A giant real-estate developer may have discovered another tax loophole in Florida

Gov. Ron DeSantis and Republican leaders in the Florida Legislature have sabotaged the state's auditing force. Tax avoidance is thriving.

Photo credit: OTA Photos

This is Seeking Rents, a newsletter and podcast devoted to producing original journalism — and lifting up the journalism of others — that examines the many ways that businesses influence public policy across Florida, written by Jason Garcia. Seeking Rents is free to all. But please consider a voluntary paid subscription, if you can afford one, to help support our work.

One of the biggest real-estate developers in the country may have discovered another loophole in Florida’s corporate tax code.

Records show that an affiliate of Benderson Development — a commercial property developer whose holdings include the sprawling University Town Center mall near Sarasota — used the loophole to shave $275,000 from its Florida income tax bill over two years.

State auditors caught the move while reviewing the company’s 2019 and 2020 tax returns and levied an assessment for back taxes. But the company is now suing in state court, setting up a potential legal showdown that could determine whether this loophole will live on.

Representatives for Benderson Development did not respond to questions about the dispute.

The case illustrates the importance of having effective state auditors who can deter aggressive tax avoidance and potentially illegal tax evasion — something that can cost a state as large as Florida hundreds of millions of dollars a year in lost tax revenue.

But while auditors may have flagged this example, Republican leaders in Florida government have been slowly sabotaging the state’s auditing force for years — a trend that has accelerated under Gov. Ron DeSantis.

For instance, three decades ago — shortly before Republicans took complete control in Tallahassee — records show the Florida Department of Revenue had nearly 800 auditors. By 2019 — DeSantis’ first year as governor — that figured had fallen below 550.

And the state’s auditing ranks have continued to shrivel since: The agency has fewer than 500 auditors today.

The revenue agency completed 338 corporate income tax audits last year. That’s less than half of the 707 audits it conducted in 2019.

What’s more, DeSantis last year vetoed a bipartisan bill that would have toughened potential penalties for taxpayers who refuse to cooperate with auditors, hide records or flout agency subpoenas. That veto pleased business front groups like Florida TaxWatch, whose members include grocery chain Publix, cable giant Charter and Bank of America.

DeSantis’ staff even drafted a plan that would have made it harder for other states to chase down tax evaders who have fled to Florida, though that legislation failed to pass.

And as a presidential candidate, DeSantis has claimed that he will try to abolish the IRS entirely if elected.

Attacking auditors and tax collectors is the sort of thing that may sound good on the stump. But coddling tax cheats ultimately hurts everyone else.

If taxpayers think they are less likely to be caught by auditors — or that they won’t face any meaningful consequences even if they are — then they are more likely to engage in tax avoidance or evasion. That’s particularly true of big businesses and superrich people, who employ small armies of accountants and tax attorneys who can find loopholes and then defend them if caught.

That ends up shifting more of the tax burden onto everyday people and local small businesses — who must make up the difference through higher taxes and fees or poorer public services.

Even tiny shifts can have enormous consequences: In Florida, a drop of just half a percentage point in voluntary tax payments would mean a loss of $311 million.

That’s basically what the state of Florida spends cleaning up springs, researching cancer and extending broadband Internet into rural communities — combined.

“When we have laws that we do not enforce, it rewards vice and it punishes virtue,” said Rep. Cyndi Stevenson, a Republican from near Jacksonville who sponsored the 2022 tax-enforcement legislation that DeSantis blocked from becoming law.

How to open a loophole

The tax dispute between Benderson Development and the Florida Department of Revenue is actually pretty simple, as far as these things go.

It involves a big federal tax break on capital investment — which the company is trying to turn into a state tax break, too.

To illustrate how it works, imagine that the Walt Disney Co. spends $140 million to build a new ride in Orlando. The company has obviously incurred a huge upfront expense. But it also gained a valuable, income-producing asset — albeit one that will lose value over time and eventually need repairs or replacement.

So Disney is allowed to write off that expense on its taxes. But it’s generally supposed to take those write offs slowly over time — a concept known as “depreciation.”

Say Disney expects the ride will last for 20 years. Under a normal depreciation schedule, Disney would subtract $7 million from the income it reports on its tax return each year for the next 20 years. (That’s because $140 million spread over 20 years equals $7 million annually.)

But Congress has repeatedly offered businesses a tax break known as “bonus depreciation.” That allows them to write off these kind of capital investments much faster.  

For example: Under 100 percent bonus depreciation, Disney could immediately subtract that full $140 million on its taxes. That means it will show a much smaller profit on its tax return — and thus pay less in corporate taxes. (Bonus depreciation is one of the big reasons that so many highly profitable corporations end up paying nothing in federal income taxes some years.)

Now, this is entirely an issue of timing: Disney gets to write off the $140 million either way; it’s just a matter of whether it subtracts $140 million immediately or $7 million a year for 20 years.

But, as we all know having just come through a period of high inflation, a dollar today is worth more than a dollar tomorrow. So bonus depreciation is still a big tax break.

It’s also very popular with corporate lobbyists and members of Congress, who claim that bonus depreciation gives companies incentive to make more capital investments in the United States. Congress has offered some form of bonus depreciation nearly every year for the past 20 years, according to the Tax Foundation, a think tank funded by corporations like Microsoft and Pepsi.

A compromise for corporations

But bonus depreciation can distort state taxes, too.

That’s because state corporate tax codes are linked to the federal tax code: A tax break that allows a corporation to report a lower profit on its federal tax return can also result in that company reporting a lower profit on its state tax return, as well.

Florida — like most states — does not like to participate in bonus depreciation, for a few reasons. But simply opting out of it would cause accounting complications for corporations. So Florida came up with a compromise.

Let’s go back to Disney’s $140 million ride.

Under Florida’s rules, if Disney uses bonus depreciation to immediately subtract $140 million on its federal taxes, it must add that $140 million back to its state taxes.

But Florida will then allow Disney to subtract that $140 million from its state taxes over seven annual installments.

So instead of subtracting $140 million in one year from its Florida taxes, Disney would subtract one-seventh of $140 million ($20 million) each year for seven years.

The goal is neutrality and simplicity. Disney still gets the benefit of bonus depreciation on its federal taxes. But the company’s state tax bill doesn’t really change much, and it doesn’t have to deal with any accounting headaches.  

Double dipping

And this is where the dispute with Benderson Development comes in.

Technically, it involves a company called “9395 CH LLC,” which describes itself in court filings as a real-estate rental company. The company appears to own commercial properties like malls around the country where it collects rent from tenants.

Corporate records show that 9395 CH LLC is controlled by executives at Benderson Development. The Florida Department of Revenue has also sent correspondence about the case to a Benderson office in Buffalo.

There are two key things to know about 9395 CH LLC.

The first is that the company only recently started paying corporate taxes in Florida.

That’s because Florida exempts limited liability companies from its corporate tax. But individual LLCs can still choose to be taxed as a corporation. And 9395 CH LLC chose to start getting taxed as a corporation in 2019, according to court filings.

The second thing to know about the company is that it has been claiming bonus depreciation at the federal level for years — long before it began filing Florida tax returns.

For example: According to its court filings, 9395 CH LLC took about $12 million in federal bonus depreciation in 2018.

Now, in theory, if the company had been a corporate taxpayer in Florida in 2018, it would have had to add that $12 million back to its state taxes. But then it could have subtracted one-seventh of $12 million each year for the next seven years.

But 9395 CH LLC was still exempt from Florida corporate taxes in 2018. It didn’t add $12 million back to its state tax return because it didn’t even file a state tax return.

But then, when the company started paying Florida corporate taxes in 2019, it began claiming one-seventh subtractions on that same bonus depreciation that it never actually added back in the first place.

Remember: Bonus depreciation is supposed to be neutral at the state level. A company is forced to add $12 million to its taxes in one year but then gets to subtract $12 million from its taxes over seven years instead. The additions and subtractions offset each other.   

In this case, 9395 LLC never had to make the original addition. But it’s now taking the offsetting subtractions.

Instead of a wash, the company ends up reducing the total profit it shows on its state tax return — and thus the amount of state tax it pays.

Again, representatives for Benderson Development did not respond to requests for comment. But in court filings, the company argues that it can do this because Florida law doesn’t explicitly say that a company must make a bonus depreciation addition before it can take the offsetting bonus depreciation subtractions.

“There is no statutory requirement that a taxpayer claiming a subtraction for depreciation… file a corporate income tax return or be subject to Florida income tax in the year the addition would have been claimed…” lawyers for the company wrote in a legal brief filed last week.

But the result is that the company is turning a federal tax break into an unintended state tax break, too.  

In a letter to Benderson Development that was filed as part of the litigation, the Florida Department of Revenue said the company was double-dipping.

“…It was not the Legislature’s intent to allow taxpayers to claim excess bonus depreciation twice,” an agency auditor wrote in a Feb. 9 letter to the company.

Small loophole, big impact

Now, there is just over $275,000 in taxes at issue in this specific dispute. But there may be a lot more money ultimately at stake.

For one thing, this audit only covered 9395 CH LLC’s 2019 and 2020 tax bills. So there are more years where the company could have done the same thing.

For another, Florida still uses an old corporate tax system that lets companies file separate tax returns for their subsidies — as if they are somehow independent companies.

So it’s possible that Benderson Development — the sixth-largest privately held company in Florida, according to Florida Trend — might have other affiliates using the same strategy.

(Side note: The single most impactful thing that Florida leaders could do to close corporate tax loopholes is to fix this antiquated system by passing a policy known as combined reporting.” Most of the rest of the country already has.)

Most importantly, there are other big companies out there who only recently became corporate taxpayers in Florida — and therefore could be in a position to exploit this loophole, too.

One example: The giant liquor distributor Southern Glazer’s Wine and Spirits — the fourth-largest private company in Florida — converted itself into a taxable corporation shortly after former President Donald signed deep federal corporate tax cuts in late 2017.

In other words, this little loophole could become very expensive for the rest of us if it’s not closed.