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Financial Planning > Tax Planning > Tax Loss Harvesting

Celebrity apprentice or biggest loser?

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The New York Times recent posting of only three pages of Donald Trump’s 1995 state income tax returns (from New York, Connecticut and New Jersey) raised the following questions:

    1. Did Trump’s 1995 income tax return show a loss of nearly $1 billion?
    2. Was that entire loss sustained in 1995?
    3. Was the net operating loss (NOL) it created a “tax shelter,” because it eliminated all of Trump’s income tax for up to 18 years?

Unfortunately, the schedules attached to Trump’s unreleased 1995 federal Form 1040, which set forth the specific types and sources of income and deductions claimed on the return, are unavailable. The information on the schedules may have provided easy answers to these questions.

Related: Worried about the U.S. presidential election? You’re not alone

Fortunately, the first page of the New York State Resident Income Tax Return (Form IT-201) is a helpful resource because the line items of income and deduction set forth on that form, and the line items set forth on the first page of Trump’s 1995 Form 1040, are the same. Some insight may then be gained into Trump’s federal tax return by examining his state income tax return. Additionally, an analysis of the return provides interesting insight into the way Trump conducted business.

Netting the line items reported on Form IT-201 (wages, interest income, dividends, state income tax refunds, Schedule C income, capital losses, losses from the sale of business property and rental real estate losses) results in negative income, or a loss of $6,269,378. Finally, including the last line item entry on the form, a negative $909,459,915 of  “other income,” there is an overall staggering loss in 1995 of $915,729,293.

Related: The 10 best & worst states to pay taxes

As discussed later in this article, whether the $909 million is an additional loss sustained in 1995 or was an NOL carried over from another year(s) depends on what the $909 million of “other income” is.

Continue reading for a more detailed analysis…

Protestors march in a downtown street holding a sign in support of Republican presidential candidate Donald Trump releasing his tax returns, outside of a campaign rally attended by Trump, Friday, Sept. 16, 2016, in Miami. (AP Photo/Lynne Sladky)

Protestors march in a downtown street holding a sign in support of Republican presidential candidate Donald Trump releasing his tax returns, outside of a campaign rally attended by Trump, Friday, Sept. 16, 2016, in Miami. (AP Photo/Lynne Sladky)

Detailed Analysis of Trump’s 1995 State Income Tax Return

Wages ($6,108): Such a trivial salary paid to the creator and CEO of the Trump businesses lacks credibility.  Clearly, Trump’s reasonable salary could have been millions. If Trump intended to avoid payroll taxes on wages (Social security and Medicare), he failed because the $3,427,092 reported on Schedule C was subject to self-employment tax (the equivalent of payroll tax for sole proprietors). 

Interest Income ($7,386,825): Interest was by far Trump’s greatest source of income. Unfortunately, the source of that income revealed on Schedule B is unavailable. Possible sources could have been interest paid on Trump loans to others and/or his corporate bond holdings. In any event, to generate that amount of interest income, assuming an interest rate of 8.83% (the prime rate in 1995), the total principal amount of loans and/or invested in corporate bonds could have been in excess of $83,600,000.

Dividend Income ($26,051): Compared to $7 million plus of interest income, this relatively small amount of dividend income indicates a very unbalanced investment portfolio  In any event, it appears that Trump’s investment in the stock market (at least dividend paying stocks), or perhaps even in his own companies was relatively small.

Schedule C – Self-Employment Income ($3,427,092). Virtually no wage income as compared to significant self-employment income suggests that Trump was operating as a sole-proprietor/independent contractor. This means Trump may have performed services for the Trump empire as a 1099 independent contractor. In addition, all or part of the income could be attributable to speaking fees, consulting, etc. If Trump had different independent contractor gigs, that income may have been reported on several Schedules C.

Capital Loss (-$3,000): Capital gains and losses from the sale of stock are reported on Schedule D of Form 1040. Capital losses are deductible to the extent of capital gains, plus up to $3,000 of ordinary income. Any excess above that amount is carried forward to future years. Thus, it is clear that Trump had excess capital losses of at least $3,000.  In the absence of the schedule, whether Trump had significant capital losses as well as what he sold and in how many transactions cannot be determined. If Trump had decided to sell off his stock portfolio, this could explain the relatively small amount of dividend income he earned in 1995.

Form 4797 losses (-$1,356,097): Form 4797 reports gains and losses from the sale of business property (such as rental real estate). If Trump sold numerous properties, the netting of gains and losses could have resulted in the reported loss. Moreover, it is possible that Trump disposed of a number of loser properties to cut overall losses.  So, without more detail, it is difficult to determine the significance of the reported loss.

Schedule E loss (-15,818,562): On Schedule E, rental income, royalties and pass through income and deductions from S corporations, partnerships and trusts are reported. Because of Trump’s heavy investment in real estate, most or all of the loss may be attributable to real estate rental expenses including depreciation deductions claimed on office buildings, casinos, golf courses, etc. Additionally, royalty income from books may also be reported on the schedule.

“Other income” is an NOL

 The netting of the above line items (including state income tax refunds) results in a 1995 loss of more than $6 million computed without taking into account the negative $909 million of “other income.”  So, the remaining question is whether that loss also occurred in 1995.  Assuming the return was properly prepared, the most likely answer is the $909 million was an NOL from a prior year(s).  This is because “other income” entered on line 15 of the New York state income tax return is the amount entered on line 21 of Form 1040.  Essentially, income entered on line 21 is income that is not reported on any other schedule (i.e., gambling winnings and discharge of debt income).  Based on IRS instructions, entries on this line are always positive.  There are only two types of negative entries, and, the one most likely to be applicable is an NOL.

An NOL is not a tax shelter

Finally, an NOL is not a tax shelter because it is comprised of an excess of deductible (real dollar) expenses over income.  Assuming Trump is in a 50 percent tax bracket, one dollar of an NOL saves only $.50 of tax. So, even if Trump was able to eliminate all of his tax in 18 other tax years, there is no way that the tax savings ever fully compensated his loss.

Thus, in 1995, Trump may have been more like “The Biggest Loser” than a “Celebrity Apprentice.” But there is no evidence from the admittedly incomplete state income tax returns that he unduly gamed the tax code.

See also:

Trump and Clinton: Care not given

Clinton, Trump campaigns turn Social Security politics on its head

Trump’s wild ACA premium figures

3 marketing lessons from Donald Trump

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