What Former President Trump’s Taxes Reveal About US Tax Law

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What Former President Trump’s Taxes Reveal About US Tax Law

What can we learn about US tax law from the intricate picture of former President Donald Trump’s taxes revealed by a New York Times investigation into his personal and company returns?

The first story in a series by The New York Times investigated Trump’s tax filings on September 27, 2020, 48 hours before the first presidential debate between former Vice President Joe Biden and then-President Donald Trump. The analysis highlighted significant legal, financial, and political dangers, as well as a history of shockingly low tax payments. According to The New York Times, Trump paid no federal income tax for 11 of the last 18 years, and barely $750 in 2016 and 2017. During the same time period, he pushed cash from licensing and TV earnings, securities sales, and large loans into failing firms, as well as incurring hundreds of millions of dollars in personally guaranteed loans from undisclosed lenders that would be due in the next four years.

Key Takeaways

  • Real estate investors benefit from particular provisions in the tax legislation.
  • Tax-cutting measures may significantly lower taxes, but they must adhere to strict guidelines.
  • The Congressional Joint Committee on Taxation examines large IRS refunds.
  • Debt deadlines and audit concerns have put former President Donald Trump’s financial situation in jeopardy.

Between 2000 and 2018, Donald Trump earned more than $427 million through “The Apprentice,” licensing, and sponsorships, allowing him to avoid paying income taxes. The tax code provides a “real estate professional,” or someone who is actively involved in the real estate industry, with particular regulations and privileges that are not accessible to other people. As a result, Trump could have used his real estate business’s tax losses to offset revenue from other sources.

Employees and taxpayers in other businesses must normally balance their income and losses individually for each source of revenue. Because of the unusual tax regulations, the former president was only one of many real estate executives who paid little or no income tax. The discoveries shed light on the specific tax breaks available to company owners and other rich people, notably real estate professionals, whose tax structuring may result in lower tax bills than average-income taxpayers.

For good reason, former President Trump has declared that he “loves devaluation.” The cost of erecting a building may be deducted as a “loss” over 27.5 years for residential real estate and 39 years for commercial buildings under tax law, even if the property’s fair market value increases over time. Trump properties are held through “pass-through” (also known as flow-through) entities—partnerships and LLCs—the standard industry practice for avoiding corporate taxation and allowing an individual partner or LLC member to report the entity’s income and deductions on the individual’s personal tax return, benefiting significantly from the latter.

Furthermore, tax law allows taxpayers to carry back or forward net operating losses (NOLs); however, for tax years beginning after 2020, NOLs may only be carried forward. According to The New York Times, Trump recorded losses of $915.7 million in 1985, which likely countered decades of estimated $600 million in TV, branding, and investment revenue. Although he paid $70.1 million in taxes from 2005 to 2007, the NOL regulations permitted him to carry back NOLs to these years and obtain a complete refund. This return seems to have been disputed retrospectively in the former president’s continuing IRS audit, as mentioned below.

  How Property Taxes Are Calculated

Alan Garten, a lawyer for the Trump company, questioned the Times article, calling it “inaccurate” in parts. He said that Trump had paid “tens of millions of dollars” in federal personal taxes since 2015. Garten may have been referring to Social Security, Medicare, and household employee taxes, as well as the federal alternative minimum tax (AMT), rather than income taxes, according to the Times. Garten also mistook the utilization of tax benefits for tax payments.

The tax calculations cited by The New York Times looked to represent Trump’s standard federal income tax responsibilities but may have removed the Alternative Minimum Penalty (AMT), a tax designed to discourage rich persons from wiping out their tax liabilities with massive losses. However, from 2000 and 2017, Trump’s total AMT was only $24.3 million; subsequent refunds seem to have lowered that figure.

Questionable Tax-Reduction Strategies

The New York Times piece detailed a series of operational and transactional tax claims that might pose significant audit concerns for the former president and his commercial entities. They also emphasized the ways in which the tax regulations allow enterprises to decrease their taxes.

Casino ‘Abandonment’ Loss

The New York Times’ study focused on several dubious tax-cutting tactics in Trump’s returns. The $70.1 million return for 2005-2007 seems to be due to the carryback of nearly $700 million in company losses declared in 2009. These losses were most likely the result of a claim of total “abandonment” of the Trump Atlantic City casino operation.

They would be legal if Trump got nothing in exchange for giving up his stake in the company. However, documents from the bankruptcy procedures show that Trump obtained 5% of the successor company’s shares, which would have negated any abandonment loss and restricted his deduction to $3,000 for the year.

Consulting Fees vs. Employee Comp vs. Gift

The presence of unspecified “consulting fees” across the filings may suggest a consistent method for reducing company revenue and taxes. The deduction of $747,622 in consultancy fees given to Ivanka Trump aroused various eyebrows. Ivanka should not have been paid as a consultant, or as an independent contractor, as an employee of the Trump corporation.

Consultant fees, unlike employee remuneration, do not incur withholding taxes from the payor. However, in order to be deducted, they must be fair, market-value quantities. Although a consultant is required to disclose and pay taxes, Ivanka may have avoided any tax responsibility. Ivanka, as a real estate professional, may have had enough real estate losses to balance the payout. This fee deduction may generate another difficulty with the IRS. Officials may query the price, which substantially exceeds the yearly gift tax exemption of $15,000 for 2020, claiming that it was a gift tax-free asset transfer to a family member.

  Tax Evasion: Meaning, Definition, and Penalties

Business vs. Personal Expenses

Although not all of Trump’s company costs are detailed, the piece does identify things that might be considered nondeductible personal expenses. On such premise, the IRS may deny deductions for aircraft used for personal travel and grooming charges for TV appearances. The New York Times questioned if the amount includes expenses spent to lawyers to defend Donald Trump, Jr. in investigations and the former president’s own legal settlements to acquire nondisclosure agreements from litigants since legal fees are disclosed as a flat sum.

Residence or Investment?

Additional difficulties arose at the Trump Seven Springs residential complex in Bedford, New York. Although Eric Trump categorized the property as a personal home, Donald Trump treated it as an investment and deducted $2.2 million in property taxes as a business cost. Property tax deductions for residential dwellings are limited to a $10,000 cap on state and local tax deductions.

Valuation of Conservation Easement

A $21.1 million charity deduction in 2015 for a conservation easement, one of four handing away the right to develop portion of the Seven Springs estate, may also be scrutinized by the IRS. A deduction of this kind represents the fall in a property’s fair market value after the gift. Tax experts disagree on whether certain conservation easements improve real property values, especially when they maintain the natural beauty of the donor’s remaining land. Given the widely publicized concerns about purportedly self-serving anomalies in Trump property appraisals for various reasons, the value indicated for the Seven Springs easement may be disputed.

The IRS and the Endless Audit

The intricacy and breadth of Trump’s corporate structure and finances, as well as his various aggressive tax stances, some justified and others dubious, would need a prolonged examination. Both the IRS and Trump’s lawyers are likely to vigorously defend their respective views. The Trump audit, on the other hand, has taken an unusually long time. One possible explanation is that the interaction of loss carrybacks and carryforwards necessitates unusual extensions of the statute of limitations for years that may be impacted by the settlement of claims in succeeding periods.

According to the New York Times, the $70.1 million refund for 2005-2007 was allegedly brought to the Congressional Joint Committee on Taxation (JCT) only after it was paid—not before—for scrutiny by the Committee’s neutral, experienced professional staff. The timing indicates that the IRS did not originally fight the refund claim or negotiated a preliminary settlement with the Trump company for at least one tax year. However, it seems that conversations between IRS officials and JCT workers are continuing. The chance that the JCT staff—the same panel that evaluated President Nixon’s taxes in 1974 and ruled some deductions improper—will disagree with the proposed return may be disturbing to both the IRS and Trump’s lawyers.

  Property Tax: How It Works

The Bottom Line

According to The New York Times, former President Trump earned hundreds of millions of dollars over the previous few decades, the majority of which came from “The Apprentice” and licensing fees. However, with the exception of Trump Tower and holdings in two buildings owned and run by Vornado, the Trump real estate firm generated massive losses.

Trump’s liquid assets look to be fairly restricted now that his “Apprentice” income has virtually gone, licensing payments are dropping, and most of his securities interests have been sold—all while massive real estate operational losses rise. Furthermore, obvious discrepancies between his tax return losses and his federal financial reports of yearly revenue in the hundreds of millions of dollars present both reputational and legal concerns.

In his current financial situation, the former president may face massive obligations. He will be personally accountable for $421 million in debts, the most of which will mature over the next several years. His exposure to lenders is eerily similar to his bankruptcy in the 1990s. Furthermore, according to the Times, his federal tax bills might approach $100 million.

Reports of Donald Trump’s tax evasion and potential financial liabilities may irritate average voters, who pay considerably more than $750 in monthly income tax, and damage his self-proclaimed image as a successful, intelligent billionaire.

Donald Trump is out of office now that the election is done. However, the investigations and the magnitude of the former president’s financial exposure, which he denied, as well as his failure to disclose his possible susceptibility to his anonymous lenders, have raised questions about whether there were any conflicts of interest while in office.

More than the New York Times’ findings on dubious tax tactics, its analysis of the chances that the tax system provides affluent company owners to legally avoid taxes—opportunities that most taxpayers do not have—could inspire widespread support for tax reform in the coming years.

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