His tax returns

As the presidential election cycle for 2016 is now in the books, the subject of President-elect Donald Trump’s tax returns will likely pass quietly away. During the campaign season and run up to the election however many of the voting electorate and political analysts were disturbed by Mr. Trump’s refusal to publicly release his tax returns. As most people know, presidential candidates for many years had been following an unofficial custom of releasing their recent tax returns for public consumption and analysis. President-elect Trump chose to break with this tradition.

Why did he choose this course of action? The primary reason given by he and his advisors was that his tax returns couldn’t be publicly released because his returns were under audit by the IRS and that fact prevented him from releasing them. While it may be true that his returns were (and perhaps continue to be) under audit, the argument does not hold water; there is no rule in the tax law that would prohibit him from releasing his tax returns to whomever he wanted.

What seems to be the real reason for not disclosing his tax returns is what now appears to be common knowledge that he has paid little if any income tax for many years. News reports consistently maintain the “no tax” issue goes back as far as 1995.

What happened

According to mainstream news organizations, President-elect Trump incurred an enormous tax loss (some estimates put the loss at close to $1.0 billion dollars) in 1995 due to adverse business conditions that caused his casinos and hotels (hereafter, his businesses) to lose money. While the exact form of ownership of his businesses are unknown to this author, it is safe to assume that Mr. Trump had personal liability with respect to these businesses; it was his personal liability for the losses of these businesses and Mr. Trump’s involvement in them that caused the businesses losses to be treated under the tax law as personal tax losses for Mr. Trump. There is nothing illegal in this result. So, in 1995 at least, it would appear that Mr. Trump’s personal tax return showed him as suffering the enormous tax loss.

In the tax law, when an individual person’s tax deductions and business losses exceed their sources of taxable income, the result, a net loss, is termed a “net operating loss”. Many taxpayers who own and operate businesses for themselves incur net operating losses on their personal tax returns in any given year. The difference between those persons and Mr. Trump is simply twofold; i) the size of his loss incurred was vastly larger than most people, and ii) most people do not endeavor to be president…..

When an individual person incurs a net operating loss, the tax law clearly allows that person to receive tax relief in the form of tax reductions and/or refunds in tax years preceding the year of the net operating loss (i.e., carryback years) or in tax years following the year of the net operating loss (i.e., carryover years). While the exact years and time periods that can be used as carryback and carryover years have varied over time, the law in place in 1995 (and hence, applicable to Mr. Trump) was that a net operating loss could be carried back to the three prior years and/or carried over for the next fifteen years. The result; because of the size of the net operating loss deduction, it likely wiped out all of Mr. Trump’s other sources of taxable income (and therefore, all income taxes) for many years.

While there are undoubtedly many other important details and facts that impacted Mr. Trump’s tax returns for the years in question, there is no question of the legality of his using his net operating loss deduction to reduce his personal taxes. The mistake Mr. Trump made, if any, was (in this author’s opinion) failing to simply explain to the American taxpayers what had occurred with his business losses in the past.

As is usually the case in the tax law, there are many variables and nuances to consider in each taxpayer’s situation when it comes to tax deductions. Consequently, seeking the advice of an experienced, qualified tax professional is recommended.

Article written By David M. Hanson, CPA, LattaHarris, LLP