Every week, our tax blog publishes new accounts of taxpayers who have landed in hot legal waters due to willful noncompliance – often in the form of failure to pay taxes – with the Internal Revenue Code. If allegations made in a New York Times article published October 13 are true, the latest taxpayer to be caught avoiding federal tax liabilities is Jared Kushner, son-in-law and advisor to Donald Trump – who was also recently accused of tax fraud by the Times. While the Times states early on that “Nothing in the documents suggests Mr. Kushner or his company broke the law,” the article nonetheless questions the mechanism by which Kushner avoided his income tax liabilities: the depreciation deduction, also named the Section 179 deduction after 26 U.S. Code § 179, from which it springs. Favored by business owners, Section 179 allows taxpayers to deduct losses resulting from wear-and-tear on eligible property, enabling businesses to save money by reducing their taxable income. In Kushner’s case, that income was reduced to virtually nothing – despite a personal net worth of more than $323 million.
Records show that in 2015, Jared Kushner’s salary, combined with capital gains from investments, totaled around $1.7 million. With earnings on that scale, you would likely expect Kushner to have substantial tax liabilities. However, due to incurring even larger losses than earnings – $8.3 million, primarily due to a reported decline in property values – Kushner, using the depreciation deduction, evidently managed to lawfully pay “little or no federal income taxes during at least five of the past eight years.” The problem is that, as the article then explains, “The law assumes that buildings’ values decline every year when, in reality, they often gain value. Its enormous flexibility allows real estate investors to determine their own tax bills.”
Kushner’s legal team was quick to refute implications that Kushner engaged in suspicious tax maneuvering, with Peter Mirijanian, who is spokesperson for Kushner attorney Abbe Lowell, stating that “always following the advice of numerous attorneys and accountants, Mr. Kushner properly filed and paid all taxes due under the law and regulations.” Mirijanian also noted that Kushner, who resigned as CEO of Kushner Companies following Trump’s January 2017 inauguration, “has avoided work that would pose any conflict of interest.”
Neither Kushner Companies nor the White House has issued any public statements regarding this story. But some tax experts, like professor Victor Fleischer, who teaches tax law at UC Irvine, have been critical of the ways in which the Trump family has handled both its and the nation’s taxes.
“The Trump administration was in a position to clean up the tax code,” he told the New York Times, “and promised to get rid of some of the complexity that certain taxpayers use to their advantage. Instead, they doubled down on those provisions, particularly the ones they have familiarity with to benefit themselves.”
The depreciation deduction is popular among business owners, and with good reason: it allows companies to write off losses associated with wear-and-tear on certain property, since physical damage causes values to decline and may necessitate replacements or repairs. The logic behind this tax maneuver, which is permitted by Section 179 of the IRC (hence the term), is that depreciation costs businesses money, resulting in financial losses.
Section 179 attempts to remedy or offset this issue by allowing taxpayers, under 26 U.S. Code § 179(a), to “treat the cost of any section 179 property as an expense which is not chargeable to capital account.” These costs, the statute continues, “shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.”
Before last year’s passage of the Tax Cuts and Jobs Act (TCJA), which resulted in sweeping federal tax reforms for both businesses and individuals, taxpayers could use the depreciation deduction to write off certain expenses associated with depreciable “buildings, machinery, vehicles, furniture, and equipment” (tangible property), as well as depreciable “patents, copyrights, and computer software” (intangible property). The Internal Revenue Service also required the taxpayer to meet specific criteria, which included ownership of the property and use of the property specifically for “business or… an income-producing activity,” while further requiring the property to have “a determinable useful life of more than one year.” Even if taxpayers met these criteria, there were still some restrictions on claiming the deduction, such as property “used to build capital improvements.” Before the TCJA, the deduction limit was $500,000, with a phase-out threshold of $2 million.
The TCJA changed these regulations. Under the TCJA, the maximum deduction doubled from $500,000 to $1 million (as provided by 26 U.S. Code § 179(b)(1)), while the phase-out threshold increased from $2 million to $2.5 million (as provided by 26 U.S. Code § 179(b)(2)). The TCJA also changed how Section 179 property is defined, adding the following:
For additional information about Section 179 and depreciation deductions, readers may be interested in our analysis of property depreciation in divorce, or our discussion of year-end business tax planning (which, though now somewhat dated by the TCJA, still contains useful information about Section 179 expensing).
While media reports have been clear that there is no hard evidence to indicate Kushner broke the law, this story still shines a light on the intricacies of the U.S. Tax Code – and the critical but sometimes fine line separating tax avoidance from tax evasion.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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