Trump's tax plan could preserve millions in savings for his businesses

His plan would maintain companies' ability to lower tax liability by taking on debt

President Donald Trump’s tax-overhaul proposal could preserve millions of dollars in savings for companies controlled by his family.

Companies that are part of the Trump Organization pay more than $20 million a year in interest on their debts, according to a Wall Street Journal analysis of financial disclosures and other public information about the companies’ outstanding loans and their interest rates.

Under current tax law, those interest payments can be deducted from a taxpayer’s total taxable income, reducing the amounts owed to the government.

The Journal’s estimate of $20 million is conservative, meaning Mr. Trump’s or his companies’ tax savings from being able to deduct interest payments from taxable income might be higher.

Congressional Republicans have proposed changes to the tax code that would end that deduction for businesses. That proposal is regarded in Washington as the likely starting point for negotiations in the most serious effort in many years to revamp the tax system.

In that scenario, based on the Journal’s analysis, Trump Organization’s taxable income could increase by more than $20 million, which might add millions of dollars a year to its tax bill.

Although it isn’t known how much Mr. Trump or Trump Organization pays in taxes, or at what rate, $20 million taxed at a 40% personal income rate would translate into about $8 million in potential additional tax liability. (According to a letter from his tax lawyers, Mr. Trump’s businesses operate “almost exclusively” through partnerships and sole proprietorships, which aren’t subject to the corporate tax rate.)

The tax-overhaul plan from Mr. Trump, who once described himself as the “king of debt,” would preserve the ability of most companies—including real-estate developers, such as Trump Organization—to lower their tax liabilities via heavy debt loads. His plan would limit the use of interest deductions only for some manufacturers.

Many businesses support the debt interest deduction. They argue that interest payments constitute a normal business expense and that making them tax deductible encourages many companies to make investments with borrowed money that otherwise would be prohibitively expensive. Others argue, though, that the tax perk distorts the economy by favoring debt over equity.

“There’s a clear conflict between his personal finances and his presidential role,” said Daniel Shaviro, a professor of tax law at New York University. “His own tax policies would be good for his financial interests.”

The White House referred questions to Trump Organization, which didn’t respond to repeated requests for comment.

Mr. Trump this month said he has transferred control of his business organization to a trust to be run by his two adult sons. It isn’t clear how the transfer might affect his taxes. Mr. Trump hasn’t identified the beneficiaries of the trust or said whether he will retake control of his businesses after he leaves office.

The exact size of the potential tax savings to Mr. Trump and his family business are impossible to calculate. That largely reflects the opacity surrounding the new president’s finances, in addition to the uncertain details of any final legislation.

Every major-party presidential candidate since 1976 had released his or her tax returns. The disclosures are meant in part to assuage concerns that White House policy is being used for personal gain. The tradition goes back to Richard Nixon, who as president released four years of returns in 1973 during the Watergate scandal.

Mr. Trump broke with that tradition, saying he would only release his tax returns after the conclusion of what he described as an ongoing Internal Revenue Service audit.

The congressional tax plan also would affect Trump Organization’s ability to gradually write off the costs of buying, or in some cases upgrading, properties over periods as long as 39 years—a practice known as depreciation. “Put simply, depreciation permits you to pay lower taxes on your earnings,” Mr. Trump wrote in his book “The Art of the Deal.”

“I love depreciation,” he said in the second presidential debate last October.

The House plan would eliminate the use of depreciation for businesses, including real-estate companies. Instead, developers would be able to write off the cost of buying a property, excluding land, against income in the year in which the purchase occurs.

It isn’t clear if this change would benefit Trump Organization. There are no public records of how much it benefits each year from depreciation or other tax breaks widely used in real estate.

“Historically, these types of potential conflicts for presidents have been addressed through transparency,” said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center. “The president produces his tax return so the American public can see what benefits the president is deriving…and can judge for themselves.”

The Journal’s $20 million tally excludes interest of at least $4.4 million a year on a loan of more than $50 million that one Trump business made to another Trump business in 2012. What little public information there is about the loan underscores why it is so hard to calculate the effects Mr. Trump’s policies could have on his family’s finances.

The loan was issued by an entity called Chicago Unit Acquisition LLC, which Mr. Trump personally owned, according to a financial disclosure form he filed last year with the government. The loan was for the Trump International Hotel & Tower Chicago, a 92-story glass skyscraper, the fourth tallest in the U.S. and a recent gathering point for anti-Trump protesters.

Mr. Trump’s disclosure form doesn’t state the loan’s exact size, purpose, structure, due date or even which company is the recipient. The form simply describes it as a “springing loan” of more than $50 million, related to the Chicago tower, and with an interest rate of the prime rate plus 5 percentage points—equal to a total of about 8% at the time. That is the highest interest rate of any loan Mr. Trump has reported.

Searches of public records in Cook County, Ill., related to the land underlying the Chicago project, conducted for the Journal by Greater Illinois Title Co., found no reference to Chicago Unit Acquisition. And a search conducted for the Journal by legal search firm Capitol Services Inc. of financing statements, which lenders typically file to record their interests in nonland property, found no record of a creditor named Chicago Unit Acquisition.

The Journal contacted more than 10 tax, legal and real-estate experts about the Chicago loan. The consensus was that the lack of details about the loan’s terms, size and structure makes it difficult to gauge the personal effects on Mr. Trump if tax laws were changed to no longer allow interest on real-estate debt to be tax deductible.

“Was the loan structured this way for tax reasons or to hide the source of the money or because there’s some other financial benefit to it?” said Lawrence Noble, general counsel at the nonpartisan Campaign Legal Center in Washington. “We just don’t know.”
 

— Richard Rubin contributed to this article. 

The Wall Street Journal