Movie Tax Write-Downs Help Studios Profit at Public’s Expense

The recent decision by Warner Bros. Discovery Inc. to shelve and write down a completed film stirred up a significant backlash following a mixed third-quarter financial report, after which Warner Bros. decided to shop the film to other distributors.

Warner Bros. isn’t alone in attempting to write down “Coyote vs. Acme”—many films and productions have taken similar routes. The practice of receiving tax incentives for film production only to ultimately write down, or write off, the production takes public money from states and federal coffers to manufacture tax losses, not produce movies.

When a film is cast into the dustbin of history for tax purposes, the public is helping offset movie studios’ gains and line studio heads’ pockets. If there’s any policy rationale for incentivizing film production, such as fostering cultural production or providing a stimulus for the arts, it’s wholly lost when the film is never released. The relationship between state tax incentives and federal tax policy needs to be reevaluated to ensure that productions receiving these incentives are not being used primarily as a means to generate tax losses.

Movie Production Incentives

Tax breaks for movie studios, which are available in more than 40 states, are inefficient at job creation and local economy stimulus. The average state subsidy is around 25 cents on the dollar for qualified production expenses, but movie productions operate somewhat nomadically. Other than placing a burden on local infrastructure, they do little to affect the local economy.

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.

But it turns out there are few economic benefits, and the reputational boon is substantially diminished when the movie never comes out and instead is sacrificed on the altar of tax planning.

Such incentives aren’t limited only to state tax codes; Section 181 allows for the treatment of qualified costs for film and television production as an expense and deduction, up to the first $15 million of costs at the federal level. There are substantial tax savings opportunities in the movie and television production business—but they’re funded on the backs of taxpayers and at the expense of other potential avenues for tax expenditures and spending.

Wile E. Coyote artwork is displayed at the Chuck Jones Experience at the Circus Circus Hotel-Casino in Las Vegas in 2012.

Photographer: Ethan Miller/Getty Images for the Chuck Jones Experience

Bad Deal Made Worse

An impairment charge, or the process of writing down a movie, traditionally was reserved for rare cases in which a world event or material change in a studio’s finances rendered the carrying cost of a given production as higher than the expected recoverable amount. For example, you might expect a big-budget movie about a worldwide pandemic to become substantially less profitable around March 2020.

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.

Solutions

States need to be deterred from destroying themselves in a race to the bottom. Expanding the federal credit but implementing a dollar-for-dollar reduction for any film production incentives received at the state level is one option. This places downward pressure on state incentives and may be a catalyst for states to attract studio attention through traditional means rather than tax dollars.

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.

An impairment charge is a function of internal accounting. The carrying cost of a given production is a complex mix of production costs, distribution costs, and even intangible concerns such as reputation and brand recognition.

There’s an element of judgment involved in coming to a carrying cost total, and the current policy motivates studios to arrive at the highest plausible cost. That math needs to be double-checked.

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.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social