Never let a good accounting discussion go to waste

As we say in the accounting profession, “Never let a good accounting discussion go to waste”.

There has been a lot of discussion about tax returns in the news lately…

Earlier this week, the New York Times released an article discussing President Trump’s tax filings and detail how little he paid in income taxes. Also this week, presidential candidate and former Vice President Joe Biden released his 2019 joint tax filing.

The recent discussion about tax returns reaffirms two key elements of tax returns from a forensic accounting perspective. 1) Tax returns reflect income for tax reporting purposes, not necessarily cash flow received and 2) Tax returns contain a wealth of information, but often can result in more questions than answers.

While it is reported that President Trump incurred significant losses and paid minimal income tax, this does not necessarily reflect cash flow received by Trump.

As a real estate developer, any distributions received from any of the underlying properties Trump owns will generally not be taxed immediately and will likely not be reported on a personal tax return. For a real estate investor, especially those with appreciating property, distributions are a common source of cash flow.

Distributions from real estate investments will be reported on the Schedule K-1s and balance sheets of the underlying entities owned directly/indirectly by the President. This information is not typically attached to a personal tax return. Therefore, even if the public were to view Trump’s tax filings, many unanswered questions would likely remain.

Turning to Joe and Jill Biden, they reported $985,233 of total income in 2019. $538,127 (or ~55%) of this income was reported from two Delaware S-corporations, Celticcapri Corp. and Giacoppa Corp. Of this amount, $229,125 reflected pass-through income that may or may not reflect the true cash flow to Joe and Jill Biden from these entities.

Without additional information on Celticcapri and Giacoppa, the public has limited knowledge of the Bidens' total cash flow from closely held businesses. Further, the manner in which activity is reported from these companies shields the nature of these companies' operations. The Bidens' tax returns report bottom line income figures from pass-through companies, and not a detailed breakdown of the sources of income as well as any assets (including other entities) that Celticcapri and Giacoppa may hold.

Politicians and clients alike will (or won’t) provide us tax returns for review. However, it is not enough to just merely check the box as to whether or not these have been provided. Usually, a detailed analysis of the tax returns and additional information is necessary to understand the true amount and nature of income and cash flow received by a taxpayer.