On October 2, 2016, the New York Times published a story about how Republican presidential candidate, Donald Trump, reported a nearly billion dollar loss in 1995. The total net losses reported to the IRS in 1995 was nearly fifty billion dollars so Trump’s losses represent 2% of of the sum total for that year. This was picked up by various news outlets and it was reported that because of this reported loss, Trump would not have to pay taxes for at least a decade. Many news outlets lambasted Trump for being just another billionaire refusing to pay their taxes. Though, The Federalist gives an interesting defense for it.
I’m no tax expert. I don’t know how that works but tax loopholes have always interested me. So I had to know, “What loophole is Trump taking advantage of?”
It’s called income smoothing.
Examples of income smoothing techniques include deferring revenue during a good year if the following year is expected to be a challenging one, or delaying the recognition of expenses in a difficult year because performance is expected to improve in the near future.
Businesses can do this, but individuals cannot. There’s an argument that poor individuals should be able to because their incomes are more likely to fluctuate and that by not being able to do so, they incur a higher tax burden than the rich.
The reason why Donald Trump is able to do this is partly due to lobbying by the real estate industry and also because of how his business is structured. Corporations are legally considered to be separate entities. This allows people to operate businesses without exposing themselves to legal and financial liability. There’s a special type of legal entity similar to corporations known as a limited liability company (or LLC). This gives a similar benefit as corporations but allows taxation to be passed on individually. This means that rather than the corporation (a separate entity) being taxed, Donald Trump is taxed on a personal basis.
So that’s how he’s able to not pay taxes: income smoothing and LLCs.