If you can count your money, you don’t have a billion dollars. — J. Paul Getty
I’m sure many of our readers saw the recent presidential debates and — no matter how you lean — are wondering how anyone could have reported a loss of nearly $1 billion and use it to defray taxes for nearly two decades. That’s billion. With a “B.” For our older readers, that’s a Sagan Billion.
I’ve always advocated for all clients to pay their taxes, or at least get on payment plans with the taxing authorities. They are like the mob, you eventually pay. You can run, but you can’t hide. They are the toughest gang on the block. This special, orange, circumstance has raised some good questions. Let’s discuss how avoiding taxes was legitimate in this instance — though I’d never want you to experience such a scenario.
The Brief Background
My understanding is that Donald Trump claimed the nearly-billion-dollar dearth in 1995, whilst teetering on the brink of bankruptcy. It didn’t happen overnight. According to news reports, he was overextended and overleveraged and his properties had suffered years of underperformance, which is how it all accumulated. He didn’t just “lose” $1 billion — the funds were investments that didn’t pay off or were for companies with operating costs he couldn’t cover.
So his accountants studied the federal tax code, which basically allows owners to make certain claims depending on the structure of a business. Business owners can take a loss for money lost in the ordinary course of business. This differs from a passive investor who is limited to $3,000 of loss against ordinary income. If that loss wipes out all of your income in a given year, the balance is carried over for the next year(s) until the loss has been neutralized. In 1995, that loss can go back three years and forward eighteen years. So, if a child was born on the day when Trump took his losses on his tax return, that child would be able to vote before they expired.
Is It Legal?
In short, yes. If it weren’t, the feds would have jailed him immediately. The New York Times article, which was not favorable, pointed out that 500,000 other taxpayers did the same thing in 1995.
He invoked this legal maneuver. Even the Times described it as such, and one that “protected him for up to 18 years’ worth of income taxes.” The exact number of years to dig yourself out of a hole may vary. In the time since 1995, he has rebuilt himself, his brand and his company — that’s when everything from the clothes to the university to the ridiculous television show started sprouting up. He recouped his losses with those shenanigans, some of which may have been profitable, and he was on the hook for a lot of money.
How To Avoid This Whole Ordeal
Don’t squander your investors’ money, for starters. Investors are putting their faith and liquidity in you, so think smart before thinking big. We’ve talked about the mindset you should keep when operating a business — one focused on leanness. The need to expand is important and is a good sign for investors, but make sure your infrastructure — physical and corporate — is solid before casting a wider net. If anyone suggested that to Mr. Hairdon’t before endeavors like Trump Shuttle took off, he obviously ignored it.
It’s illegal to simply say “screw the government” and not pay taxes — and I’d never advise that course of action. You’ll be scrutinized forever if you do that — just like Mr. Hairdon’t. Well after this election is over, his tax matters and dealings will continue to be on the radar of both the public and government agencies.
However, as a small business owner, I exercise every legal right to minimize taxes. It’s the right of every business owner to do so. Regardless of your feelings toward the aforementioned presidential candidate, that’s what he aimed to do. That’s what Brinen & Associates is here to help you do. You’re the one assuming the risk, so contact us to help you make sound decisions as you build, grow, or rebuild your business.