The Former President of the US Mr Donald Trump has alleged for not being compliant with federal income taxes. Recently, the New York Times has obtained tax information of Mr Trump. As per the NYT reports, Mr Trump has not paid any income tax for 10 years from the past 15 years. He had just paid $750 as federal income tax in the year 2016 when he got elected as US president. And he paid another $750 in the first year of his presidency.
Although Mr Trump called it a fake report, here are some of the key points to look in;
The key allegation as per the report
- The former president paid just $ 750 as income tax in both years when he ran for the presidential election and first year as US president.
- The Former president has tried to lower his taxes by reporting huge losses on business.
- He paid no taxes in 10 years of the past 15 years of tax records assessed by the newspaper.
- Although after the success of The Apprentice TV show, he paid significant taxes –$ 95m over 18 years. But later, he got it back as $72.9 million as a federal tax refund. The refund is still under review.
- Trump’s daughter, Ivanka’s huge consulting fee has reduced the family’s tax bill.
- He has personal liability for hundreds of millions of dollars in loan mostly due in the next for years
- Trump has claimed a tax deduction on expenses inclusive of $70,000 of hairstyling for television.
Is anything wrong about Trump’s tax return?
The New York Time NYT reports suggest huge tax avoidances by Mr Trump that may heat moot conversation although it is not illegal as per laws. Several wealthy Americans use such loopholes to reduce the tax liability they are legally obligated to pay. According to IRS source, in 2017 the average federal income tax rate for the highest-earning was 0.001% of the tax filers was 24.1%. And this is almost equivalent to net average tax paid by the average American worker in 2019.
If the reports of NYT are to be believed, Mr Trump has paid $400 mn less in combined federal tax return over the last two-decade when compared to the average income tax of similar rich category person each year. However the Trump organization has denied the allegation and its Chief Officer, Alan Garter told the newspaper’s claims as inaccurate.
Take away points from Trump’s tax return
Mr Trump tax return has raised questions of illegal tax planning, the bias in tax laws and conflicts of interest. Here some points to consider
Profit and loss netting is very common:
The NYT’s report highlights how Mr Trump used losses from the unprofitable ventures to offset the income from the profitable ones. Thus, this helps in reducing the overall tax liability. However, it by no means is illegal, rather it is an indication of sophisticated tax planning. But it raises questions over compliance on whether the deductions for generating the losses in business is permitted.
Mr Trump claimed some personal expenses as a business deduction. But, the contribution of these deductions to overall loss is lower than the depreciation of his real estate assets. Depreciation is the allocation of cost throughout the useful life of the assets. Thus, depreciation expense is a tax-deductible expense that is prepaid. Since depreciation is charged each year and not associated with actual cash payment, it is perceived as shrew planning to reduce taxes without actual spending. But in a real sense, the depreciation is not free as it represents the actual cost paid by the taxpayers that need financing in some ways.
If expenses exceed your revenue, the owner has three options: self-financing, equity financing or debt financing. Where debt financing and equity financing is not feasible, the owner is bound to liquidate their assets. This point is relevant to Mr Trump’s case, where he assumed personal liability as a portion of his business expense. This nothing but savvy tax planning tactics to maximize the amount of loss that is deductible against the income.
