Hollywood, California, that city where every aspiring actor or actress dreams of making it big. This is where those big budgeted blockbuster movies are produced and made. Where one’s creativity and talent could be the key to instant gratuity and fame. And speaking of creativity – apparently in Hollywood creativity is not just limited to talent or writing, but is also prevalent in terms of how they account their finances.
Creative accounting or more notoriously known as “Hollywood accounting” has been the dirty method used by studios to cheat their way through royalties and profit sharing. It won’t be a surprise to know that these studios might also be applying this “creative accounting” in declaring their taxes.
The unfortunate part here is that they are able to lure writers, lower ranking actors and other production staff into believing they will be getting bonuses once the net profit has kicked in. Net profit being the remainder after all the deductibles have been removed from the gross sales. This is where all the creativity begins because the studios will make it appear that there was no profit at all, only losses. So kaput to all of those people expecting to receive extra cash. It is like gambling on something, then you win, but then the house takes back all your winnings.
What studios do is inflate their overhead costs to make it look that they are losing money instead of profiting. Three ways they can do this are either through production, distribution, or marketing overhead costs. They create subcompanies to do specific tasks and then the main company devices ways to extract money from the subcompanies by charging it for services rendered.
Take for example the movie “Harry Potter and the Order of the Phoenix” – the 5th installment of the world’s favorite boy wizard and his journey in discovering his magical powers. This movie raked in almost a billion dollars at the box office. Yet, from a recently leaked accounting report, apparently, magic was also used to compute for the movie’s accounting, because the report shows that the movie did not profit at all but instead is down by $168 million.
Along with Forrest Gump, Coming to America, Rain Man, Who Framed Roger Rabbit, and even Spider Man to name a few lay claim that these movies caused losses instead of profits. Peter Jackson, director for Lord of the Rings, sued New Line Cinema because of Hollywood accounting. And the list just goes on and on.
If people are to believe the accounting reports of these companies, it will show that only 5% of the movies being produced and made are actually making a profit. The strange thing about this is that if production companies are losing money, how come they continue to produce the big budgeted sequels? And isn’t profit the income of the movie which is subject to tax? If that is the case, this clearly shows that there is an intent to cheat not only the movie people, directors and other production staff but also the government as well. Why hasn’t the IRS looked into this and scrutinize the accounting methods and do a full audit? The world is a strange place indeed, because if the IRS can hound regular people who have had the error of committing an oversight on their tax declarations and subject them to an IRS audit then why can’t the IRS do this with big production companies?
Speaking of tax audits, the IRS would usually launch one if there is evidence of suspicious activity. Then, they should start looking into these companies’ books and question how they account for their finances. Isn’t it suspicious enough that these companies are willing to settle in court (as with the case of Art Buchwald for the movie Coming to America and Stan Lee for Spiderman) so as not to be audited?
The country is still struggling with recession and scrutinizing these production companies / movie studios might help the IRS in recovering lost revenue, because of some accounting malpractice and/or oversight. Hope they can smell the stink of Hollywood.
To conclude, I’m quoting a line from John D. MacDonald’s 1981 novel Free Fall in Crimson: “Darling! This is the industry. The really creative people are the accountants.”
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