NYT On The Donald’s Taxes

We would like to jump in on the ridicule of the NYT attempted hit piece on The Donald’s taxes from 1995.  It starts out:

[The Donald] declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years, records obtained by The New York Times show.

Let’s start out with declared, a word that suggests The Donald made a decision in what the loss should be.  As the experts in the article note, this large loss would almost certainly attract the interest of the IRS.  Legally is almost nice.  At least they admit that he didn’t do anything illegal but it suggests that it might be close to problematic.  Later on they explain it was three back and 15 forward.  This source shows that it is currently two back and 20 forward.  It seems odd that the NYT did not emphasize the opportunity to carry back.

Sidebar One: Carry Back is also the name of a great horse who won the 1961 Kentucky Derby and Preakness.  End Sidebar One.

Carry back means that a net operating loss (NOL) can be carried back allowing the taxpayer to create an immediate tax rebate from the previous years.  As an example, if you had $10 million in business income in 2013 and 2014 and paid $3 million in taxes each year then a $20 NOL in 2015 would generate a $6 million rebate from the carry back provision.   The opportunity to carry back and get taxes previously paid seem like a great headline to scare the innumerate.  Of course, any taxpayer would be wise to carry back first because of the time value of money and the uncertainty of future income.  The NYT mentions it later but seems to miss an opportunity to mislead.

Next they say:

Tax experts hired by The Times to analyze Mr. Trump’s 1995 records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period. [emphasis added]

Why is the carry forward rule especially advantageous to wealthy filers?  Anyone?  Any individual with such a loss would have the same opportunities.  The NYT seems to have confused wealth and income.  High income in the allowable past or future means a bigger tax impact because that income is subject to higher rates but every taxpayer has the right to NOL carry back and carry forward.

Sidebar Two: Think about many of the recent successful startups like Uber, Facebook, and Amazon that are now household names.  One suspects that all of these benefitted from NOL carry forwards.  They were not profitable early so carry back would not apply.  End Sidebar Two.

Carry back and carry forward are an example of fairness in the tax code.  If our business and your business both earn zero over three years then we should both pay zero in taxes.  You should not be stuck with a multimillion dollar tax bill because your income varied widely and ours didn’t.

Later they throw lots of verbiage:

The provision, known as net operating loss, or N.O.L., allows a dizzying array of deductions, business expenses, real estate depreciation, losses from the sale of business assets and even operating losses to flow from the balance sheets of those partnerships, limited liability companies and S corporations onto the personal tax returns of men like Mr. Trump. In turn, those losses can be used to cancel out an equivalent amount of taxable income from, say, book royalties or branding deals.

Better still, if the losses are big enough, they can cancel out taxable income earned in other years. Under I.R.S. rules in 1995, net operating losses could be used to wipe out taxable income earned in the three years before and the 15 years after the loss.

This is like on the TV show when the bad guy says, “It doesn’t matter it is a tax write-off.”  Of course it does.  Losing a dollar and getting back 35 cents in tax benefits is not a good business model.  We will interpret the bold phrases above.  A dizzying array of deductions is another way of saying it was proper under the tax code.  Even means that if you have a loss in one area and a gain in another you can do the arithmetic on your tax return.  How rational.  Better still means not as beneficial when applied to carry forwards because of the time value of money and the uncertainty of future profits.  Carry back would be equally fair or beneficial.

Even by NYT standards this isn’t very good.



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s