What About Trump’s 2005 Tax Return?

In these last few days, someone leaked copies of Donald Trump’s 2005 Federal Income Tax Return. It definitely shows that he made money that year. But you may be surprised at what else we learned:

Wages: During that year, he and his spouse were paid combined salaries of slightly under $1M. The reported income was just $1401 short of 7-figures from regular paychecks. Not shabby.

Interest Earned: He showed earned interest of over $9 million. This does not necessarily represent interest earned from cash in the bank. Instead, most of this interest would likely have been from loans made, or structured, which pay him interest. In turn, he would take a deduction on the interest that he paid from the funds borrowed to make those loans. Undoubtedly, Trump served as his own middleman in order to make a few bucks from bridging a loan to his own business.

Business Income: The return showed income reported on a Schedule C. Generally, a return preparer creates this Schedule C to report a client’s non-incorporated, sole proprietorship business activity. In most cases, if a working class taxpayer (like you, like me) has Schedule C income, it is from being self-employed in your own business.

But be assured that Trump’s is different. This Schedule C income (line 12 of the tax return) is likely from a series of many “single-member LLC” businesses. This type of business entity is reported on that same form. Any individual person may have several. Even dozens, even hundreds of those single-member LLC businesses reported the same way.

And, these LLC’s may include real estate operations. If numerous real estate activities are reported this way, the IRS is more likely to accept that the filer (let’s just call him “Taxpayer”) is a real estate professional. Professionals like sales agents and brokers, developers, property managers, even lenders, may be considered as real estate professionals.

Why do we care? Well, there are limitations to taking losses on real estate related activities. We call them the “passive activity loss” rules (or “PAL Rules”) under Tax Code §469. This set of rules creates an audit issue looked at during IRS examinations. When there are real estate losses, or other losses reported on Form K-1, the IRS auditor will consider whether these losses may be deducted on the return. Businesses owned by multiple family members face the same problem in audits. Some of our commercial real estate clients in Oakbrook IL (near the Downers Grove IRS office).

But someone considered to be a real-estate professional enjoys an exception to those rules and may take losses from real estate operations. Actually, they can deduct a seemingly unlimited amount of loss on the tax return. And as we learned earlier, over the last 20 years, Trump has taken substantial, numerous losses as deductions on his returns. Those losses in other years greatly exceeded the $42 million Trump reported as income in 2005. If you operate in real-estate related services, that’s why you should care.

Capital Gains, Partnerships, Other Income Losses: There was an impressive amount of income from sales, buyouts, insurance proceeds, etc. This nearly $100 million of income was just barely outmatched by the $103 million of Other Losses claimed.

Taxes Paid: In 2005, Trump paid over $22 million with his tax return. The IRS also kept and used another $13 million that had been paid at other times in the past. It looks like Trump actually did pay federal income tax. At least he did for that year.

If you want to look, courtesy of the New York Times, you may access a copy here.

Source: Jeffrey Anton Collins (Former IRS) is a Tax Attorney with Tax Law Offices. Contact the IRS tax attorneys at our office if you need help with your own tax resolution.