Trump Taxes: The Unplanned Tax Years

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The recent release of information on President Donald Trump’s tax returns has caused quite a stir in the public. In 2016, Trump paid $13,301 less in federal income taxes compared to the average taxpayer according to nationalpriorities.org. Yet, he out earned the average taxpayer by hundreds of millions of dollars. Tax return data obtained by The New York Times shows in tax years 2016 and 2017 that Trump paid a combined total of $1500 in federal income taxes. Many are speculating that his activities were fraudulent and dubious to achieve such a small tax bill. However, none of those claims have been substantiated to date. Net operating losses (NOLs), depreciation, tax credits, law changes, and savvy tax planning appear to have contributed to Mr. Trump avoiding paying any substantial amount of income taxes over the last two decades.

From 1995 to 2005, Trump paid very little to no taxes by utilizing an almost billion-dollar net operating loss (NOL) he unabashedly gained in 1995. A net operating loss is the accumulation of deductions above and beyond taxable income. Generally, you could carry forward a net operating loss for 15 years. In 10 years, Trump absorbed all that loss while earning almost 1 billion dollars but paid zilch in taxes. It was not until 2005 that Trump started paying federal income taxes again. From 2005 to 2007, Trump paid over $70 million in federal income taxes. Those few short years are now known as the “taxpaying years.” Even so, averaging $23 million a year in taxes from 2005 to 2007 probably did not sit well with Mr. Trump. The strategies that he employed prior to the “taxpaying years” were still available. These are the years that seem to have gone unplanned.

The accountants for the Trump Organization let planning for 2005-2007 slip through cracks for lack of better wording. The Trump Organization and its accounting firm had gotten comfortable under the nearly $1 billion-dollar NOL assuming it would last well beyond a decade. In doing so, other tax avoidance strategies were either underutilized or not considered altogether. Around this time, Trump’s popularity was increasing largely due to the show, “The Apprentice.” With his increased popularity, Trump’s earning potential increased as well, and he made over $427 million from television, licensing, and endorsement deals. With no losses to offset this higher taxable income, Trump had to do what millions of Americans do every April 15 and that is pay taxes.

Tax planning is especially critical when taxable income is expected to be higher in current or future years. Either Trump’s accountants were not running the numbers or perhaps tax planning scenarios were presented to Mr. Trump and he refused to implement any of them. Inasmuch, an unexecuted tax plan is about as good as no tax plan. Before long, Trump saw the folly in his reliance on letting the chips fall where they may and possibly started actively engaging in tax planning for the first time in his life. There would be no more “taxpaying years.” Trump’s finance team ensured that in future years he would pay no more than $750 in federal income taxes.

From 2007 onward, Donald Trump squandered cash from profitable ventures and acquired large loans to fund the operating expenses of less profitable businesses like his golf courses and casinos. He also took advantage of generous depreciation deductions which pushed his businesses further in the red.

As loans became due, Trump refused to pay many of them back or unceremoniously filed bankruptcy resulting in forgiven debt that had to be claimed as taxable income. Most recently, it was reported that he failed to pay back $56 million in loans between 2016 and 2017. Yet, savvy tax planning perpetuated the cycle of paying no federal income taxes year after year. With the use of habitual business losses and uncapped business and investment credits, Trump virtually escaped tax free. In effect, Trump used millions of dollars of free money from lenders to pay hundreds of dollars to the US Government on billions of dollars of revenue. Based on this fact pattern, there is no doubt that now every year is a carefully planned tax year for Donald Trump.

Other sources used: New York Times

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Nicole Davis
Nicole Davis is the founder and CEO at Butler-Davis, a tax and accounting firm located outside of Atlanta, Georgia. She brings more than a decade of experience in accounting, tax, financial management and advisory services to clients of all sizes in various industries. Nicole specializes in tax strategy, small business accounting with specialties in construction, pharmacies, and service-based businesses. Prior to founding Butler-Davis, Nicole spent most of her career in industry with Fortune 500 companies. She began her career with ConocoPhillips in Bartlesville, Oklahoma. Nicole is a member of the American Institute of CPAs and the Georgia Society of CPAs. She earned a Master of Business Administration from the University of Tulsa and graduated summa cum laude from Grambling State University earning a Bachelor of Science in accounting. Nicole is also a member of the Rockdale Chamber of Commerce and board chairman for More Than Conquerors, Inc. Nicole and her husband JW live in Conyers, Georgia and have five kids. In her free time, Nicole enjoys writing poetry, cooking and making handcrafted soaps.