Movie Accounting - How Hollywood Accounting Can Make a Box Office Hit Unprofitable

Learn how movie accounting rips off actors and leaves producers for broke.

According to Lucasfilm, the Return of the Jedi earned $475 million at the box office against a budget of $32.5 million. However, the movie "has never gone into profit." What happens with Star Wars is not the only time box office hit movies have never returned a profit. Art Buchwald sued Paramount pictures calling Paramount's actions "unconscionable," noting that it was impossible to believe that 1988's Eddie Murphy movie Coming to America, which earned $350 million in the box office, failed to make a profit. Especially when the production costs were less than a tenth of that, Paramount would later settle for $9000, rather than have their accounting methods scrutinized. Even Marvel's Stan Lee, the co-creator of the character Spider-Man, had a contract awarding him 10% of the net profits of anything based on his characters. The film Spider-Man (2002) made more than $800 million in revenue, but the producers claim that it did not make any profit as defined in Lee's contract, and Lee received nothing. In 2002 he filed a lawsuit against Marvel Comics.

So what are these accounting practices Hollywood uses to make sure producers, actors, and other people from obtaining the royalties?

Hollywood Accounting is the way production studios avoid paying actors, models, filmmakers, and crew royalties or anything else based on a percentage of profit. Production companies overestimate your expenses, and through accounting practices, there is no profit, or at least a lot less of it - at least on paper, even if the movie makes billions of dollars. Movie Accounting works like this:

1. A movie studio creates a production company for the sole purpose of making one specific movie (or sometimes a franchise).
2. That production company charges the movie studio a lot of money (typically an artificially inflated amount) to make the movie.
3. When the movie comes out, the production company is absorbed back into the studio, so while the expenses and other transactions were recorded on paper, the money never actually went anywhere.

The costs are then charged out to, for example, CGI companies, script companies, companies owned by actors and directors. It's an efficient way of distributing profit and saving money if it tanks. It's important to point out that the IRS already took this to court and "lost" as it was found that tax evasion wasn't behind it, just accounting practices to suit the way Hollywood does business. Some people argue that the real reason why Hollywood engages in this form of account practice is to stiff whomever they want out of money. Imagine if someone isn't playing ball, then whichever company is paying them stops making money. They get nothing - even if it's not tied to gross or net or whatever. It makes it easy to switch the cash taps off in any direction. The more complicated it is, the easier it is for shady stuff to go on, but it's not as though it hasn't been looked at in detail.

History of Hollywood Accounting

• According to Lucasfilm, Return of the Jedi, despite having earned $475 million at the box office against a budget of $32.5 million, "has never gone into profit"
• The estate of Jim Garrison sued Warner Bros. for their percentage of the earnings from the film JFK (1991), which was based on Garrison's book On the Trail of the Assassins. The case was settled in 1999, with Garrison's estate getting a "very small settlement.
• Gone in 60 Seconds grossed $240M at the box office, but the studio said a $212M loss, fundamentally through Hollywood accounting as described on NPR.
• 21st Century Fox was found guilty of using Hollywood accounting method to deceive the producers and stars of the drama Bones and directed to pay $179 million in missing profits.
• Michael Moore sued Bob and Harvey Weinstein for creative accounting to strip him of his percentage of profits for the movie Fahrenheit 9/11. Ultimately, Moore entered an arrangement with the Weinsteins and the lawsuit was withdrawn.

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