Though it appears that the stars who walk the red carpet during award season are the rulers of Hollywood, we will just say that looks are deceiving. It is not the powerful producers either. No, the ruling class of Hollywood is the accountants.
Hollywood accountants are akin to financial magicians, making millions of dollars in profits vanish into lines of numbers, piles of paperwork, and complicated contracts that would make the average worker’s head spin.
Take for example one of the most popular movies of all time – The Return of the Jedi. The budget for the film was $32 million and the movie grossed $475 million. Basic arithmetic would lead one to believe the movie made $443 million.
Like the sets, makeup, and costumes though, profits are deceiving. On paper, this epic movie has grossed $0.
Zero Profit Cult Classics
Studios create a corporation for a movie, then charge the corporation a massive fee that is sure to overshadow sales. Therefore the movie is a loss on paper, giving stakeholders massive tax write-offs. Essentially studios, directors, producers, actors, and production companies make complex arrangements to split the revenues to ensure there is no profit.
They bicker over net profits, gross profits, and flat fees when creating the corporation, causing a headache for accountants. Money becomes complicated when it has to be essentially laundered through a chain of businesses set up by the studios, talent, unions, and production companies.
Profits are written off through exorbitant expenses including
- Travel Expenses
- Special Effects
- Cost of getting a movie to the theaters
- Fees charged by studios
Talent takes a hefty chunk of money out of the taxable equation. Some actors work only for a flat salary. Others work for a piece of the gross receipts. A few foolishly agree to a piece of net profits as compensation and are left out in the cold, such as the actor who played Darth Vader at the end of Return of the Jedi.
The tricky part is that all of the people behind the money are buddies, sheltering each other’s money through complex accounting and slick business arrangements. When deals go bad, accountants are called in to review everything for the courts; audits that can take months. Hollywood accounting is confusing at best, and shockingly abusive of the tax code at worst.
Without savvy accountants working to keep money flowing from one production to another, movies would cease to exist on the grand scale we have come to know and love. Hollywood is America’s favorite tax sham, and the accountants are the ones that make it all possible.
Learn more about accounting at the Veriti website.
photo courtesy of Ron Riccio under Creative Commons License