What is a "tax write off"?
What is a "tax write off"?
Let's say that I have this one movie that is finished that I spent 80 million to make. I decided to "write it off". So when I get to pay my taxes, do I get a 80 million discount?
A write off is a colloquialism that refers to reducing your effective taxed income. A more realistic example would be, let’s say you make $250k, but you’re self employed and spent $50k on business expenses like a car and office space. Then you can write off that $50k and only pay taxes like you made $200k.
You can only deduct the full purchase of a capital expense such as a car in certain situations. Usually you have to amortize/depreciate the expense over a set amount of time. I'm not sure if you can still claim milage as an expense if you claim the vehicle as an expense.
I think it was just offered as an illustration of the concept, not as tax advice.
My understanding is that amortization is the confusing part of the situation OP is asking about. When you have an asset, the cost of it is deducted from income over the useful life. By declaring that it will never be released, the useful life is reduced to zero, allowing them to take the whole tax deduction at once.
They still would have been better off never spending the money. Since they already have, if they have so little cash that they can't afford their tax bill, it might make sense to throw away future income to stay afloat now.
I'm seeing a lot of complicated explanations so I'm gonna go with a simpler one.
Say you build a fence for somebody and they pay you $1000. You have to report that income to the IRS. Let's say the tax rate is 40% so they say "Well you owe us $400." But instead you provide them with receipts saying you bought $500 of supplies in the form of lumber, screws and such. You have "written off" your expenses and shown the IRS you really only made $500 so you only owe $200 in taxes.
What I have trouble wrapping my head around is what else can you write off? How far can this go? I'm thinking of making an LLC for example to hold real estate, cars, buy stuff using its credit card. Can I do whatever I want and try to call it a company expense?
In the case of your fence can you write off the truck, gas, computers you used to do research, house you used to plan out the project?
You're supposed to include an approximate percentage of personal vs business use. Generally this isn't really policed, but if it's clearly 100% personal and you say it's 100% business, that's a disaster waiting to happen.
Also using stuff like this while making less than a million a year is going to bump you up several notches on the "people to be audited" list.
The answer is basically yes, until you get audited. Then you'll have to defend it
Write offs are a scam because of this big gray area. The rules get complicated fast and it quickly becomes less clear whether you can or not, and they’re difficult to automatically check. So …. You can write off any expense, up until you get caught. Remember this next time you see a politician wanting to reduce funds for IRS audits.
For all the dread people fear at the word “audit”, remember who really has the most to fear, and it’s not you
FYI - my own experience with the dreaded IRS enforcement was …. Receiving mail that something was wrong on my tax form and if I agreed, they calculated how that would change what I owe. I took a look, and “yep, my bad”, and paid the correct amount. No fees, no penalties, minimal paperwork, no threats, no bullying. Just facts. Ooooh, nightmares
Yes write off rules get complicated fast. People generally agree with the very simple example I've given but all you have to do is ask "What if you bought a drill while building the fence?" and you're gonna trigger a whole host of opinions.
But I think sometimes people only see the complicated examples and think "write offs are a scam got it" so I think it's important to provide an example where most people would generally agree it's not. It helps people realize there's some nuance to the discussion.
That being said: Tax the fucking rich already.
Sell things on eBay, you have to pay taxes on any profit, but you can claim milage as an expense at 65.5 cents per mile. There's no UPS dropoff near me, but there's one near my work, so I claim the mileage to go to the UPS store and back. I just happen to go to work in between those two things.
You can also claim travel if you buy an item somewhere. Maybe you went somewhere to buy something and just happened to have a good time with your family while you were there.
If you write off 80 mil you're basically saying that you lost 80 million on an investment.
So let's say a different movie you made makes 80 million, and this one lost 80 million, you basically made zero money and shouldn't have to pay taxes.
So if I get this right: I lost 80 million by making this movie and shelving it. I made another movie that I spent another 80 million but made 40 million in profit. Then, instead of paying taxes for 120 million (the 80 million it made + 40 million extra) I'll pay only over the 40? This would start to make sense about Warner Brothers...
If you spent 80 million making the other movie, I'm not sure if you have to pay taxes on it, or just the 40 million profit. If the latter, than you wouldn't pay any taxes. Someone come in here and straighten Tiger and I out please!
If you invest 80 million and make 80 million in return, it's a wash, and you wouldn't pay any taxes because you didnt make any money.
You would have to invest 80 million in a movie, scrap it, and then 80 million in another movie, which goes on to make 160 million in order to have 80 million in profits to offset with an 80 million write off. This would result in a net $0 made for tax purposes.
No. You're doing the math wrong.
You make 2 movies that cost $80m each, you have spent $160m. One of them gets shelved and makes no money, one of them makes $120m. You are still at a $40m loss. You haven't made any money to pay tax on at all. You have only lost money.
You are approaching this with the preconceived notion that is some kind of scam, which it's not.
The only benefit to shelving the first movie is if you think it'll cost more money to finish, market, and release it than money it will bring in. They are cutting their losses, not magically generating money out of thin air.
you can't just write off anything you want. You only get to write off certain things, but at the end of the day, a tax write off is just a tax deduction for how much you need to pay, in the same way any normal person paying their taxes does. Just like with personal taxes, you can just reduce your tax liability down to 0 if you get enough deductions.
Corporations obviously work differently than for a normal person, but the same basic principle applies.
Edit: i suppose i should clarify - You can take deductions for investment losses. Normal people can even do this. What you're referring to would be a deduction along those lines, where you're "writing off" a loss on your taxes. If you invest $100 in stock, and sell when the value is $50, you took a $50 loss, and can deduct those loses from your tax burden, because you're required to pay taxes on 50 less dollars that year.
Personally I think it's all bullshit. We should be able to write off so much shit as regular people but can't.
Sure, maybe I make $60,000 a year, but I also spend $5000 in gas to commute to work, $4000 a year in car payments for a vehicle that I primarily use to commute to work, $2000 a year in insurance for said vehicle, and maybe $1000 a year for repairs for said vehicle.
Who's going to let me write off $12,000 a year for the privilege of getting to my job?
Kramer is that you?
“You don’t even know what a write off is”
They just write it off!
A tax write off is also called a tax deduction.
So when you do your taxes and you need to pick between the standard deduction or itemized, that's picking if you want to write off the standard amount or try to find all the amounts that might apply to you.
The deductions, or write offs, reduce your income for tax purposes. So if you have 50k in taxable income, a 10k deduction will mean you're only taxed on 40k.
To get something you would call a discount, you would need a tax credit, which reduces the bill by some fixed amount.
10k write off: 100k income becomes 90k, 20% taxes are 18k.
10k credit: 100k income at 20% is 20k, less 10k credit is 10k is taxes.Movie studios do complicated accounting to make it so the business that collects the money for showing the movie is often not the one that made the movie.
That means that often the movie is able to be described as a financial failure even though it made more money than it cost to produce.
Usually this isn't done for tax purposes, because the IRS will generally get their cut regardless, since if the movie makes money, someone is collecting it.Entertainment often pays actors, writers and such royalties based on a proportion of profits. By manipulating which specific entity actually shows the profit, they can manipulate how much royalties they have to pay.
Entertainment often pays actors, writers and such royalties based on a proportion of profits. By manipulating which specific entity actually shows the profit, they can manipulate how much royalties they have to pay.
And it's probably closer to what's happening here. Probably something in their contracts state that certain financial obligations will be paid on the movie's release. But if the movie is never released they don't need to pay out.
But it sounds bad to come out and say "our contracts say we can get out of paying people if we don't release the movie so we aren't releasing the movie" rather than saying "we aren't releasing the movie because we can write it off on our taxes."
Sure in the past there were significant distribution costs in pressing out all those copies of a film and sending it out to theaters everywhere. Even direct to video has distribution costs. So "writing off" a movie to avoid paying those costs made sense when it was done in the past. But direct to streaming is basically just copying some files to a server, and a movie is basically guaranteed to recoup those costs. So the only reason to write off a movie and not release it is because of contract shenanigans.
Expense, not deduction. If you profited $100k on the sake of your house but had to spend $50k on repairs, you’ve only made $50k. The write off is subtracting the related expenses from income in order to calculate the actual profit
Colloquially, the term "tax write off" has been used to mean one of two things: 1) a tax deduction for expenses against taxable income, or 2) a tax deduction due to a partial or total loss, also against taxable income. In both cases, it's a deduction from the amount of income which the tax rates would apply toward. To be clear, neither would be a tax credit, which is a form of direct reduction in the tax amount to be paid.
The first category includes business expenses, such as amortization of the cost of office furniture, usually over a number of years. This can also include expenses which the government deems especially worthy, such as mortgage interest expenses in the USA.
The second category is for calamities, economical or natural disaster related. Someone losing their coastal home due to land erosion could write off their home, because that asset is now worthless. Or an investor can write off their shares in a film production, if the main actor turns out to have done awful things and no one wants to work on the film anymore. In this category, an asset has been involuntarily or voluntarily given up, with no hope of a recovery, and so the tax code usually allows this to be a deduction against income.
To be clear, a taxpayer cannot just randomly designate stuff to write off. The first category is wholly defined by policymakers, and the second category requires an irrevocable declaration of the asset's worthlessness, such that a future (unlikely) recovery will be a new, separate taxable event.
(n.b. my context is USA taxes)
But what about charitable donations?
Charitable donations can fall under both categories. Note that the "categories" I spoke of are just what is used colloquially. The USA tax code doesn't really distinguish all these tax deductions into two neat groups.
A charitable donation can take the form of a business expense, say if a local welding supplier pitches in $100k to sponsor a regional vocational technology fair. They get to be a "platinum sponsor" and a spokesperson will speak during the event, so maybe some of that expense is actually marketing dollars and not purely philanthropic. The tax code may have specific rules, but most donations of this sort tend to be allowed.
Likewise, a charitable donation can be a way to extract a little bit of value from something near worthless. For example, fine art is known to be ripe for abuse in this way, where the donation of the artwork means the "market value" can be written off. But that market is easily distorted, and valuations can vary tremendously. Another example is the donation of development rights, whether or not a development was even possible under the zoning laws at play.
Charitable contributions can qualify as tax deductions because it's viewed as good policy, after balancing the upsides with the loss of government revenue. But some are clearly better policies than others.
Overly simplistic and assuming you are talking about the US: So you spent 80M making a movie but for whatever reason it never makes it out of production, you never see any return on this investment. But overall this year you made 100M from something else. When you do your taxes, you can "write off" this 80M spent as a loss, so you only have to pay taxes on the remaining 20 million. It doesn't deduct 80M from taxes owed.
hollywood accountants will inflate the internal markup for everything, shuffle some numbers around, and come up with a 300mil 'write off' across all the various corporate divisions and shit.
You've got some answers as to what specifically it is, but I'd like to chime in and remind everyone that the US tax system is maliciously complex and designed to fuck over people like you and me and help the obscenely wealthy.
Corporate tax rate is 21%, so by subtracting $80 million from their income they get a $16.8 million discount.
That's... Not very much in this context. Makes me think that WB is penny pinching, which doesn't make too much sense. Wouldn't it be better to release the movie and profit from it than just having a 21% discount?
I don't know, just thinking loud here...
I suspect the movie would likely make a profit, bit not enough of one. They'd rather take the loss to "play it safe" and not scare away institutional investors. Or something stupid like that.
Think like a gambler. What are the odds of winning a higher sum if you play the game, vs taking the guaranteed tax savings? It'll vary case-to-case, and is ultimately a subjective decision. That said, they have a very large dataset of historical examples to draw from to inform their decisions on the likely outcomes. They don't need to make wild guesses like a bunch of amateurs on the internet would.
Also, sometimes you want your money today, and not five years down the road. Corporate structure itself does not necessarily place a strong incentive on long-term success, since ownership of shares of corporations can be so fluid and rapidly changing. If you have no strong attachment to owning part of a company in five years, you have no real reason to care about it's long term health, and you'll naturally start to prefer $5 today over $10 tomorrow.
This is the main reason corporations end up as such a pain in the ass, and require oversight from multiple directions, from consumers in the market on up to regulatory agencies that are supposed to be independent of them. Their structures do not naturally incentivize much long-term thinking beyond what might be necessary.
I understand it to mean what's called a "deduction". This is an amount that you are allowed to claim that reduces your taxable income, which reduces the tax you pay. "Writing it off" means claiming the deduction.
Generally speaking, to be a valid deduction, an expense must be necessary and ordinary to running your business. In practice, a valid deduction is whatever your tax authority decides is allowable.
I am answering from the point of view of the Canadian income tax system, but what I describe here is pretty common throughout the world.
Here you go: https://en.m.wikipedia.org/wiki/Hollywood_accounting
A tax write-off is something that you 'lose' in order to offset what you owe in taxes. If you donate a car to a charity, you've losing the value of that car - because you aren't selling it, and thus that value 'lost' gets calculated against what you owe the government.
It doesn't mean you get all the money you spent back, it just means you get the taxes you already spent back and/or don't have to pay new taxes on it.
Going to add to this, the confusion comes from people saying something is a tax wire off as being a good thing. That confusion comes from the fact that a tax write off is essentially a "discount" compared to paying for something out of your own pocket post tax. You're essentially buying it for whatever percent cheaper you tax rate is. This is good if it's something that you gain value from, but bad if it's something like a wasted investment (though that gets complicated when you start actually assigning percentages to an investment's potential return as you hedge it, that's so far outside of my wheelhouse that it might as well be on the moon).