October 2, 2016 | No Comments
The campaign-shaking disclosure that Donald Trump claimed a $916 million loss on his 1995 tax returns raised more questions than it answered. It’s not surprising that Trump would use losses to minimize his tax bill, which is perfectly legal. But their sheer magnitude has many tax experts wondering about the details of how they were racked up, how much Trump pushed the envelope on tax law and what it says about the GOP presidential nominee’s business acumen, which has been a cornerstone of his appeal to many voters.
According to The New York Times, which said it was mailed three pages of Trump’s state returns for 1995, his losses stemmed from “mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.” He could have used that to avoid paying federal taxes for as many as 18 years, the paper estimates.
Here are five questions the disclosure raises:
Is this unprecedented?
No. Democrats are spinning this as an example of how the wealthy game the tax system, and Trump surrogates like Rudy Giuliani are calling it evidence of the Republican candidate’s genius. In reality, it’s standard business practice.
The government taxes businesses only when they make money — if they lose money, they pay nothing. What’s more, if companies lose money, they can carry losses forward and backward, to offset income in future or past years, which then reduces their tax bills in those years as well.
Why is this allowed?
It’s partly to account for the fact that the vagaries of running a business may not always match up with the calendar-year schedule on which they pay taxes. (The way Trump’s companies are structured, he records profits and losses on his personal income tax forms.)
Consider a business that loses $50 in June but makes $100 in July. “Everyone agrees that’s a $50 profit,” says Alan Cole, an economist at the Tax Foundation.
But what if a company loses $50 in December and makes $100 in January, which happens to fall in the next tax year?
“Fundamentally, these are the same thing, with slightly different timing,” says Cole, so the tax code allows that second company to book those losses in the next year in order to show that it also made $50.
Or consider highly cyclical businesses, like agriculture, where a farmer might earn $300,000 one year (putting him or her in a high tax bracket) and nothing the next two years. Allowing these “net operating losses,” as they’re known among experts, helps smooth those ups and downs.
This routine practice was particularly important during the recent Great Recession when many businesses were hemorrhaging money, which allowed them to reduce their taxes for years to come.
“In each year from 2008 to 2012, approximately 15 to 19 percent of all active corporations had their income completely offset in this manner,” the nonpartisan Government Accountability Office said in a report released in April. It also said that at least two-thirds of all businesses did not have federal tax liabilities between 2006 and 2012, in part because they didn’t make any money.
Many tax experts expect Trump’s more detailed tax returns, should he ever disclose them, to reveal more exotic tax-avoidance techniques than this.
Eighteen years of no taxes? Really?
In order to know how many years Trump avoided paying taxes, you’d need to know (among other things) what his taxable income was, and the Times acknowledges this is still unknown.
It estimates he made $50 million, based on his fees for the television show “The Apprentice” and the “roughly $45 million he was paid between 1995 and 2009 when he was chairman or chief executive of the publicly traded company he created to assume ownership of his troubled Atlantic City casinos.”
So $916 million in losses divided by $50 million in annual income is 18 years.
But it’s possible that the number of years Trump didn’t pay taxes was fewer than that. Or it could have been many more years, depending on his actual — and still unknown — income and losses in those other years.
“He could have had a billion-dollar gain the following year,” said Marty Sullivan, chief economist at the nonpartisan Tax Analysts. “You need more than a snapshot to adequately assess Donald Trump’s tax situation.
“It’s a lot of smoke and no fire,” he said.
Is Trump a bad businessman?
Some tax experts are stuck not by the fact that Trump is claiming net operating losses, but by the sheer size of them. A $916 million loss in one year is really, really big, and is sure to raise questions about Trump’s business acumen.
Of course, savvy business tax planners want to report big losses to the IRS, in order to cut their tax bills. It’s impossible to know, though, how Trump came up with the $916 million figure from the documents provided to the Times.
“A claim of a $916 million [net operating loss] would catch the attention of even the least ambitious IRS agent,” said Cole. “Presumably it was then audited and confirmed. So there’s a good chance that he really lost a whole lot of money.
“More information about the nature of the losses, and what kind of income he generated in other years, would be helpful, but we don’t have that yet,” he said.
Remember: Businesses pay taxes only when they make money, so it would be ironic if Trump — who often brags of his business prowess — ended up paying very little taxes because he doesn’t actually make very much money.
Who leaked Trump’s tax return?
To many experts, this is one of the most surprising parts of the Times report.
It is extremely rare for tax returns to get leaked, in part because deliberately disclosing federal returns is a felony, and states have strict laws against it too.
Joe Thorndike, a tax historian who has been highly critical of Trump for thumbing his nose at the decades-old tradition of presidential contenders voluntarily releasing their returns, slammed the leak.
“Tax returns are private by law,” he said. If candidates are willing to release them voluntarily, “I think that’s great. But until the law requires that sort of release, we shouldn’t encourage illegal disclosures.”