In what has been a unique presidential campaign, we have received the first surprise of October. The New York Times received copies of Donald Trump’s tax returns from 1995, which showed he had a loss of $916,000,000 due to the failures of two casinos and one hotel. While the loss was huge (or “yuge”) and possibly would call in to question his competence as a business person, some are wrongly angered by Trump’s legitimate use of tax law.

Due to the large loss, Trump was able to carry forward the losses to reduces his taxable income in future years. Many have suggested this indicates that the system is rigged for wealthy people or that Trump has not paid income taxes in a long-time due to this loss.
I’m an agnostic on this election and may not even cast a vote for President, but I do think its a disservice to draw incorrect conclusions about the tax code and subsequently form opinions based on wrong information. So hopefully this clears up some questions people may have.

If you run a business and it loses money, this creates a Net Operating Loss (NOL). That loss can either be carried back 3 years to offset previous income or carried forward for 20 years to offset future income. So let’s say you operate a business that lost $100 in 2015, but you turned it around and made $120 in 2016 . Your 2016 tax return would show $20 of income since you could use the $100 loss created in 2015 to offset the income in 2016. Essentially over those two years you generated $20 of income ad are taxed accordingly.

The NOL is not something that is only available to the rich – it is available to any taxpayer who operates a business and it is used frequently. Many new businesses lose money in their early years of operation before they start turning profits. I don’t view this as a loophole because the government does not cut a check to the owner in a year when the business loses money – so it would be unfair to disregard these losses when the business starts to make money. Our government’s approach is to offer anyone who starts a business the ability to either carry back or forward losses.

The shocking part of the story is the size of the loss because we’re not used to seeing numbers that big. If we moved the decimal point 5 spots to the left, and Trump carried forward a loss of $9,160, it wouldn’t even be a discussion. The fact that he carried forward a NOL to offset future income shouldn’t be shocking and anyone who operates a business would certainly do the same.

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