$916 Million Loss - Good Businessman, Fraud or Gambler
Let me just start by saying that by no stretch of the imagination am I a Trump supporter. Having said that, let's talk about the Trump tax return that was released yesterday by the New York Times because a little education goes a long way.
The tax return showed a business loss in excess of $900 million. That loss resulted in zero taxable income, which resulted in zero tax. So what happened here?
BACKGROUND: If you invest money into a business and that business loses money, you get to offset that loss against other income on your tax return. If you still have a loss after offsetting against all other income, you have what is called a NET OPERATING LOSS (NOL for short).
An NOL means that after you have added up all your income for that tax year, you have a net loss. You can either apply that loss and offset income in the past or you can save that loss and apply it to taxable income in the future. If you want to go back, you can go two years back. If you want to go forward, you can go up to 20 years forward.
Now that we have the background, let's apply that information to an example.
The Beginning: In 2000, Genius Businessman invests $100 million into a partnership that operates an airline.
Beginning investment $100,000,000
2001 through 2003: The airline makes money. Genius Businessman's allocation of that income is $20 million and Genius Businessman is taxed on that income.
Beginning investment $100,000,000
2001 through 2003 Income $ 20,000,000
Investment in Airline $120,000,000
2004: The airline runs into trouble, files bankruptcy and closes. Genius Businessman is able to take that $120 million loss on his tax return.
(NOTE: Your loss cannot exceed the amount of your investment.)
Now, let's turn our attention to the 2004 Example Tax Return.
Wages $ 2,000,000
All Sorts of Business Income $ 25,000,000
Loss on Investment in Airline $ (120,000,000)
Taxable Income - NOL $ (93,000,000) (A)
At this point, Genius Businessman has a NOL of $93 million. He can either amend his 2002 and/or 2003 tax return (2 year carryback) or he can apply that loss to income for 20 years in the future.
Genius Businessman decides to carry the NOL forward. So, the 2005 Example Tax Return might look something like this:
Wages $ 8,000,000
All Sorts of Business Income $ 42,000,000
NOL carryforward from 2004 $ (93,000,000) (A)
Taxable Income $ (43,000,000)
At this point, Genius Businessman has a NOL of $43 million. He can continue to apply that loss to future taxable income for 20 years until that loss is all used up.
This concept was portrayed on a Sunday morning show as part of a "corrupt tax system" and was implied to be a loophole for billionaire tax payers. I don't agree.
If business owners or investors are not able to take losses that means that business owners or investors will only be taxed on income and not be able to get a tax break when they experience a loss. That is not fair.
So, the New York Times headline: Trump Could Have Paid No Federal Income Tax for 18 Years is great for getting attention and getting people to talk. But it is my hope, that we get past the issue of losses and address some more difficult and substantial issues. By that, I mean asking additional questions such as:
- why such huge losses?
- are these sorts of losses typical?
- where did the $900 million come from in the first place?
- what other entities were involved in these business dealings?
Attacking Trump on the use of business losses allows him to slither out of addressing the issue. If instead we ask about the substance of the transactions, Trump has a much more difficult time slithering out of the response. And as the voting public, we might actually get insight into his business dealings to determine the accuracy of his assertion as a successful businessman.
One year of tax returns is a start, but without all the rest of the returns, the voting public cannot get a good idea as to the whole story. Kinda like trying to understand a whole book when you have only read one chapter.
IMPORTANT: These examples are grossly simplified for demonstration purposes only. They should not be considered or relied upon as tax advice. Each situation is unique and you should consult a qualified tax adviser before applying these concepts to your situation.
Numbers in this example were not based upon facts.
For more info the IRS has a publication on Net Operating Losses: https://www.irs.gov/publications/p536/ar02.html