Donald Trump’s Income Tax Return

Some of the Democrats have complained that Donald Trump has stated that he will not release his current income tax return until after the audit is finished. I think that this is reasonable.

Someone found a copy of his 1995 return in which he showed a huge Net Operating Loss. The calculation of the NOL is complex and difficult. I have only prepared a couple of them. They often take a couple of hours to fill in. The corresponding Canadian form takes only a few minutes.

The concept of Net Operating Losses is to decrease the effects of varying income levels. A typical one would be for someone like a realtor who made money when real estate was moving in the early 2000s and had huge losses when the real estate market died, because he was still making the same advertising expenses. Companies in mining or oil exploration would have the same problems. The NOL permits taxpayers to decrease the tax on other years to compensate for the losses of the loss year.

People whose income varies from year to year are quite likely to use NOLs. Some examples are a newspaper, a grifter, and an angel investor. I specifically mentioned these because the New York Times, Hillary Clinton, and Mark Cuban all recently condemned Trump for using NOLs recently without realizing that they had done the same. I have no idea why Mark Cuban made such a stupid mistake. Until recently I thought that he was smarter than that.

I would not expect to see anything interesting in Trump’s tax returns in any case. Anyone buying real estate developments in the US has to form a new corporation for each project. If the address is 123 Main Street you would try to set up a corporation with a name like 123 Main Street Ltd.

This is necessary because there are huge numbers of lawyers who are looking for business and nearly all of them would be glad to get a chance to make a claim against a property owner. Many lawyers make a practice of filing trivial actions against companies like real estate owners in the hope of getting a quick out of court settlement. They typically ask for an amount that is significantly less than the cost of going to court.

Trump says that he does not pay off these shysters. He makes them go to court. If there was only one or two it would be cheaper to pay them off than to go to court. He takes the position that if he paid off one of them he would be besieged by trivial lawsuits.

As a sidelight here, Al Sharpton’s daughter filed a claim against New York City stating that she had sprained her ankle because she tripped on something on the sidewalk. She went ahead and posted photos on the internet of her dancing in high heels later the day of her supposed accident, and climbing a large hill or small mountain a couple of days later. How stupid can they get?

To take money from a corporation to an individual owner is not difficult. The company can pay a dividend, a management fee, a director’s fee, or some similar thing. All of these would simply go onto a form 1099 and these would be added up, either directly or on a schedule C.

In Canada it used to be necessary to have the owner of a private company receive a draw during the year. Near the end of the year the accountant had to figure how much was a salary and how much was a dividend. The objective was to select the distribution of income types to minimize the total tax bill. Similar calculations are done in the US. Naturally they are more complex when a large number of corporations are involved.

There is an additional complicating factor in Trump’s case. Because he has interests in a couple hundred corporations, some of these are probably treated as separate businesses and some of them consolidate the accounts of some other corporations, which are officially owned by the mother corporations instead of the shareholder. It requires some pretty fancy calculations to figure out the best distribution.

In summary I expect that when his 2015 return is published it will not contain anything interesting because it will only show the funds that went from his companies to his personal account. This will be quite close to his cost of living plus whatever additional amount he wants to put into his stock trading account.

If the Dems really wanted to know what was in his tax return they would instead look at the 104 pages that he filed a few months ago. One financial writer looked at this and found that Trump owned a large amount of shares in a particular company that did not fit in with his other investments. He looked at it, examined the company’s filings, and recommended that his readers all buy shares in it.