U.S. President Donald Trump gives a thumbs up while walks towards the White House on the South Lawn after returning from an 11-day Asia trip in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Trump’s ‘Abnormal’ Interest Income Two Decades Ago Came Tax-Free

(Bloomberg) -- President Donald Trump earned a large amount of interest income two decades ago that was used in tandem with then-burgeoning losses to help him avoid paying federal taxes, according to newly published tax details.

While it’s unknown how Trump earned $52.9 million in taxable interest income in 1989, it was a curiously outsize amount of revenue -- and a key way he avoided taxes, tax experts say.

Under Internal Revenue Service rules, the interest income could have helped Trump zero out his tax bills that year, when his old business losses still hung around and new losses began mounting.

Where that sizable amount of interest income in 1989 came from is unclear, but what it allowed him to do is clear – absorb some of his previous business losses, known as net operating losses or NOLs, to help zero out his federal income tax bill. Such NOLs can be used to lower or eliminate federal tax bills only when there’s enough taxable income – in this case, the interest income -- to partly or fully absorb them.

The New York Times obtained Trump’s IRS transcript that included figures from his federal 1040 tax forms from 1985 to 1994 from someone who had legal access to it. The Times published a report about his finances on Tuesday, showing that he lost $1.17 billion over 10 years on failed business deals.

The spike in interest income is notable because Trump reported receiving only a fraction of that interest income in previous years. By contrast, he reported $11.8 million in interest income in 1988. In 1987, Trump reported an even smaller $5.5 million, and in 1986, only $460,566, the Times said.

“It’s abnormal,” said Julie Welch, a tax partner and accountant at Meara Welch Browne in Leawood, Kansas. It’s also evidence of a savvy tax move, she added. “That’s good planning.”

Trump, a real estate and branding businessman, has made no secret of his love of tax avoidance, boasting that it makes him “smart.” He’s under increasing congressional and state pressure to release his tax returns, which he has refused to do.

On Wednesday, Trump tweeted that real estate developers “always wanted to show losses for tax purposes.”

During the period covered by the documents examined by the Times, Trump’s businesses generated huge operating losses, and his hotel and casino properties were eligible for large depreciation write-offs that caused him to pay federal taxes in only two years between 1985 and 1994.

“Losses are valuable -- if you have a billion of losses, you can soak up a billion of income without paying taxes,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. But someone has to have enough taxable income to use them in a given year.

Portions of losses that go unused because there isn’t enough income can be used to lower tax bills on prior and future income, making them a potentially lucrative piggy bank. In 1989, the losses could be carried forward 15 years and back three years; now it’s 20 years forward and two years back.

It’s not known when Trump’s previous losses in the years leading up through 1989 were set to expire.

But his hefty interest income in 1989 would likely have been useful for 1985, when he reported losses of $46.1 million from his casinos, hotels and retail space in apartment buildings, and for 1986, when his business losses were $68.7 million, according to the Times. By 1990 and 1991, his business losses were more than $250 million each year, the newspaper said.

The sharp increase in interest income may have signaled a need to generate income to soak up losses before they expired.

“People will sometimes go out of their way to generate income, because they have expiring NOLs and they want to absorb them,” according to H. David Rosenbloom, a tax partner at Caplin & Drysdale. “People go through hoops” in order to avoid losing that tax benefit,” he said. “There’s nothing illegal about it.”

Brian Galle, a tax law professor at Georgetown University, tweeted that “Interest income is typical of efforts to shift taxable income from hi to low tax jurisdiction.”

One thing appears clear, Welch said: “it’s unlikely he had a big outside investment” like bonds, because his interest income before 1989 was so much lower.

Either way, the interest income that Trump reported helped fuel tax write-offs that likely relied on the paper of a federal return, as opposed to real economic losses, to create tax benefits.

“I’m skeptical that” the new details “demonstrate real economic losses, as opposed to tax losses on paper, Rosenbloom said. “There’s plenty of that in the real estate industry.”

©2019 Bloomberg L.P.