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Hollywood accounting is the practice of big studios of making successful movies into what looks like a financial failures on purpose and through questionable accounting tricks. The goal is to show no profit despite the movie actually being profitable, in order to not having to pay anyone who negotiated for a cut of profits.

This practice has been going on for a long time, and certainly pretty much everyone in the industry must be aware of it, but at least the lawyers and agents that negotiate the contracts.

So why does this practice still continue? Why is there apparently no wide-spread, effective boycott by movie makers and actors, why do people still accept a percentage of profits as payment, as opposed to a percentage of gross earnings?

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2 Answers 2

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What you need to remember is that in financial negotiation, the accounting department will never overtly declare that they are pursuing 'Hollywood Accounting', it is often something instigated through people being misled. The wording/circumstances are often rephrased to evade detection: I believe 'Net Point Profit' was the circulating terminology for a long time, but has since fallen out of style as people have becomes immediately aware of its real definition.

David Prowse was a famous example of this, the man who 'played' Darth Vader...

After seeing how lucrative Sir Alec Guiness' net-point deal was, he signed on for a similar payment. What Prowse failed to realize however, was that Guiness' deal included the merchandising wing of Lucasfilm, not just the Movie itself. This resulted in Prowse still not being paid to this day, whilst Alec Guiness' estate continues to receive residuals.

In the case of Actors/talent, they often have little choice in the matter: if they want a part in the movie, they'll get what their given, and hope that the finance department is fair in the execution of debt owed. Although not 'Hollywood Accounting', Jonah Hill is a recent example of this 'desperation' to be in a movie, taking only $60,000 for The Wolf of Wall Street, because it was the only way he could get Scorcese's people to agree to his involvement. That's a mainstream, Oscar nominated actor taking a financial hit to secure his role, so sometimes Actors will just take what they can.

Many 'in-house' department actually benefit from 'Rolling Profits', so if they are in on it, it makes sense to go along with the scam.

A good way to keep a movie out of profit is to keep going back and paying different departments for work 'owed', and delivering bonus' upon bonus'. If you've worked on the film, and are 'in on it' (and willing to co-operate), if the film is successful there's a good chance you'll receive some kind of surprise 'bonus' (who's real purpose is to stop the film having to commence net-point payouts).

As you've pointed out, there perhaps should be some kind of 'United We Stand' front against this kind of behavior, but unfortunately there are too many people complicit in its process, and the old system of 'Unions' was broken apart by the rise of the New Hollywood in 1969, so the only formidable force left in Hollywood is the SAG & WGA: which are themselves complicit in this process.

Unfortunately, Hollywood Accounting is borne out of two factors: Greed and Ignorance.

Until they are eradicated, its likely the practice will continue...

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Some people call it a desperate move, but who wouldn't agree to just about anything to co-star in a movie next to DiCaprio, and directed by frickin' Martin Scorsese? Not to mention he's nominated for Best Supporting yet again, so after this I doubt he'll have any trouble convincing anyone he's worth whatever role he's cast in. –  MattD Jan 31 at 15:41
    
@MattD, totally, I think he knew what he was doing. He's the best part of the Movie too! –  John Smith Optional Feb 1 at 13:51

Hollywood accounting tries to maximise the tax rebates from the various states/countries where the movie is being made, while reducing the payments made to third parties (tax payments etc).

It's not really a scam. "Creative accounting practices" are not only observed in the film industry. Google, Amazon, Starbucks and other well-known companies are using various techniques for tax avoidance and maximum gains from local laws.

While not illegal, some find these accounting practices immoral...

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"Hollywood accounting tries to maximise the tax rebates from the various states/countries where the movie is being made." That's not what Hollywood Accounting is –  Darrick Herwehe Dec 7 at 16:39
    
It's exactly that. From Darrick's article: "How can a movie that grossed $475 million on a $32 million budget not turn a profit? It comes down to Tinseltown accounting [...]. Like any company, it calculates profits by subtracting expenses from revenues. Erase any possible profit, the studio charges this "movie corporation" a big fee that overshadows the film's revenue. For accounting purposes, the movie is a money "loser" and there are no profits to distribute." Compare it to this –  arkadian Dec 7 at 23:04
    
From your excerpt: "The studio charges this "movie corporation" a big fee that overshadows the film's revenue." That has nothing to do with taxes. It's more like setting up a shell/dummy corporation than tax avoidance. –  Darrick Herwehe Dec 8 at 13:49
    
But that's exactly what Google, Starbucks, Amazon et al are doing. The UK operation of Starbucks apparently loses money, as they have to pay a very high price to Starbucks in Switzerland to source the coffee. The money is just moving to the owner company, in the most efficient/creative way. The studios, just do the same for each film, not for each country. The fact that, in the studio case, this process also affects those with royalties, not just the taxman, doesn't make it different. –  arkadian Dec 8 at 14:10

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