Profitable Losses, or How Trump Trimmed His Taxes

(Bloomberg) -- How does a billionaire pay next to nothing in federal income taxes? The simple answer is by losing money. But a New York Times report on how President Donald Trump has consistently whittled down his tax liability, paying just $750 in 2016 and again in 2017, shows how complicated that approach can be in practice. Many of the tax breaks laid out in the Times’ Sept. 27 story are not only legal but common, raising questions of the fairness of the tax system in general.

1. What did the Times article say?

That Trump paid just $750 in U.S. income taxes in both 2016 and 2017, paid no income taxes in 10 of the past 15 years, and is in a long-running audit dispute over a refund of $72.8 million, including interest. It said his returns showed he reported losing millions of dollars from his golf courses and has hundreds of millions in debt that will come due in the next few years, on top of the possibility of having to repay that refund if he loses that fight. The documents showed that many of Trump’s businesses are struggling, with him putting more money into the firms than he’s taking out, the report said.

2. What tax breaks did Trump use to pay so little?

Among the biggest tax benefits Trump took advantage of is the net operating loss deduction. Losses reduce the amount of income that’s subject to tax. They’re meant to keep businesses from paying taxes when they don’t have profits.

3. How did Trump use net operating losses?

Between 2000 and 2018, Trump was losing tens of millions of dollars on his European golf courses, his Washington hotel and on the Trump National Doral resort in Miami, among other properties, according to the Times story. Tax-offsetting losses can be restricted if the company generating the losses gets acquired, or reduced if it owes tax on income from canceled or modified debt. Some companies can avoid tax stemming from debt cancellation, but generally only if they reduce losses, credits, and other tax offsets they’ve been carrying forward year after year.

4. Did Trump have canceled debt?

The article said that Trump has failed to pay back $287 million in loans since 2010. When Trump’s debt was forgiven, that normally would have generated a new tax liability. But he “was able to avoid taxes on much of that money by reducing his ability to declare future business losses,” the Times reported -- that is, he traded future tax-offsetting losses for minimal taxes from debt cancellation.

5. Has Trump changed how losses are handled?

Yes. Thanks to the GOP tax overhaul that Congress passed and Trump signed in 2017, corporations can carry unused losses forward to future years indefinitely -- instead of the prior limit of 20 years. The law barred them from shifting those losses back to earlier years to trigger refunds, and capped the amount of income corporations can write off with losses in a given year at 80%. But the massive Covid-19 aid package passed in March and signed by Trump temporarily reversed these restrictions.

6. What did that relief package do?

A common stimulus tool in a downturn is to allow companies to shift their new losses into previous years, generating a refund of previously paid taxes. Congress temporarily allowed this both after the 2008 financial crisis and as part of the Covid-related CARES Act. After the financial crisis, Trump received $70.1 million plus $2.7 million in interest after he filed for a “quickie refund,” which corporations can file early in the year when they think they’ve significantly overpaid last year’s taxes, according to the Times report. Trump wasn’t alone in claiming loss carryback refunds at the time: Loss carryback claims through other forms spiked following the financial crisis. Trump’s refund required IRS auditor approval and was large enough to necessitate an opinion from the Joint Committee on Taxation, the report noted. But according to the Times, after the IRS audit results were sent to the JCT in 2011 and an agreement was reached in 2014, the audit picked up again and expanded, then in 2016 was once again sent to the committee, where it remained unresolved.

7. How does this work for other kinds of businesses?

Businesses like partnerships and LLCs, which are taxed at the owner level at individual rates, rather than the corporate rate, are subject to a separate 2017 tax law limit on losses. The Covid-19 stimulus law temporarily rolled back this limit, and business owners making $1 million or more reaped the lion’s share of the benefit. It’s not clear from the Times story the extent to which Trump might have benefited from different forms of business loss relief based on the structure of his businesses.

8. Did Trump use tax breaks for property?

Capital-intensive companies, such as those in the energy sector, often rack up losses from numerous deductions related to wear and tear on their machinery and equipment. Real estate companies also get these benefits, known as depreciation deductions. While Trump has expressed praise for depreciation, his losses have been enormous even before depreciation is factored in, according to the Times. Depreciation can usually be only claimed a bit at a time, with the amount depending on the type of property, but the 2017 tax law temporarily allowed businesses to get all the write-offs in one year.

9. What other tax breaks did Trump use?

Trump claimed historic preservation tax credits relating to his hotel in Washington, according to the Times. Developers of historic rehabilitation projects can get a dollar-for-dollar tax credit worth 20% of their costs over five years. According to the Times, he also took several “conservation easement” deductions, a tax break that’s recently come under government scrutiny.

10. What else?

Trump has also written off tens of millions of dollars in business expenses — including consulting and other fees may have been paid to Trump family members, and even $70,000 to cover his hair styling — according to the Times, which raised the question of whether Trump was spreading profits to his family in an effort to avoid the gift tax rather than compensating them for services. Companies can deduct a vast number of “ordinary and necessary” expenses as the cost of doing business, including certain portions of legal settlements.

The Reference Shelf

• An analysis by the National Taxpayers Union Foundation of the Times’s report on Trump’s taxes.
• An article by the Institute on Taxation and Economic Policy on tax breaks for real-estate investors like Trump.
• ProPublica asks: Who’s More Likely to Be Audited, A Person Making $20,000—or $400,000?
• The Tax Foundation looks at the CARES Act and net operating loss deductions.

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