What might Trump be hiding in those tax returns he won’t disclose?

Republican presidential candidate Donald Trump speaks during a campaign rally at Sun Center Studios on Thursday, Sept. 22, 2016, in Aston, Pa.
Republican presidential candidate Donald Trump speaks during a campaign rally at Sun Center Studios on Thursday, Sept. 22, 2016, in Aston, Pa. AP

Donald Trump is the first nominee from a major party in recent memory to decline to release at least a summary of his taxes. This generates speculation that he’s hiding something big, that he’s not worth as much as he claims or even that he’s squirreling money away in offshore tax havens.

He compounded the speculation during Monday night’s debate by appearing to boast that he’d paid no taxes in at least one year.

Never before has a presidential hopeful had such a complex tax profile, associated with at least 515 companies.

We talked to several tax experts who provided insight into Trump and his taxes:

Q: Can it be true he pays no taxes?

A: Trump has said he does pay federal taxes, but he won’t say how much and insists he can’t release his returns because of an audit. What little is known about his taxes comes from dated tax and court documents. A report from a New Jersey casino commission said that in 1978 and 1979 Trump reported negative income and paid no federal taxes, even as he publicly boasted of being a multimillionaire.

How is that possible?

“One way you can do it is with leverage (borrowed money), lots of interest deductions, depreciation,” said Len Burman, a leading tax authority and professor at Syracuse University’s Maxwell School. “My impression is that people who are involved in the (commercial) real estate business can often go for years without taxable income.”

In plain speaking, Trump can write off the interest he pays on his debt and depreciate his properties. This is using a legitimate tax break that allows for the declining value of an asset over time. That’s allowed even though the assets are often growing in value. Tax law provides a formula for writing off portions of assets over time.

Trump has bragged about aggressively using debt to buy properties, a process called leveraged buying. During the debate, Trump insisted he was now under-leveraged, meaning his businesses aren’t carrying a lot of debt that could create tax breaks. The New York Times in August tried to assess his debt load by examining regulatory and securities documents tied to some of his many U.S. properties, concluding he owed creditors at least $650 million, or twice what his election filings suggest.

Q: How can someone pay no federal taxes?

A: Most Americans get income through wages. Not so for commercial real estate developers, who usually have partnerships or other company formations that carry lower tax rates. They can take a loss from one project and count it against gains from another. They can also take money from one sale and use it to buy land on which they’ll build – a practice called like-kind exchanges. Think of it as financial juggling – before one ball comes back down, another ball is going up.

“The joke in real estate is if you are close to paying taxes, buy another building,” said Ed Kleinbard, a professor of law and business at the University of Southern California, in Los Angeles.

Developers enjoy huge deductions, and the value of a property that’s appreciating is ignored until its sale, he said. That means they “often face minimal tax liability as long you keep growing the business. That can continue indefinitely.”

Q: How many rich people like Trump don’t pay federal taxes?

A: Most Americans who pay no federal tax either earn too little or are retired. According to the IRS, for 2013 tax returns – the most recent year available – 12,517 Americans with incomes of $200,000 or more reported owing no U.S. income tax that year. The IRS also offers a category called expanded income, which is a broader measure of economic well-being. Using this gauge, 25,926 Americans had no federal tax liability that year. Some of those with zero tax liability derived their incomes from earnings on tax-exempt bonds, which sort of work like an implied tax since an investor is willingly taking a lower return in exchange for avoiding the headache of taxes.

Q: How likely is it that Trump pays virtually no taxes now?

A: It’s unlikely. The handful of documents that are public about Trump’s taxes predate the last tax overhaul in the 1980s and reflected a time when he was just a real estate developer. Today his businesses encompass retail products, licensing, golf courses, all types of companies that make it harder to claim large tax breaks. As McClatchy’s reporting in the Panama Papers project showed, Trump doesn’t risk a lot of his own money on real estate. Instead he lets others take the risk and he leases the use of his name to attract investors and buyers.

He aggressively guards the use and reputation of his name, which now generates income as a brand. Many of his companies have collected royalties for the mere use of the Trump surname on everything from neckties to bottled water to steaks and luxury condominiums.

“If he is truly as successful a businessman as he says he is, you can’t pay no tax,” said Roberton Williams, a senior fellow at the Tax Policy Center, a nonpartisan tax research think tank.

Q: Does Trump use offshore tax havens?

A: There was no evidence of that in the now-infamous leaked offshore documents from the Panamanian law firm Mossack Fonseca, one of the major law firms that help clients establish shell accounts in tax havens. However, there are several other major law firms that specialize in this. Absent a look at his tax documents, there’s no way of knowing whether his accountants run portions of the business through places like Ireland, which helps mask shell companies in the Bahamas, Bermuda and British Virgin Islands that are often used to lower corporate tax burdens.

Trump told debate viewers that, in lieu of the release of his tax returns, they can review his finances through his disclosure statement to the Federal Election Commission.

“That’s not really true. Financial statements are audited, they have a statement of outside auditors, they’ve applied consistent and known accounting standards … they have elaborate footnotes,” said Kleinbard. “None of which is true in the FEC disclosures.”

Q: Why are there suspicions that Trump might use offshore entities?

A: The absence of tax returns fuels such speculation. In his disclosure statement, Trump listed his involvement in or ownership of 515 companies. Of those, 378 were registered in Delaware. One of Delaware’s main attractions is privacy – there is little made public about true company ownership. Trump does a lot of business overseas, and if these Delaware companies have a non-United States partner, which isn’t clear in what little is revealed, then some of these Delaware companies aren’t necessarily exposed to any U.S. tax liability. It is complex, but companies can be structured in ways to avoid taxes. That’s a principle Trump has publicly and enthusiastically embraced.

There are hints at this sort of tax structure in the Panama Papers. The luxurious 70-story Trump Ocean Club International Hotel & Tower Panama is not actually owned by Trump. Nor did he develop it. He licenses his name to Newland International Properties Corp., the developer sells the condo units and pays both the $5 million annual licensing fee and a portion of all condo sales to Trump Marks Panama LLC. The operator of the Panamanian luxury hotel is Delaware-based Trump Panama Hotel Management LLC.

His company DJ Aerospace (Bermuda) Limited is registered in Bermuda. Excel Venture I LLC and Excel Venture I Corp. are in St. Martin in French West Indies, and both are tied to residential real estate valued between $5 million and $25 million. Both Bermuda and St. Martin are known as tax havens.

Without seeing his tax returns, there’s no way of knowing whether Trump’s tax attorneys use something akin to a model that Google and other big corporations have deployed to funnel offshore earnings through structures that never flow through the U.S. tax system. These involve creating a subsidiary in an offshore tax haven where profits earned by related companies flow, lowering the overall tax liability.

“An awful lot of the Trump business empire is about licensing the Trump name, the Trump lifestyle brand, and not about owning and developing real estate,” said Kleinbard, pointing to why there’s so much speculation about how Trump treats the income generated in business done abroad. “He’s very well advised. He comes across as a seat-of-the-pants, make-it-up-as-I-go-along guy . . . (but) it’s definitely not true in regards to his legal and tax affairs.”

In an interview with Vanity Fair magazine published in August, Trump said he doesn’t use offshore tax havens.

“There is greater incentive in many ways to keep your money in the U.S.,” he said.

Q: Is it wrong for Trump to keep his tax returns secret?

A: That’s up to voters to decide. It’s been a common practice to release them since Republican Richard Nixon did it in 1969 to quell a political controversy. Every president since has released tax returns, which are protected by law from unauthorized disclosure. Republican Gerald Ford was the exception. He released summaries of his tax liabilities from 1966 to 1975, according to the Tax History Project, an online archive of presidential tax returns and those of aspiring candidates.

Q: Should they be required to reveal their tax returns?

A: “Speaking as a historian, it’s an old argument we’ve been having for 100 years,” said Joseph J. Thorndike, the director of the Tax History Project. “If it’s a problem, it’s a problem with law, not the tax filer.”

If Trump released his returns tomorrow, it would be the closest such release to Election Day since GOP hopeful Mitt Romney released his 2011 tax returns on Sept. 21, 2012. His returns showed that his investment income gave him a much lower tax burden than ordinary Americans, a fact that hurt his election chances.

Q: So by law Trump doesn’t have to disclose anything?

A: There’s nothing in the law that requires a candidate to disclose their taxes. They are required by the Federal Election Commission to complete financial disclosure forms. These require candidates to list assets and debts in a step-like range with a top category of “more than $50 million.” That’s been adequate for most candidates, but not Trump. He declared in election filings that he’s worth at least $1.5 billion, but in speeches and interviews he has suggested he’s actually worth more than $10 billion. Financial publications such as Forbes and Fortune magazine say that number is under $5 billion. This wide range has led some critics to suggest that releasing his tax returns would show he’s not as rich as claimed.

Kevin G. Hall: 202-383-6038, @KevinGHall