WASHINGTON. On May 8, the New York Times (NYT) reported that after seeing President Trump’s tax returns from 1984 to 1995, Trump had losses of over a billion dollars. The NYT concluded that Trump “appears to have lost more money than nearly any other individual American Taxpayer.”
The New York Times is showing an ignorance of the tax code.
The reason Trump had tax losses but was still able to build a real estate empire was due to how the tax code allows a business to recover its capital.
The explanation is very simple. In fact, anyone who has taken at least one course in accounting can easily explain this to the completely uninformed and obviously biased New York Times.
Understanding depreciation expense.
Suppose a businessperson buys or builds a factory for $100,000. She uses capital from income earned after paying income taxes. The IRS says they will allow that person to recover her capital investment over say a 25-year period at $4,000 year.
Because of this $4,000 annual depreciation expense, no income taxes would be paid annually on $4,000 of future income for the 25 year period.
Now suppose the factory generates $3,000 in profit the first year. With no depreciation expense, their total tax bill could be as much as $1,400, leaving them just $1,600 cash flow. But with the $4,000 depreciation expense, the income would be negative (a loss), so the businessperson pays no taxes.
As a result, the cash flow is $3,000.
Trump’s tax returns show a negative profit but positive cash flow.
Trump’s tax returns show an accounting loss, meaning no taxes would be paid, resulting in a larger positive cash flow for future investments. In accounting, this is known as the depreciation tax shield.
On May 9, the New York Times doubled down on their ignorance. A column by an NYU School of Law professor “Trump is a bad businessman. Is he a tax cheat too?” also shows a lack of understanding of business principles and how the tax code works. This is somewhat surprising coming from a law professor who should know at least the basics of the tax code.
Because of the losses, the author claims “ Donald Trump is a terrible businessman.” In fact, it is exactly the opposite. Trump is a great businessperson. The author further concludes that “we do a terrible job of adequately taxing the wealthy.”
Last year the top 20% of income earners paid 87% of all income taxes collected. How much more do you we expect the wealthy to pay?
Trump’s tax returns are audited.
We know that President Trump’s tax returns are audited every year. That means that every deduction the President takes must completely follow the law. We could change the law but that would be counter-productive.
If depreciation expense was eliminated, capital would not be recovered. That would be a disaster for the American economy, especially considering our economy is capital intensive, meaning we need new capital to be created to facilitate economic growth.
Without depreciation, the economy would stagnate.
Of course, The New York Times – uninformed, biased and bogus as always – then reaches its next fake conclusion. That is the President must be forced to release his tax returns.
It is for exactly because this type of reporting that Trump should never and likely will never release his tax returns.
The President has had more than 100 successful real estate investments. For each of those projects, Trump invests often more than $100 million or more and then seeks financing for the balance. Because real estate investments are highly leveraged he borrows 5 to 8 times the investment.
Real estate investments are highly leveraged for all of us.
This is similar to an individual who purchases a home. For a $100,000 house the homeowner invests $10,000 to $20,000 and then gets a mortgage for the remaining $80,000 to $90,000. If the homeowner fails to repay the mortgage on a timely basis, the lender forecloses on the home, seizes ownership and then sells it to recover the mortgaged amount.
Of the more than 100 projects Trump has undertaken, four of them were not successful.
If Trump released his tax returns the biased mainstream media (MSM)would write slanted stories and highlight every instance where a charge-off was taken. The IRS allows these but the media would still call him a “tax cheat.”
It continues to be very disturbing that most of the MSM has become so tarnished and has lost their objectivity. More than 90% of the reporting on President Trump is negative. In spite of the biased reporting, President Trump is truly making America great again.
We should read between the lines on stories like this.
— Headline image: President Donald J. Trump carries an umbrella as he disembarks Air Force One in a rain storm Friday, April 26, 2019, at Joint Base Andrews, Md. returning from his address before the National Rifle Association convention in Indianapolis, Ind. (Official White House Photo by D. Myles Cullen)