Whether or not you love or hate him, the records show that Presidential candidate Donald Trump has paid no federal income taxes in some years. For someone with a real estate empire generating millions of dollars in revenue, to some, this may seem wrong and even unpatriotic. Let’s go over some of the obvious strategies he may utilize, which you also may benefit from.
Real Estate Investing
Investing in real estate generates huge tax deductions in depreciation. The cost of the real estate is depreciated over several years; 27.5 years for residential and 39 years for commercial. This creates a large tax deduction, with little in cash actually being used, presuming most of the purchase was made with borrowed funds. It is possible the real estate investment generates positive cash flow, but for tax purposes, a significant loss.
For most, real estate investing is considered a passive activity, which means losses can only be offset against gains from passive activities. If unused, the passive losses are carried forward until there is passive income or when the property is sold. Mr. Trump likely qualifies as a real estate professional, so this rule would not apply to him. The tax losses on Mr. Trump’s real estate investments could offset the income he earned from other income producing activities such as his salary, dividend income, and capital gains.
For the individual investor, real estate investing can be risky, hard work, but financially lucrative. The potential appreciation, positive cash flows, and tax benefits can make real estate investing worthwhile. In addition, appreciation on real estate investments is not taxed until the property is sold, and even then the property can be sold in a tax-free exchange. Consult with a qualified real estate professional to learn more about real estate investing.
Business Losses & Net Operating Losses
Starting and running a business has many risks and challenges. Most new businesses lose money in the first few years. These losses can offset your regular income. Business income is taxed in the current year, but business losses (if not used in the current year) can be carried forward 20 years, or until the loss is used up. Recently uncovered tax returns show that in 1995, Mr. Trump had an astonishing tax loss of 916 million dollars, which depending on the year it was generated, can be carried forward to 2010. In other words, the losses he had from almost 20 years ago can offset income from today. That is ultimately how he may owe no federal income taxes.
For the individual, starting a business can be advantageous from a tax standpoint. Whether or not the business earns a profit, the losses generated can reduce your taxable income. For example, by simply joining a network marketing business opportunity, you may be able to deduct a portion of expenses that previously would have been deemed 100% personal such as computers, cell phone bills, Internet expenses, and possibly a portion of your home. Be cautious, though, since consecutive years of losses would not be deemed a bona fide business venture.
Does Trump Pay Taxes?
The allegations that Mr. Trump pays no taxes are not entirely true. Undoubtedly, Mr. Trump has paid hundreds of thousands of dollars in property taxes, sales taxes, real estate taxes, social security taxes, state taxes, and federal taxes. He is a highly skilled businessman, who recognizes that his obligation is to pay no more tax than legally required.
As a presidential candidate, he is not legally obligated to release his tax returns to the public, and so far, has chosen not to do so. His campaign states he knows the tax code far better than anyone who has ever run for the Presidency before, but does that justify him paying no federal income taxes? The bottom line is to familiarize yourself with the IRS Tax Code or consult with a professional who can help ensure you pay no more in taxes than you legally owe.
Mr. Noel B. Lorenzana is an Illinois Registered Certified Public Accountant with over 20 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicagoland area. Contact me to find out how I can help you optimize your year-end tax strategy.
The information presented in the above article is general in nature, and not warranted or guaranteed. Your situation is specific to you alone, so be sure to speak with a Certified Public Accountant or a trusted tax advisor. You are welcome to contact me if you would like a free consultation to discuss your tax situation.
This article first appeared in the November 2016 issue of Pinoy NewsMagazine. If you found this article on How Trump Pays No Taxes and How You Can Benefit useful, I would greatly appreciate if you shared and commented below.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.