WASHINGTON: A May 8, NY Times (NYT) article declared “Decade in the Red: Trump Tax Shows Over $1 Billion in Business Losses.” The column went on to say:
“Newly obtained tax information reveals that from 1985 to 1994, Donald J. Trump’s businesses were in far bleaker condition than was previously known.”
There was also this from the Apprentice, some fifteen years before the NY Times article:
President Trump quick tweets response was the column was “highly inaccurate.” The President, in twitter brevity, did try to explain why.
Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ……
— Donald J. Trump (@realDonaldTrump) May 8, 2019
While Trump really does have a legitimate position, he seems to not communicate that position well.
For instance, Trump notes that depreciation expense minimizes income tax liability. It is a justifiable expense because it allows for the recovery of capital investment.
This is necessary to ensure that capital is re-invested back into the economy often in ventures that carry large risk.
It’s cash flow, not income that matters.
In other words, 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 investment over say a 25-year period at $4,000 year.
Without paying taxes on the capital, recovery can be from the profits the factory generates.
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.
Depreciation Tax Shield
In finance, that is referred to as the depreciation tax shield. Trump referred to it as a tax shelter.
It results in negative income but smaller tax liability and larger positive cash flows. Nothing is illegal, immoral or wrong about that. It is precisely for that reason that Trump’s tax returns show negative income (losses) while his cash flow was very positive.
And why he became very successful.
Trump’s tweet said, “You always wanted to show losses for tax purposes….almost all real estate developers did – and often re-negotiate with banks, it was sport.”
The last part of that tweet is interesting. Trump called re-negotiating with the bank a “sport.” Many large developers and very successful business people often view certain negotiations, particularly with a bank, like a game or a sport.
Banking’s high finance game
Banking is one of the very few industries where the product offered is what economists would call “perfectly homogeneous.”
That means every bank is offering exactly the same product; the use of money.
Since businesspeople always try to minimize their cost, they negotiate with many lenders. It doesn’t matter which bank agrees to finance the project since money is money.
In these negotiations, it is not simply the interest rate that is negotiated but many other conditions like minimum balances, up-front fees, contingencies, timing, and flexibility.
Many developers often say that the terms of the loan are more important than the actual interest rate. These conditions often result in spirited negotiations.
In the end, the developer does business with the lender that offers the best overall package of price and terms. Many view the negotiations as a sport, or game, which results in a competition that produces winners and losers.
Simply put, that’s how a business operates.
NY Times fake news.
The President says the NY Times article is another “Fake News hit job!” And it looks like he is right.
More disturbing is that the column shows that the writers simply do not understand business. Therefore writing about a topic without sufficient knowledge. A journalistic “no-no.”
Perhaps the real motivation is simply to continue the narrative that Trump is a crook, liar, and or deceitful. The New York Times, as well as most other major media outlets, write very biased and often inaccurate stories about the President. Before and his winning the election in November 2016.
Trump’s right. About his losses and gains. And that there is a lot of fake news out there.