Your Money

Your Money Capital Games

By Allan Rolnick, CPA

Back in 2000, a scrappy little startup named Netflix was losing millions every month on their business renting DVDs online, mailing them to subscribers through something called the “Post Office.” (Remember them?) The founders had the bright idea to sell their company to Blockbuster video – for the princely sum of $50 million – and turn themselves into “Blockbuster.com.” Blockbuster said no, and now they’re corporate roadkill. Netflix is the 800-pound-gorilla in the streaming video world, spending billions annually to create new content in 37 different languages.

Netflix’s newest blockbuster is a South Korean mashup of Sesame Street and Hunger Games with 456 contestants who find themselves risking their lives to play a series of children’s games for the chance to win ₩45.6 billion (approximately $38 million). Critics love it (the review aggregator Rotten Tomatoes gives it a 93% approval rating), and it’s on track to become Netflix’s most-watched show ever. One in four Americans says they’ve watched it since it dropped on September 17.

So…does Netflix’s newest success have fans at the IRS cheering, too? Netflix doesn’t report earnings for individual programs. However, they do calculate something called “impact value.” For this new show, that amount is $891.1 million. Net-

flix also calculates an “efficiency score,” which measures a show’s value over its cost. The show cost just $24.1 million to produce, making the efficiency score an impressive 41.7.

Unfortunately for the IRS, those numbers don’t translate into taxes. In 2018, Netflix reported $845 million in profit but paid nothing in tax. (Bernie Sanders criticized them for paying less than your monthly subscription.) In 2020, with COVID-19 keeping people inside bingeing, the company earned $1.7 billion but paid just $24 million in tax. There’s nothing shady about it – they use accelerated depreciation, deductions for employee stock options,

In 2020, with COVID-19 keeping people inside bingeing, the company earned $1.7 billion but paid just $24 million in tax.

and research and development tax credits to zero out their bill. (In other words, don’t hate the player, hate the game.)

But this show is already putting tax dollars into Uncle Sam’s pocket, long before Netflix reports any increased earnings from new subscribers. That’s because the show has pushed the stock price up by over 7% since it premiered. That, in turn, means every time investors sell, they pay just a tiny bit more in capital gain and net investment income tax.

What about the show’s ultimate winner, Contestant #______? (No spoilers here!) South Korea’s income tax starts at 6% and rises to 45% on income over ₩1 billion. There’s a 9% Social Security tax, split between employer and employee just like here in the U.S., capped at ₩226,350/month. Of course, that assumes that playing “Red Light, Green Light” to avoid death counts as “employment” in South Korea.

We’re going to assume your business and investments don’t involve nearly as much risk as the show’s version of tug-of-war. But we know you aren’t interested in sharing any more of it than you legally have to. So call us when you’re ready to play, and let us help you win the Capital Games!

Allan J Rolnick is a CPA who has been in practice for over 30 years in Queens, NY. He welcomes your comments and can be reached at 718-896-8715 or at allanjrcpa@aol.com.