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Evan Horowitz | Quick Study

Did Donald Trump spin his tax losses into gold?

News that Trump could have spent nearly two decades without paying income taxes — largely because he reported a loss of nearly $1 billion in the mid-1990s — threatens to puncture one of the core arguments of his campaign.
News that Trump could have spent nearly two decades without paying income taxes — largely because he reported a loss of nearly $1 billion in the mid-1990s — threatens to puncture one of the core arguments of his campaign.

A bare handful of pages from Donald Trump’s 1995 tax returns has sparked feverish speculation that the Republican nominee may have avoided federal income taxes for the better part of two decades. Whether this counts as a scandal depends on your view of tax fairness.

Trump lost $916 million in 1995, according to partial tax returns which were leaked to the New York Times. It was a low point in Trump’s career, when the real estate market was depressed and his casino businesses collapsing.

But in the byzantine world of tax law, gigantic business losses aren’t always a bad thing. You can actually use those losses to avoid future taxes. Lose $100 this year, and next year your first $100 is tax free.

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In Trump’s case, the whole thing is just magnified. A $916 million loss could mean years and years without a tax bill.

Using one-time losses to offset gains is a standard practice with an utterly banal name: “loss carryforward.” What’s more, it has a perfectly sensible rationale: sometimes, a one-year timeframe just isn’t the best way to assess the appropriate tax-liability of a business.

Picture a young startup, just trying to find its footing. Maybe it loses $500,000 in year one, before turning a $100,000 profit the next. Should the company pay taxes on that $100,000? Even though it’s still $400,000 in the hole?

Reasonable people can disagree about how to handle these situations, but there’s nothing nefarious about weighing good years against bad ones when figuring out how much businesses should pay Uncle Sam.

But this doesn’t mean Trump is in the clear. The touchy question in Trump’s case is whether his losses are real losses — or fictive. Was Trump actually $900 million poorer at the end of 1995, or was there a funny-money calculation specially prepared for the IRS?

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To know for sure, we’d need more of his tax returns. Then we’d have details about the deductions he claimed, information for individual businesses, and more ways to check his numbers against market conditions in the mid-’90s.

Absent that, we’re left with tantalizing hints and lots of speculation.

We know, for instance, that real estate developers have special tax loopholes, which could well have played a role in Trump’s 1995 returns. Among other things, developers are allowed to take deductions for the depreciation of their buildings — something you don’t get to do for your house.

There’s also the fact that a lot of Trump’s businesses run on debt. They are often financed by banks, rather than by money from Trump’s pocket. So sometimes when Trump loses big, it’s actually the banks who get stuck holding the bill. When his debts are canceled in bankruptcy, for instance, that’s a windfall for him and a loss for the banks — but we don’t know exactly how it was handled for tax purposes.

Faced with these kinds of probing questions, the Trump campaign went on offense Sunday, insisting that Trump’s manipulation of the tax code showed his business genius. He used the rules at his disposal to get the best outcome for himself, his businesses, and his investors. How could any committed businessman do less?

Trouble is, Trump’s not running for America’s top businessman. He’s running for president, where he’d actually be overseeing the IRS and helping to make tax law. In that role, he could be responsible for making decisions that have a substantial impact on his own businesses. As yet, he hasn’t said how he plans to handle such situations. And if we never see his tax returns, we might not even know when such conflicts of interest arise.

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Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.