I haven’t seen President Trump’s tax returns. I start there. No matter how many times today I’ve been asked to offer my “take” on returns, I can’t give a more honest answer than “I haven’t seen the returns”.
However, I have read the very detailed article in the New York Times
So here are some answers to common questions raised by some of the titles that are sure to arrive this week. I’ll update my answers as the story progresses.
I thought you once said you couldn’t find anything out of a tax return?
This is what President Trump said in 2016, stating: “You learn nothing from a tax return.”
But that’s not what I said. I wrote the exact opposite in 2016, noting that “a tax return isn’t just a bunch of numbers. It’s a snapshot of your financial life. “Not only do you have a better understanding of where taxable income comes from, but you can also see potential bankruptcies in losses and troubling positions with investments and loans. When it comes to the taxpayers they detail, you can know the charitable deductions (not just the amount but where it is distributed), property taxes, real estate, etc. You can also collect information on the existence of offshore accounts, home employees, rental properties, and more.
However I have tweeted that “tax returns (even those officially submitted) are not mandatory when it comes to wealth”. I agree. One of the flaws of reviewing tax returns alone is that they are not a reliable measure of a person’s net worth.
It looks like Trump’s returns are really in check. But I thought you agreed that he couldn’t issue his tax return while he was under control?
No, if Trump wanted to release his tax returns, even in the middle of an audit, he could. There is no prohibition against it. Former IRS Commissioner Koskinen agreed that this was the case in 2016. Whether or not it’s a good idea is another matter: many tax professionals, like me, weren’t so sure that to publicize a tax return while under control was a good idea.
This audit appears to have gone on forever. I understand the statute of limitations (more or less), but why should you reject it?
The Times said records show there is a verification of Trump’s 2009 refund. The refund request remained in commission, “unresolved, with the limitation period repeatedly pushed forward”.
By statute, the IRS cannot review your returns forever. There are deadlines and the IRS must resolve exams and other issues within a certain period of time. If the IRS doesn’t fix the problem by the end of the period, it’s done. BUT. Sometimes, there is an advantage to extending the time, but it is generally done by written agreement (you may have seen Form 872, Consent to Extend Time to Assess Fees first).
If you don’t sign the consent, the IRS can go ahead and publish its results. Once that happens, the clock starts rolling over your options which generally at this point mean going to court if you disagree. So, if you think you can reach an agreement, you could sign the consent to buy a little more time. You could also do this to keep the matter out of court (which could be what’s happening here).
I tried looking for it after reading the story, but couldn’t find line 56 on form 1040. What is it?
Line 56 – total tax after adjustments but before taking into account taxes such as self-employment and housework taxes – existed in 2014. But if you’re looking for it now, you’re out of luck: there’s no line 56 up IRS Form 1040 for tax years after 2018 due to revisions of the form due to, among other things, the Tax Cuts and Jobs Act (TCJA).
All right. Let’s talk about tax specifics. First, what is depreciation really?
Trump previously advertised the benefits of depreciation, suggesting that losses on his tax returns do not translate into losses in a portfolio. There is some truth in this because depreciation is a tax and accounting construct: you don’t actually “lose” value on the property every year when you depreciate it.
For federal income tax purposes, depreciation is a deduction that allows you to recover the cost or other basis of certain properties. It can be complicated, but you generally start to depreciate your property when you first put it into service. The IRS considers property “put into service” when it is ready and available for use, not when you actually start using it. So, for example, if you buy a car for your business, it’s ready and available once it belongs to you, not necessarily the first time you take a drive. The cost of the item is amortized over its useful life (based on the type of ownership) unless an exception applies.
Here’s how it works. Let’s say you bought a commercial property for $ 1 million in 2000. You generally can’t claim the deduction in year 1 even if you paid cash for the whole thing. Instead, you have to depreciate the property over its useful life (in this case, it’s 39 years), which means you have to deduct a little every year until the end of its useful life.
And when you sell or otherwise transfer depreciated property, you may need to recover the depreciation, which can increase your tax bill. It can be complicated.
This is why the Times noted that “Depreciation, however, is not a magic bullet …” It does not simply create losses out of thin air. You can read more about depreciation here.
OK understood. Now, how does the cancellation of debt income work?
According to the Times, Trump has failed to repay at least $ 287 million since 2010. Normally, a failure to repay that type of debt would result in a chargeable event.
If the cancellation of the debt is less than the amount owed, the amount of the canceled debt is considered income and may be taxable unless an exclusion applies. The most common exclusions include bankruptcy, insolvency and indebtedness of the qualifying primary residence.
If you are not eligible for exclusion, you typically need to report income and pay tax in the year of forgiveness.
The Times says Trump was able to offset some income from losses and extend tax payments by taking advantage of a provision as part of an Obama-era bailout that allowed income to be deferred from canceled debt for a period of time.
And in a nutshell, how do business losses work?
This is a tall order. But here’s the gist: Business losses are sometimes called net operating losses (NOLs). A NOL generally occurs when the tax deductions exceed the taxable income. If that number is negative in one year – but was positive in other years resulting in tax due – it just doesn’t seem fair. The NOL exists so that we can balance this inequality. In other words, you can use the loss in one year to lower your taxable income and reduce your tax burden in another year.
(Don’t confuse holding losses with a NOL – they’re not the same.)
Under existing tax laws, if you have a NOL, you first carry the full NOL amount over a number of years, and if you still have a NOL remaining after reporting those losses, you can carry the losses forward. You can also choose not to report a NOL and only carry it for up to 20 years. A carry-over means that you can apply the loss to your income in a future year.
NOLs can be complicated (you can read more here) and it’s not unusual for the rules to change during an economic crisis.
According to the Times, Trump reported huge business losses – a total of $ 1.4 billion from his core businesses for 2008 and 2009. Before the bailout, those losses could only be rolled back two years. But the bailout has extended the gaze to four years: The Times says it allowed Trump to recover the taxes he paid when The apprentice it was profitable. This resulted in a high refund – this is the problem that presumably led to the refund being verified.
So what happened with the refund?
If you pay too much tax, you may be eligible for a refund, but you already know that.
This is simply what the Trump camp claims happened here. But the Times article seems to suggest it’s more complex: by racking up losses (the legitimacy of which may be in question), he was able to generate a $ 72.9 million tax refund (taxes paid from 2005 to 2008, plus interest ).
Ok, I get my refund. So why was there a verification?
By law, refunds of over $ 2 million for individuals ($ 5 million for corporations) require IRS approval and a report is sent to the Joint Taxation Committee. This may involve verification – that’s what apparently happened here.
I have literally never heard of abandonment when it comes to taxes. What is that?
Surrender occurs when a taxpayer deliberately relinquishes ownership of a property (including interest in a partnership). The IRS takes a few factors into consideration when evaluating whether the property was abandoned, including the property prior to abandonment, whether there is an intention to abandon, and the actual steps for abandonment.
The Times believes Trump may not have abandoned his property in his Atlantic City casinos, leading to losses. He turned away from them in 2009, telling the Securities and Exchange Commission he was “abandoning” his stake.
If a loss is considered an abandonment loss, then it is generally deductible like an ordinary loss: this means that the full value of the loss can be deductible. It is huge.
But instead, if it is considered a sale or exchange, which means that you received something in exchange for the removal, it is treated as a capital loss. These losses are limited to $ 3,000. Trump reportedly received an interest in a new company after the bankruptcy of the company he claimed to have left.
Trump’s abandonment losses for 2009 – which led to reimbursement – were reportedly $ 700 million. To quote Jon Lovitz’s character, Ernie Capadino, in A league of their own: That would be more, wouldn’t it?
Ok, now explain to me the difference between the tax treatment of a house and a real estate investment.
It’s pretty easy: you generally can’t fully deduct the expenses associated with maintaining your home, whereas you can with a real estate investment. Good examples of limited deductions include real estate taxes and mortgages, which are limited for homes (but not typically for real estate investments).
The Times suggests that Eric Trump characterized the Seven Springs property as a “base” in a Forbes article. Do you know what they are talking about?
To be honest, I didn’t. But I found the article for you. It’s here.
Can you really cancel the styling fees?
You can’t deduct an expense just because it’s desirable or makes you look more professional – this goes for hairstyles, makeup, accessories, and more.
The same generally goes for uniforms and costumes (believe it or not, this post referencing ABBA’s costumes remains one of my most popular to date).
To request a deduction for business expenses, section 162 of the tax code requires that the expense be “ordinary and necessary”. According to the IRS, an ordinary expense is the one that is common and accepted in your business or business. The IRS defines a necessary expense as “a useful and appropriate expense for your business”. (You can read more about business expenses here.)
As a tax attorney, I cannot claim that hairdressing fees, even if I have to look professional in a courtroom, are ordinary and necessary. But could anyone appearing on television? Could be. But for television / cosmetic appearance only, not for personal convenience or other unrelated business use.
(Note that any unreimbursed labor expenses for employees have been eliminated for the 2018-2025 fiscal years as a result of the TCJA, but business expenses remain deductible for self-employed and businesses.)
Can you cancel the attorney’s fees?
The same rules generally apply to styling fees such as legal fees. Yes, for real. Legal fees also need to be ordinary and necessary in your business to be deductible.
Believe it or not, fees paid to a criminal defense attorney can also be deductible. While lawyers and judges have squabbled over the details over the years – even carving out public policy exceptions – the rule is that if the action otherwise means the criteria for a valid business expense, it’s deductible.
There is, however, one notable exception: no deductions are allowed for legal fees incurred in purely personal litigation.
Can you explain why the “20 PERCENTAGE SOLUTION” is even a problem?
Again, I have not seen the returns and cannot speak to the validity or appropriateness of the consultancy payments. But what caught my attention – and I’m sure other tax professionals too – is the alleged consistency of the size of the payments (20%) regardless of the transaction. There may be a compelling reason for such a thing and this is an example of where additional documentation is key.
One of the things I tell my clients is that your records should always support your deductions – rounding up or guessing isn’t enough. And this is especially true when those numbers indicate a pattern. Numbers that seem too good to be true are almost always a red flag. The IRS knows as well as you do that your office phone bill isn’t always $ 100 and your cleaner doesn’t make 10% of your monthly income.
Is it a crime for the New York Times to have returns?
A lot has been asked of me. Some taxpayers believe their tax returns are private … which is only partially true.
No Internal Revenue Service (IRS) employee has the right to simply browse through taxpayer records – it is against the law to inspect tax returns without being authorized to do so. Congress, claiming to “view any unauthorized inspection of tax return information as a very serious offense,” passed the 1997 Taxpayer Browsing Protection Act (public law No. 105-35), which made such inspection a felony. .
And the Internal Revenue Code mandates, in section 6103, that “returns and information about returns must be confidential” unless otherwise authorized.
Under section 7213 of the Tax Code, intentional unauthorized disclosure of any restitution or restitution information by a federal employee (and certain other persons) is a crime; and under section 7431 of the Tax Code, civil damages may also be appropriate for intentional or negligent violations, depending on the circumstances. Also, if convicted of such a crime, a federal employee can be suspended or fired. But those rules apply to federal employees, not private citizens. A private citizen, such as a spouse and / or former spouse, can legally have access to a taxpayer’s tax return. Also, once tax return information is disclosed to a third party, that information is no longer protected by federal tax laws.
According to the Times, the document “obtained tax return data spanning more than two decades for Mr. Trump and the hundreds of companies that make up his business organization, including detailed information from his first two years in office.” The Times refused to provide the documents for review to a Trump Organization lawyer “in order to protect his sources.”
So, I don’t know if they got the records legally, but simply having someone else’s tax or financial information is not a crime.
What else should we look for?
It can be fun to play an armchair (tax) detective, but as you read the articles this week, do me two favors:
- Be attentive to what you are reading. Rely on reliable sources and, where possible, combine tax elements with sections of code or court cases. Don’t assume that something is true just because your favorite expert says it.
- Be patient, but not necessarily contemptuous. Again, the Times claims to have the returns: Most other tax writers, like me, don’t. So we rely on what we believe to be good information, and that’s not all. But that doesn’t mean you should ignore everything. The Times raises some valid questions that shouldn’t be ignored. As I read the article and your questions, something comes to mind that Don Fort, head of the outgoing IRS-CI, used to point out: Voluntary compliance is the foundation of our tax system and no one is above the law.