Tax Law

What Do Taxes Have To Do With The 'Batgirl' Movie, Electric Vehicles, And An Unborn Fetus?

Let’s look at each in turn.

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tax-468440_1920Over the last week, three stories involving taxes made the news and raised interesting discussions. Was the “Batgirl” movie cancelled for tax reasons? Are the new EV tax credit rules going to reduce the cost of EVs? And what is Georgia’s fetus dependent tax deduction law going to accomplish? Let’s look at each in turn.

The “Batgirl” Movie Was Not Cancelled For Tax Reasons.

Earlier this month, Warner Bros. Discovery (WBD) announced that its upcoming movie “Batgirl” has been cancelled even though filming had been completed and over $90 million was spent to date. A film being scrapped this late is very unusual (although it has happened before), so people were speculating about why this happened. One reason is that WBD wanted take a large tax write off. While this is true, the potential tax savings isn’t as large as some people think and probably isn’t the main reason for the movie’s cancellation.

By cancelling the film, WBD’s tax bill will not be reduced by $90 million. Instead, WBD will reduce its taxable income by that amount and the tax savings would be a fraction of that. Even less if outside investors helped finance the film. With the federal corporate tax rate at a flat 21%, the tax savings will be $18.9 million with additional tax reductions at the state and local level.

On that note, it would make no economic sense for WBD to spend $90 million to save about $20 million in taxes.

Also, the IRS could completely disallow the use of the “Batgirl” production expenses to offset WBD’s other income if it believes that the movie was made with no expectation of profit. There appears to be numerous credible business reasons for cancelling the film that has nothing to do with tax avoidance. And since WBD is a major entertainment company, it is highly unlikely that tax authorities would take this position unless they had serious evidence.

Finally, WBD has also made additional extreme cost-cutting measures, mostly due to its merger earlier this year. An example of this is when WBD shut down the CNN+ streaming service a few weeks after its launch, despite spending $300 million.

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The Inflation Reduction Act EV Tax Credit Provisions Might Inflate Prices For Certain Vehicles And Slow Its Adaptation.

Yesterday, the Inflation Reduction Act was passed, and it created new tax credits for the purchases of electric vehicles (EV). But these credits come with rules that limit which cars and taxpayers qualify.

First, cars that cost over $55,000 and trucks and SUVs that cost more than $80,000 are ineligible for the credit.

Second, individuals making more than $150,000 or married couples with a joint income exceeding $300,000 are ineligible for the credit.

Finally, the Act requires that final assembly of qualifying clean vehicles occur in North America.

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These rules could actually increase the cost of certain EVs. In anticipation of the law’s passage, people were advised to buy an eligible EV before the law passes. So the last-minute rush to purchase the EVs that still qualify for the credit could have resulted in buyers paying a premium on top of the already inflated prices of cars due to the chip shortage.

Also, since the price and final assembly rules limit which cars will qualify for the credit, there may be more demand for the cars that do qualify. This could result in dealers charging a markup which could reduce or eliminate the tax credit.

Time will tell as to whether domestic auto companies will adjust their operations so that their EVs can qualify for the tax credits.

Previously, I stated that if the government is serious about switching away from internal combusting engines in the long term, it should provide incentives to get more people into EVs, rather than trying to meet some ambiguous goal of economic fairness. These limitations will likely reduce the number of people who will purchase EVs which can affect Biden’s climate change goals. It may also increase the cost of existing EVs that qualify for the credit due to increased demand. It reduces consumer choice which could encourage manufacturers and dealers to maintain high prices for qualifying EVs. Lastly, as foreign auto companies have complained about their cars being ineligible for the credit, their governments may see this as a tariff and may respond in kind, thus increasing prices for everyone.

This doesn’t sound like inflation reduction.

Georgia’s Unborn Fetus Tax Deduction Does Not Make Fiscal Sense.

As others have written previously, the state of Georgia’s Department of Revenue has issued a special ruling that states that an unborn child with a detectable human heartbeat is eligible for dependent personal exemption which will reduce an individual’s tax bill. This is only applicable for the state income taxes and will not reduce the taxpayer’s federal income tax. This was in response to the Supreme Court’s recent decision that eliminated the federal constitutional right to an abortion.

It seems obvious that pregnant women can qualify for this deduction. But it is not clear as to whether the unborn child’s father can claim the deduction as well.

This ruling seems to do more financial harm than good. The state’s tax revenue could be significantly affected if claimed by enough taxpayers. But to the individual claiming the deduction, the tax savings will likely be minimal since state income taxes are lower than federal income taxes.

Will this ruling encourage behavior that benefits society or reduce governmental burdens that would justify the revenue decline? A small state tax savings is not likely to encourage or discourage pregnancy. Nor would it discourage abortion as the cost of raising a child would be considered a lot more than being able to claim a fetus as a dependent.

So taking the above into consideration, this ruling seems to do little more than make a political point. It does not accomplish the tax policy objectives of raising government revenue or encouraging actions beneficial to the state. Since Georgia has recently become an election swing state, this ruling could backfire and create or exacerbate problems for pro-life politicians in the state.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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