Trump Towers, a few years ago

“Kids we need to need to plan.”

“What’s up?”

“It’s about depreciation.”

You love depreciation!

“I do, but at some point it’s going to catch up with us.”

“What do you mean?”

“Well you know how the tax code allows us to keep two separate sets of books, one for the banks and another for the IRS?”

“You’ve said that before, but I’ve never really understood how it works.”

“Well the banks value our properties at their current worth, and the IRS looks at the value of the properties at cost minus depreciation. That difference means that we can borrow against the full value of the properties, and write-off the interest and the depreciation against income for tax purposes. If we keep buying properties and writing off the depreciation plus the interest, we don’t pay tax on the difference in the values, until we sell them.”

“Well that’s simple then. Don’t sell them!”

“It also happens when I die!”

“What happens then?”

“The IRS takes all the depreciation written off over the years as income.”

“How much does it come to?”

“A lot!”

“So we’ll just sell a few of the properties to pay the taxes.”

“After you pay off the mortgages, there still won’t be enough cash.”

“So what do we do?”

“We need to change the tax code, especially the part that covers estate duty.”

“The politicians will never agree to that! Not even the Republicans.”

“There are a number of politicians who are very concerned about the complexity of the tax code. The person at the head of that queue is Paul Ryan. Even The Economist says that the tax code needs reform. We just need to make sure that the estate duty is done away with, or at least significantly reduced.”

“And how are you going to convince them to do that?”

“I’m going to become the next President!”

More at:
26 U.S. Code § 6103 – Confidentiality and disclosure of returns and return information
Donald Trump’s Deep Love Of Tax Depreciation – An Affair To Remember
Donald Trump’s Possible $0 Tax Bill – That’s Why People Do Commercial Real Estate Development
Fixing the Broken Tax Code
Fixing the tax sieve
How Donald Trump Uses the Tax Code in Ways You Can’t
Ok, so where are the tax returns
Simpler, fairer, possible
Trump owes us his tax returns now more than ever
What is Depreciation, and Why Was it Mentioned in Sunday Night’s Debate?

Canada’s book cooks

In a recent article, The Economist reported that the Canadian budget uses the accrual basis of accounting for its revenues, and the cash basis for reporting its more detailed spending.

Accounting like that provides a government with the opportunity to cook the books, Enron style. The Public Sector Accounting and Auditing Board (PSAAB) of the Canadian Institute of Chartered Accountants provides recommendations for how Canadian governments should account, but has no authority to enforce their recommendations.

In a speech given in 1982 by PSAAB’s first Chairman, N.G. Ross, he posed the following question to a group of legislators – why might governments “cook the books”? The answer – because governments, like any organization, do not like to report bad news. Bad financial news can constrain policy and spending initiatives that a government wants to introduce.

In 2003 a Liberal finance minister changed the budget to full accrual accounting. But the more detailed spending estimates were still accounted for on a cash basis. So, Canada’s anticipated expeditures do not follow the matching concept, one of four founding principles of accounting.

And the government no longer reconciles the figures, the most basic accounting control mechanism.

To forensic accountants these are signs that things are amiss.

And it suggests that one of the world’s leading democracies isn’t.

More at:
Something doesn’t add up
Perspectives on Accrual Accounting