the full impairment. In other words, the studio still gets the full write-off and the income from the sale to the public.
Understandably, the complication from such sales that buys out distribution rights for the public adds issues with residual rights owed after. But, I think, many creators would prefer a film to be released even if it meant that residuals are removed. The incentives just shouldn’t be such that it becomes advantageous to ALWAYS release a film like this in order for film studios to avoid residuals.
Okay, let’s get weirder (and perhaps more impractical)?
We know the public value of IP/media. Inventions and culture eventually become public domain. For some cases, if the IP is left unused for decades until it becomes public domain, it might have been at a loss to the public. Thus, using Harberger Tax, one can re-imagine that IP must be constantly be valued by its owner and taxes paid on it as a result IF the IP is privately exploited. In other words, you pay for the privilege to take a product OFF the market. It could even be the case that the period of private exploitation exists as it is for 5-10 years, after which, if it’s at a certain scale, the owners need to pay to keep it out of the hands of the public. Some older readings on Harberger IP + open sourcing from Matthew Prewitt and Luke Duncan.
I think there’s definitely some variations here that could hopefully mean that we don’t increasingly live in a world where creators might spend years of their life into their work and not have it be seen. And likewise, that the only option fans have, is to never be able to see something (or own it).
via MidJourney. Tax Write-Offs requires a lot of calculators!
Bonus Content!
I’m in Europe briefly. A flash trip brought on by my wife changing jobs and having a sudden window open for some travel! Of note, one city I visited was Barcelona and I had the opportunity to see, experience, and document some of the city’s famous urbanism. It’s been a dream to see. Happy that I could! Hope to share that next week! :)
Finish It
Simple advice but meaningful advice from
. As a creator, I heartily agree. Finish what you create.Finishing means failing. If you always stay in the drafting stage, success—however you define it—is always on the horizon. But failing is how we teach ourselves to write. You have to write a lot of bad poems to write a good one. Nearly every novelist has “trunk novels” they’ve abandoned, yet which taught them how to write the novel they did publish. And every book goes through many drafts before it is finished.
For me, it’s not saying that starting a new novel or story kernel entails that you finish all of it. It’s more that if you start something, a part of the process is finishing it. We’ll start way more things than we can ever hope to finish. Starting is easy and gets easier. We will only get better at finishing if we actually finish. So, even if it means that you write out a shoddy plot, or complete a painting with a few haphazard strokes, it’s about the practicing the muscle of finishing. Finishing is important because it casts the entire work into a new light that’s all necessary and a part of the process. To finish is to step back and see the detail and the whole at the same time. So, yes, do finish when you can.
OpenAI’s Sora & Process
OpenAI’s Sora made news this week. Really incredible generative video. In all honesty, I don’t have much new to add to the discussion. Over the past year, I’ve written a lot about how I feel about AI, authenticity, context, and process. I found that Mat Dryhurst gave a nice summary of this shared feeling.
The output matters less. The process matters more.
Yancey on Crypto and Means & Ends
In all of these cases the means outweigh the ends for the true believers. Since the industry is obsessed with the means of blockchains as a nascent technology, the end experience is not as important as the tooling that created it. But for people outside the space, it’s the ends that matter. This is what makes crypto feel like such a hostile and unwelcoming space.
While crypto isn’t a part of MetaLabel for now, its impact is shared in the philosophical design of MetaLabel. Unlike other critique, this reasonably hits home the specific trade-off that crypto-focused products.
Our search for peer relationships with other creative people comes from the same place. Our own experiences as lonely creative people trapped in the Creator Economy lit a fire that made us want a new context and experience. The old ways stopped working. We needed something new.
The design space of crypto opened up a new path, even as we’ve chosen not to adopt its plumbing for now. Our goal is to provide a fundamentally better outcome than the status quo, and this is how we feel we can best fulfill that. It’s the ends, not the means, that really count.
It’s one of the things that I enjoy about the entire intellectual scenius of crypto. It present the reality that we *can* change our institutions: if it’s coding it or actually getting off our couches and voting in an election. It’s the belief that the status quo doesn’t have to be the way that it is. So, the conclusion doesn’t have to be that crypto is the answer to everything, but that we can imagine different structures, societies, and how organise in the 21st century. I’m glad it inspired Yancey and that those ideations form a part of MetaLabel.
After The Fact, Editing
While we’re worried about deepfakes and cryptographically verifying media, something more mildly worrisome that’s easier to do: editing the live version after the fact. Here’s an example of Alicia Keys’ voice being modified after the halftime show at the Super Bowl.
English Teacher - The World’s Biggest Paving Slab
A lovely mix of genres here. Both grungey, indie, shoegaze-y, and even hints of britpop to it. High hopes for this band. ht to my twin for sharing this one!
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That’s it for this week, friends. Hope you get to enjoy a sunset.
Simon