https://www.accountingtools.com/articles/film-costs
I have a client who invested several hundred thousand dollars into a film project. For several reasons (including the pandemic and subject matter) the film is likely to be a huge loss. There were three partners but only one with the capital. The original operating agreement outlined a return of investment and a 1/3 split on profit and losses. As this movie will likely never recoup the original capital investment, the LLC operating agreement is being amended to assign 100% of the losses to the only partner that invested capital and has basis to claim the losses.
I intend to amortize the costs based on an estimate of earnings. There is no readily available source to estimate future earnings, but $10k over 10 years might be generous. If I amortize this out over 10 years (at straight line just for illustration), it will generate significant losses on 40-50k a year.
They attempted to push the film at the festivals (Cannes, etc) when it was first completed and it picked up very little traction. It now has a distribution agent for both US and worldwide audiences, but that agent is not able to come up with an earnings estimate. The total worldwide earnings for 2021 were not even enough to cover the agents out of pocket expenses.
1, does amending the LLC operating agreement to allow the only partner with basis to take the losses pass the sniff test?
2, does assigning a rather arbitrary estimate on lifetime earnings also pass the sniff test?
3, any exposure to hobby losses limitations here?
The whole project seems up and up, just happened to have some terrible timing and subject matter related to current events that unfolded over the last couple years.
Would you handle this any differently?