So, here’s something I’ve been wondering. Why would Donald Trump go to all the trouble of having people who owe him money give the money they owe him to his foundation, and then use his foundation to pay business expenses? It’s so complicated! What did it benefit him?
If a normal person engages in a business, and a client owes him $100,000 and that client pays the money (and gets to deduct it as a business expense for the client’s business), but the person has $100,000 in business expenses, then net earnings are zero, and the normal person owes no taxes.
It’s the same difference if a normal person’s client gives earnings owed to a normal person to the normal person’s private foundation (ok, we’re stretching things here...most normal people do not have private foundations). Client gives $100,000, the client deducts the $100,000 as a deduction, not as a business expense. So, the client doesn’t care, right?
And if the normal person pays a business debt through his private foundation instead out of his business’ accounts — as Donald Trump has been shown to have done by Washington Post reporter David Fahrenthold — what is the big deal? There’s no net difference.
HOWEVER...the IRC has an interesting exclusion for business expenses that are paid as the result of fines or penalties:
Penalties and fines. Penalties paid for late performance or nonperformance of a contract are generally deductible...
On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. These fines or penalties include the following amounts.
Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding.
Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code.
Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal.
So, basically, if you pollute the water, and are fined by the EPA, you can’t deduct the fine as a business expense.
So the actual payout that Fahrenthold dug up actually was a payment that conforms exactly to this type of situation. It was the settlement of a fine for a flouting city zoning laws. Here is the detail:
FAHRENTHOLD: Well, I think that sort of confuses the legal issue here. In this case, Trump puts up an American flag on a giant flag pole that the town of Palm Beach decides was too high, it's against their town code. They fine him. He has $120,000 in unpaid fines against his club. Now, you can think the town was right or wrong, but those are the fines that his club was facing, his for-profit business. So then Trump makes a legal settlement with the town that he agrees to. This was enforced on him, he agrees to it, and the town says we’ll waive the $120,000 of unpaid fines but you, Donald Trump, your club, must pay $100,000 to this specific veterans charity. And what Trump does is basically, he doesn't give any money from his own pocket or from the club, as he had agreed to, but rather takes the money out of the Donald J. Trump Foundation. Even though the money is going from one charity to another, what the charity is doing there is basically paying the bill agreed to by Donald Trump's business. It’s like a gift from Trump's charity to Trump's business of $100,000. That's the part that breaks the law.
So in this case, by having his earnings diverted to his Foundation, and then having the Foundation pay for the fine, Trump not only engaged in clear self-dealing, he also was able to make the payment he made in settlement of the lawsuit brought against him by the city 100% tax deductible against his earnings rather than 0% tax deductible. That’s because he paid for it out of funds that he never had to pay taxes on. He still had to pay the fine, but he figured out a way to do it from pre-tax dollars instead of after-tax dollars. So it was cheaper (for him...it was more expensive for the taxpayers, i.e. everybody but Donald Trump).
Here is how it would have worked if he had done this the normal way:
Honest Way: Client owes Trump $100,000. Trump pays $100,000 in fines. Fines are non-deductible. Trump owes taxes on $100,000 in earnings. Say those taxes are $25,000. Trump then pays the fine. It is $100,000. Trump has paid a total of $125,000.
Here is how it worked the TrumpTM (TM stands for ‘Thieve & Misappropriate’) way:
TrumpTM Way: Client owes Trump $100,000. Client “gives” Trump Foundation $100,000. It doesn’t matter to the Foundation whether the payment in settlement of the civil lawsuit against Trump is a penalty or not, because the Foundation pays no taxes on the “gift” because it is a non-profit. Trump receives no earnings, and thus pays no taxes, and yet gets his debt settled with pre-tax earnings, he “pays” his penalty with $100,000 in earnings which he didn’t receive.
So, essentially, the taxpayers are paying for Trump to thumb his nose at the law.
What could possibly go wrong if this guy is elected President?