The New York Times' reporting on Trump's tax returns was misleading, distracted from important issues

I've been asked by practically everyone I know to comment on The New York Times’ recent reporting on Trump's taxes. I don't like to comment publicly on politics, but I am a tax professional and I do enjoy teaching people how taxes work as an entertainment accountant and tax preparer to self employed business owners. 

This Times piece is one of the most irresponsible, sloppy, misleading pieces of journalism I’ve read on the subject of taxes. It highlights numbers that aren't actually meaningful (at least not in the way the piece suggests they are) and employs comparisons to other people’s tax histories that don't make sense except for purposes of advancing a political narrative.

What about that $750?

The authors of the piece appear to have a hard-on for line 56 of Trump’s tax return, which claims to be the $750 amount Trump paid to the IRS. You pay more than that every paycheck, they suggest. I saw that and died. That one line in the return has been the near-exclusive focus of reaction to the piece online and it means nothing. 

The article references that Line 56 was where Trump’s accountants entered the income tax he was required to pay. A good accountant should always mitigate what you pay with the filing. Instead, you have W2 withholding (tax withheld from your paycheck) or you make Quarterly Estimated Payments. None of this was referenced in the Times piece. The article makes a big issue of millions in corporate revenue (corporate gross), but then juxtaposes that with a  misleading focus on the individual tax paid with filing (based on individual net). You would never pay an individual tax on your corporate gross earnings, so why reference the two in the same sentence of the story like there's a direct relationship?

The piece also puts a spotlight on the $750 number because it was paid at the time of filing. So if you get a refund with your filing, are you going to say that you paid no taxes all year? What about all the money coming out of your checks every two weeks?

I'm interested in reading more about the corporate taxes, his K-1s, AGI and taxable income to then later compare total tax assessed. I don’t think an army of lawyers and accountants could make a persuasive case that there’s fraud or evasion here while focusing narrowly on the amount of individual tax paid or even Trump’s personal tax return.

“When Trump sells these assets, he will have to add back depreciation as part of the “Depreciation Recapture” which will increase his profit; he’ll have to pay capital gains taxes, which are a bitch.”

— Margot R. Bordas

On tax losses

There’s confusion around the subject of the losses claimed on Trump’s return; it’s insinuated that tax losses are this illegal thing that only Mafia bosses use to avoid paying taxes. The fact is real estate developers almost always have tax losses until they actually sell assets and pay capital gains taxes (which can later be deferred with 1031/1231 exchanges, but that’s a detail for another time).

Here’s how it works. First, you get a loan (an interest-bearing piece of debt). You use that loan to purchase an asset, place it in service, and then hire people, buy furniture, buy food, maintain the property, and so on. Then, the IRS allows you to deduct all of the above expenses in addition to depreciation. For example, suppose you get a $500,000 loan and purchase a two-family income property for $400,000. In that very simplified example, you would take $400,000, divide by 27.5 years (the allowable useful life rate), and get $15,000 in depreciation expense every year! That’s not an expense you paid out of pocket. You didn't even pay the $400,000 yourself (that came out of the loan), but you get to deduct the depreciation expense against your earnings. Make that a million dollar property and divide it by the 39 year allowable commercial useful life rate, and you end up with massive deductions that create tax losses.

Generally, when you finance your operations with debt (like everyone who got SBA, EIDL or PPP loans) you will show a tax loss in the first couple of years until your active income is greater than all deductions. But don't worry! When Trump sells these assets, he will have to add back depreciation as part of the "Depreciation Recapture" which will increase his profit; he’ll have to pay capital gains taxes, which are a bitch.

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Apples and oranges

There is a misconception that reducing income tax liability is fraudulent and that, by not paying as much as Obama did while in office (I think I saw $1.275 million one year! ¿Qué?), Trump is delivering a slap to the face of the American people. Apparently, being president should somehow mean a greater federal income tax burden than the rest of us.

Be a critical thinker here. Why is there such a focus on federal income taxes paid with the personal tax return? For a self-employed person, this is the most insignificant indicator of overall income and net worth. This is where all the business income/losses can cancel one another out, so to speak.

The Times’ piece goes on to note what Nixon paid in 1970 for comparison. Again, I died.

Don’t worry. People who know me know I die all the time.

What Nixon paid is beyond irrelevant. Again, the article is comparing the tax returns of non-self-employed people earning active income to the tax return of a self-employed person earning passive/investment income. To make the comparison demonstrates a lack of understanding of all the different types of tax streams.

I tell my self-employed entertainment clients all the time: “Don't compare your taxes with that teacher or banker friend who gets one W2. It is not the same. The second you get rent/royalty/investment income, 30 K-1s and 15 1099s, and have 12 schedule Es, it’s a different freaking tax return!”

The article strictly focused on the millions Trump’s corporation makes, but then also the $750 Trump personally paid with filing. If we are going to talk about the millions the corporation made, it would be more appropriate to talk about the millions in tax the corporations paid. The Times piece makes no mention of the payroll/unemployment taxes paid to the IRS or state with its payroll expenses, the sales tax paid to the states on all purchases/rent, the property taxes paid on the land buildings sit on, etc. 

These taxes cannot be easily manipulated or reduced like income taxes are and, in aggregate, will be more than 30 percent paid weekly, monthly, and quarterly and directly to the states.

“But he can have corporations in Delaware." Sure. But once you have property, sales, or payroll in any state, you pay those taxes to those states where all of that is happening, not where your main headquarters are based. So if he has a hotel in New York City hiring New York City people, he's paying New York City payroll and property taxes. As an economics enthusiast, I'd like to think it is a more effective use of tax policy.

Trump’s $72 million refund

His $72 million refund was the kicker for me! "How did this man get a $72 million refund when he only pays $750 in tax?" was the question everyone seemed to be asking. 

That's not how that happened. As per the NYT, from 2005 to 2007, Trump paid a combined $56.9 million in federal income tax in 2005 & 2006 and $13.3 million in 2007. Then the recession happened in 2009 and the economy crashed. Everyone in real estate —  developers, mortgage brokers, everyone — was out of work. Then President Obama signed the Great Recession recovery effort that allowed a Net Operating Loss Carry Back Claim, enabling you to take the current year’s business losses and apply them to all the preceding profitable years to get a refund on taxes paid in those years.

While working at Ernst & Young, I worked on one of the largest NOL Carryback claims in history for a developer that I cannot mention until 2025 (gag). This was genius because it allowed the developers (Lennar, Toll Brothers, and yes, Trump) to take those refunds and build everything they did from 2010 to 2020. Major construction projects you see right now were probably initially funded by a NOL carryback claim. These refunds got millions back to work, built homes, built offices, built stores. It resuscitated the economy. 

That said, Trump is still under audit for this refund he received. If he loses, he would have to pay it back with interest. But the buildings are already up. People are working in there. Good luck with that, papi.

On deducting bouffants and anal bleaching

He deducted $70,000 in hairstyling expenses. I died again! ¡Ese pelo, Dios mío! His hair is the ultimate hot topic, so everyone gets riled up. 

The wording of this part of the story is misleading. That figure represents the salary of the stylist for the show "The Apprentice." I've seen a thousand TV budgets, and I'm in Latin entertainment, so you know we go hard on those fajas, sequins and hairspray! Every show has a complete staff. Wardrobe, hair, makeup, catering, etc. A hair stylist applied for and was paid to do this job. You cannot base the validity of someone else's deduction on whether you can deduct it yourself.

The politics have no bearing on the fact that Trump worked in entertainment. A normal & reasonable deduction for one person is not the same for the other. As a tax professional, I’m deducting anal bleaching for an adult star, a tooth diamond tattoo for a lipstick model, iTunes subscriptions for my music producers, Netflix subscriptions for my movie directors; tiger balm for my yoga instructors, false eyelashes for my makeup artists, cryotherapy for my athletes. This is why Trump was able to staff a hairstylist for a television show for the most unusual bouffant in history.

The questions that matter

The Times story did get me thinking about important technical questions. They’re not addressed in the story, maybe because they aren't as sensational or relatable and won't cause Facebook wars or get as many clicks.

What kind of debt does Trump have? Are these loans interest bearing and who is issuing these loans? Is the interest expense being deducted 100% or being amortized over the useful life of the loan? If the loans are being forgiven, is Trump picking up the forgiven portion as income? Is his basis in these properties/partnerships being accounted for correctly? Incorrectly monitoring partner basis can cause you to take more Passive Activity Losses than are allowable. Are there bribes/kickbacks disguised as consulting fees? Let's talk about the gift tax! 

We could bury ourselves in questions about how the tax system allowed for Trump to offset his corporate earnings with business losses to minimize his personal tax due or we could question the source of the capital and the legitimacy of the deductions. Journalists shouldn’t publicly crucify a taxpayer — even one in public office — for structuring their operations in a way that minimizes personal tax liability. Dropping such misleading, irrelevant, articles just days before a presidential debate was predictably — maybe deliberately — provocative. Time spent on Trump’s taxes in a debate could have been given to issues that might have better informed voters. Instead, subjects like education and national security were mentioned only in passing.

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