According to Huffington Post, Mitt Romney’s 2010 tax returns include more than a half-million dollars in “trade and business expense” deductions derived from Bain-related income—a tax reduction strategy that is only legal if Romney had an active role in Bain. What does “active” mean in this context?
The IRS advises that “[f]actors that indicate active participation include making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees. Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity who is an independent contractor rather than an employee.”
Even if Romney could persuade the IRS his involvement was legitimately active, that still leaves him in a rhetorical jam: For tax purposes, he claims an active status; for political purposes, he claims to have zero to do with the investments.
In other words, if Romney’s deduction was legal, it means his claim to have had no involvement with Bain after February of 1999 was pure fiction, because as late as 2010, he claimed more than $ 500,000 in expenses related to his Bain investments. Of course, if it wasn’t legal, Romney has other problems.
Whichever the case may be, the deduction was a particularly sweet deal for Romney: the income he receives from Bain is taxed as capital gains, which means he pays just 15 percent on it. But because he says these deductions are business expenses, they can reduce his ordinary income, which is taxed at 35 percent rate. That makes the deductions more than twice as valuable as they would have otherwise been.
Presumably, this isn’t the first time Romney has deployed a tax-reduction strategy such as this. But because he won’t release any tax returns before 2010, nobody can say for certain what exactly he is hiding.