NEW YORK–(ENEWSPF)–August 12, 2016
By: James B. Stewart
Mr. Trump has said in the past that highly paid corporate executives “get away with murder” on their taxes while boasting that he pays as little as the law allows. At the same time, he has insisted that his federal income tax payments are “substantial.”
No one I spoke to has seen Mr. Trump’s tax returns, because he has not released them. One obvious potential reason is that he reports little or no taxable income, and thus pays very little to support the government he wants to run. He is not obligated by law to make his returns public, but every candidate since Richard Nixon refused to has done so. (Gerald Ford released summaries.) Mr. Romney was harshly criticized for releasing just two years’ worth, and it became a major campaign issue four years ago.
Even though his recent returns are confidential, the notion that Mr. Trump has paid little or no tax is not entirely speculative. It’s consistent with Mr. Trump’s returns from the late 1970s, which he filed with the New Jersey Casino Control Commission when applying for a casino license in 1981. Mr. Trump reported losses and paid no federal income tax in 1978 and 1979 and paid only modest sums — a total of less than $75,000 — for the prior three years.
David Cay Johnston, a former reporter for The New York Times who has written extensively about Mr. Trump, reported in The Daily Beast in June that Mr. Trump also paid no income tax in 1984, citing a New York State Division of Tax Appeals ruling.
Their conclusions are reinforced by Mr. Trump’s extensive financial disclosures required of presidential candidates. His latest filing in May lists 564 entities in which he holds a position, usually president, director or “member.” Most are corporations, usually owned in turn by a limited liability company and associated with a specific Trump-owned property, such as the office tower at 40 Wall Street (the subject of four such L.L.C.s, each of which owns a major interest in the other). That does not count entities in which Mr. Trump does not hold any position.
He lists 188 entries under “employment assets and income.” Candidates are only required to list assets from which they earn more than $200; reporting money-losing ventures is optional.
L.L.C.s pass on income tax-free (and, equally important, losses) to their owners. Real estate L.L.C.s can generate enormous losses, even with millions in revenue, because of depreciation, interest payments, real estate taxes and operating costs. Mr. Trump can use paper losses to offset taxable income, such as interest, dividends, royalties and employment income.
That’s a loophole that was eliminated for most investors in the landmark tax reform legislation in 1986. But because of aggressive lobbying by the powerful real estate industry, so-called active developers like Mr. Trump were exempted from restrictions on using such paper losses to offset ordinary income.
The tax value of Mr. Trump’s paper losses may well exceed his investment in the underlying properties, because he and other developers typically make minimal down payments and use as much debt as possible to finance a purchase. To take just one example, Mr. Trump bought what is now the Trump National Doral Miami resort and golf club for $150 million while it was in bankruptcy proceedings and financed the purchase with $125 million in loans from Deutsche Bank.
Interest payments on mortgages and loans are deductible. How much total debt Mr. Trump’s properties have incurred is not known, but based on his latest financial disclosure (which shows only ranges), it’s at least $250 million and probably far more than that, with some estimates close to $1 billion. At an average interest rate of 4 percent, that deduction alone is worth at least $10 million a year and perhaps $40 million or more.
At least interest is a cash payment. Depreciation is a noncash charge, and is largely an accounting conceit that benefits real estate investors. The theory is that real estate loses value over time and is eventually worthless. As everyone surely knows, most real estate has historically appreciated in value.
How much Mr. Trump’s property investments might throw off in depreciation depends on what he paid for them, how much he’s spent on capital improvements and how the assets are categorized (some assets qualify for accelerated depreciation). But the 39-year depreciation schedule for commercial property, and purchases and capital investments of $2 billion (a modest estimate, given that Mr. Trump values his assets at $10 billion), would generate depreciation deductions of $50 million a year.
Depreciation is ordinarily recaptured and taxed when an asset is sold. But Mr. Trump and other developers can benefit from provisions that make that unlikely. If they sell appreciated properties at a large profit but use the proceeds to buy other real estate, the transactions may be considered a “like-kind” exchange. If so, there’s no tax on the gain.
Critics have called like-kind exchanges an outrageous tax loophole that benefits wealthy real estate developers and other investors to the tune of $33 billion in lost tax revenue a year. The Obama administration has called for repealing it, and several bipartisan measures to do so have been introduced in Congress, all to no avail given the gridlock over tax reform.
“It’s a big loophole,” Mr. Rosenthal said of the like-kind exchange provisions. “It allows well-to-do and well-advised taxpayers to defer their tax liability potentially until death.”
Mr. Trump’s business entities also deduct real estate taxes and all their operating costs and expenses, which might well include most of Mr. Trump’s living and travel expenses, because his personal and business lives are so intertwined. (Even his suits are presumably a business cost, because he has a men’s wear line.)
“The difference between business and personal costs can be a very fine line,” Mr. Green said, “especially for someone like Trump.”
If Mr. Trump’s losses exceed his income, they can be carried over into subsequent years and used to offset future income. Politico reported in June that documents from New Jersey’s Division of Gaming Enforcement and Casino Control Commission indicate that Mr. Trump had such tax-loss-carry-forwards in the 1990s, when his casino operations were under stress.
This may also explain why Mr. Trump has not disclosed many large charitable contributions, because the charitable deduction would be of scant value if he has little or no taxable income.
The enormous tax benefits available to real estate developers like Mr. Trump make yet another a compelling case for overhauling the tax system. But that’s not to say he’s done anything wrong.
“People aren’t obligated to pay taxes they don’t owe,” Mr. Green said. “It’s the job of tax professionals to use every legal means to minimize taxes, and I’m sure Trump has some of the best working for him. Many wealthy people pay no tax.”
But they’re not running for president.
“It is disqualifying for a modern-day presidential nominee to refuse to release tax returns to the voters,” Mitt Romney recently said on Facebook.
He, of all people, should know.
This commentary was published in the New York Times at: nytimes.com/2016/08/12/business/how-much-does-Donald-trump-pay-in-taxes-it-could-be-zero.html
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