Following a report by The New York Times, President Donald Trump's taxes became an issue at Tuesday's presidential debate with Democratic candidate Joe Biden in Cleveland. (AP Photo/Julio Cortez)
While leaving unanswered questions about his income sources and tax structures, the report documented how Trump claimed exorbitant refunds through the aggressive use of net operating losses, incurred from decades of failed ventures. The scope of the reported negative earnings seems to conflict with the image of business success and the lavish lifestyle Trump promoted in the media for years as a real estate developer. In at least one case, the requested refunds raised scrutiny from the Internal Revenue Service as well as the Joint Committee on Taxation.
To critics of the Coronavirus Aid, Relief and Economic Security Act
, which loosened many restrictions on the use of net operating losses and temporarily allowed losses to be carried back to prior years, it's a perfect example of behavior they claim will continue under the current law."He was gaming the system, creating losses to wipe out the years he had taxable income," said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. "That kind of gaming will happen again because of the poor design of the CARES Act."
Economic losses can be one of the trickier aspects of an income-based tax system, whether it's trying to measure genuinely unsuccessful companies or those in industries where unpredictable profit swings are the norm.
"The tax system defines income, sometimes in clear and consistent ways, sometimes in arbitrary ways," said Daniel Bunn, vice president of global projects at the Tax Foundation, a right-leaning Washington, D.C.-based economic think tank.
"When people have negative income, or losses from previous business ventures, there can be some confusion on whether that income fits with the overall design of the system," Bunn said.
When the economy takes a turn for the worse, how the tax system handles losses can become all the more important. Congress will often remove limits on net operating loss carryforwards and carrybacks — the ability to use losses in a current year to reduce taxable income in a future year, or apply for a refund from prior, profitable years. In 2009, for instance, Congress more than doubled how far back some taxpayers could carry back losses.
This provision proved key to Trump's tax minimization, allowing him to use 2008 and 2009 losses to gain back much of the taxes he paid on revenue from the TV show "The Apprentice" earlier in the decade, according to the New York Times reporting.
During boom times, Congress often looks to loss restrictions as a source of revenue. Ironically, the 2017 Tax Cuts and Jobs Act
, signed by Trump, reversed or removed many of the provisions that helped him in previous tax years.As lawmakers crafted the TCJA and looked for potential sources of revenue during a time of economic expansion, restrictions on losses generated the least resistance from the business community.
The law eliminated the ability to carry losses back entirely, and restricted the use of net operating losses in future years, only allowing them to be applied to 80% of annual taxable income. The law also included a 30% restriction on deductibility for business interest expense, which is more likely to affect companies that experience unprofitable years.
Noncorporate taxpayers also now face a $250,000 restriction on how much they can apply business losses to other income, such as capital gains. The so-called excess business loss restriction applies at $500,000 for joint filers.
One provision that is also likely to affect Trump's tax positions is the tax on global intangible low-taxed income. The levy targets foreign income disproportionate to associated tangible property, and depending on the type of taxpayer — a corporation, a partnership or a solo owner operating through a pass-through — can apply at rates ranging from 10.5% to 37.5%.
Under GILTI, taxpayers can recognize losses, as well as credits for foreign taxes. But they cannot carry either forward to future years.
Trump owns properties around the world, including golf courses in Ireland and Scotland as well as buildings in India and the Philippines. According to The New York Times, he paid significantly more in foreign taxes than U.S. taxes in 2017. Overall, he earned $73 million abroad during that year, the first of his presidency.
At this point, tax experts can only speculate on how the TCJA's provisions affected Trump, as The New York Times said it does not have access to Trump's tax returns beyond 2017. But if his strategies from previous years continued, he may have found it more difficult to shield sources of income from taxation using losses from other years or divisions of his business empire.
As the coronavirus pandemic sparked another global recession in 2020, Congress once again moved to give companies more flexibility to manage losses. The CARES Act temporarily removed the 80% restriction on net operating losses, as well as the 30% restriction on business interest expenses. It nixed the excess business loss restriction. It also allowed companies to carry back losses from 2018, 2019 or 2020 as far back as five years — which means the losses can be applied against the 35% corporate tax rate that the TCJA lowered to 21%.
While the bill's Republican authors said these changes were meant to give companies access to liquidity as revenue froze and the economy faced annihilation, many critics blasted the changes as a giveaway to the rich. The excess business loss provision provoked an outcry after the Joint Committee on Taxation estimated that taxpayers earning more than $1 million annually would receive 82% of the benefits from lifting the restrictions. Former Vice President Joe Biden advocated reversing the change as part of his campaign platform in the 2020 race.
Democrats have proposed to restrict or roll back many of these changes, including in the latest Democratic coronavirus relief bill, which the U.S. House of Representatives is expected to vote on this week.
The revelations in Trump's tax returns likely add a new dynamic to the political debate over losses, providing an example — although perhaps a unique one — of how wealthy individuals can manipulate loss flexibility in ways that some claim flout the goals of the tax system.
Despite the criticisms of misuse, some tax experts argue that maximum flexibility to use economic losses to smooth out tax payments over uneven years is ideal to achieve a neutral tax system, one that doesn't tilt toward a particular industry.
"Three hundred and sixty-five days is kind of an arbitrary window," said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, a right-leaning public policy think tank. "Companies put investments down that are going to span 5, 10, 15 years and the fact that the IRS divides these things up on an annual basis distorts things."
On the other hand, increased flexibility means an increased potential for abuse, stretching the resources of the IRS even further. The agency must issue tentative refunds within 90 days of a request, which critics claim gives overworked auditors little chance to scrutinize the details.
"They're completely outgunned," said Rosenthal of the Tax Policy Center. "When you have manipulators like Trump, that takes a toll on the entire system."
The loss debate dovetails into the debate over the effective tax rates of major corporations such as Amazon.com Inc. — which is no one's idea of an unprofitable company, but often spends and invests so much in a given year that its deductible expenses exceed its taxable income.
Both cases demonstrate the difficulty the tax system can have defining and measuring the elusive concept of profit.
Biden has blasted the tax practices of both Amazon.com and Trump throughout his campaign, and wasted no time linking the president to the TCJA in Tuesday night's debate.
"The tax code that put him in a position that he pays less tax than on the money a schoolteacher makes is because of him," Biden said of Trump. "He says he's smart because he can take advantage of the tax code. And he does take advantage of the tax code. That's why I'm going to eliminate the Trump tax cuts."
--Editing by Robert Rudinger and Joyce Laskowski.
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