So how might this add up to income-free earnings for nearly two decades? Trump used a provision of the tax code that allows businesses to transfer their tax payments to their owner’s personal tax returns, which in most cases are subject to lower tax rates. This tactic, in which the business becomes what the tax code calls a “pass-through entity,” has been contentious for years, with some—including Trump—saying that it helps small businesses avoid onerous corporate taxes. But suggesting that pass-through provisions mostly benefit small businesses is misleading, says Harry Stein, the director of fiscal policy at the left-leaning Center for American Progress Action Fund. “Most passed-through income, 70 percent, goes to the top 1 percent,” Stein told me.
And just as these businesses can pass their profits onto their owners for a more favorable tax rate, they can also pass losses along too. In Trump’s case, he was able to pass nearly $1 billion of losses through to his individual return as what are called net operating losses—which allow for deductions, real-estate depreciation, and other write-offs available to businesses. In doing so, he could have applied those losses to his future earnings, nullifying any federal income taxes he might have incurred on them. “If you lose money in your business, the tax law allows you to carry back a loss three years and carry it forward for 15. So you can use a loss from today to go back and wipe out income in the past and wipe out income going forward,” said Dorothy Brown, a tax-policy scholar and law professor at Emory University. Net operating losses, she noted, aren’t available for the average individual filer, just business owners.
By preferentially blending bits and pieces of the corporate and personal tax codes, Trump might have gained important financial flexibility that simply isn’t available to most people. “Wealthy people can game the system in a way normal people can’t,” Stein says. Corporations, for instance, are allowed to time their reporting of losses in ways that are beneficial to their bottom line. For instance, Trump could have had his businesses wait to report losses until a new calendar year, in order to help offset gains and reduce his overall taxable income at a more advantageous time, Stein said. And the rules on net operating losses allow an individual to report a loss that will offset income for several years, which could also result in a lower tax rate for owners. These are all options not available to individuals who might make vastly different amounts every month or year. Trump also could have received preferential tax treatment on his real-estate holdings when it came to reworking the loans he owed to banks, Brown added.
Experts say that without seeing Trump’s entire 1995 return, it’s difficult to determine the extent and methods of his tax avoidance, but still Trump hasn’t denied avoiding taxes since The New York Times’s report. Instead, he has flaunted his ability to successfully use tax loopholes, insisting it is a hallmark of being a shrewd businessman. In a statement following the leak of his tax returns, the campaign (which declined to elaborate further for this article) spun Trump’s tax tactics as business savvy:
Mr. Trump is a highly-skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required. That being said, Mr. Trump has paid hundreds of millions of dollars in property taxes, sales and excise taxes, real estate taxes, city taxes, state taxes, employee taxes and federal taxes, along with very substantial charitable contributions. Mr. Trump knows the tax code far better than anyone who has ever run for President and he is the only one that knows how to fix it.
Trump maintained his defense into this week. “I knew how to use the tax code to rebuild my company when others didn’t. My understanding of the tax code gave me a tremendous advantage,” Trump said at a campaign stop in Colorado on Monday.