Personal Finance

These two strategies may have helped Trump pay just $750 in federal taxes

Key Points
  • The New York Times published an analysis of President Donald Trump’s tax return data going over two decades.
  • Over the years, Trump’s businesses have generated significant losses, which he has been able to carry forward to help lower income – and taxes – in the future, according to the Times.
  • Real estate businesses come with special tax breaks, including the ability to write off the depreciation of an asset.
U.S. President Donald Trump speaks to reporters during a news conference inside the James S. Brady Briefing Room at the White House September 27, 2020 in Washington, U.S.
Ken Cedeno | Reuters

Apparently, losing millions of dollars can work in your favor – if you're President Donald Trump and can hire a team of professionals to help you strategize.

The president's various businesses lost hundreds of millions of dollars over the last 20 years, allowing him to sharply lower his federal tax obligation, according to The New York Times.

The billionaire president paid just $750 in federal income taxes in 2016, the year he won the presidency, and $750 in 2017, the Times found, in examining the president's tax documents.

CNBC has not seen the tax returns and cannot verify the validity of newspaper's conclusions.

The president tweeted in response on Monday that he "paid many millions of dollars in taxes but was entitled, like everyone else, to depreciation & tax credits."

Trump's attorney, Jay Sekulow, did not immediately respond to an email request for comment.

Trump tax returns show large income offset by large losses
Trump tax returns show large income offset by large losses

Though a federal income tax return doesn't necessarily tell the full story of a person's financial condition – financial statements and other documents would back that up – the report sparked a wave of outrage on social media on Monday.

Accountants said what we might be seeing is some very aggressive tax planning at work.

"Ultimately it's possible we find more information and it might be he's doing more than dubious things, but it's possible that this is the end result of some good attorneys, smart CPAs and a messy tax code," said Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, N.Y.

Here are two strategies that may have helped Trump reduce his tax bill.

Net operating losses

Trump paid little to no federal income tax over several years: The New York Times
Trump paid little to no federal income tax over several years: The New York Times

Losing money pays in some circumstances.

In Trump's case, he racked up close to $1 billion in losses back in the early 1990s and used that to save on taxes until 2005, The Times found.

He also declared $1.4 billion in losses from his core businesses for 2008 and 2009.

These are known in accounting parlance as a net operating loss or NOL. This strategy allows business owners who are facing losses in a given year use the red ink to help offset income – and lower taxes -- in future years.

"Let's say you had $50 of losses in July and $100 of income in January of the following year," said Erica York, an economist with the Center for Federal Tax Policy at the Tax Foundation.

"You wouldn't be taxed in the first year due to those losses, but you'd be taxed on the $100 the next year," she said.  "The NOL allows the business to carry forward the $50 loss," she said.

The point of the NOL is to help smooth a business's taxable income over time.

"The NOL is a business loss that gets passed through to the owner of the business," Levine said. "You're a sole proprietor or an owner in a partnership and you're passing through a loss? That's an ordinary income loss."

More from Personal Finance:
What Trump's payroll tax plan may mean for Social Security's future
What a Biden win could mean for your Social Security benefits
Claiming Social Security retirement benefits? Don't let these myths trip you up

Coronavirus pandemic pushes small businesses to create succession plans
Coronavirus pandemic pushes small businesses to create succession plans

The law surrounding NOLs has undergone some changes recently.

Taxpayers were once limited to a 20-year carry forward period, and they could apply the loss up to two years preceding the year in which their business had lost money.

The Tax Cuts and Jobs Act, which took effect in 2018, overhauled these rules. Business owners can now carry the loss forward indefinitely, but they are limited to 80% of taxable income. The law also barred companies from carrying losses backward into prior years.

However, the CARES Act, passed earlier this year, gave business owners a reprieve: Taxpayers can carry back losses from 2018, 2019 and 2020 for five years. The coronavirus relief act also suspends the 80% rule on  taxable income limit on loss carry forwards for three years.

When it comes to losses from real estate, how much income you can offset depends on your level of involvement with the business.

You have to actively participate in real estate to maximize those losses.

The tax code has a test with two conditions: First, more than half of the professional service that you perform in a trade or business are in real estate in which you materially participate. Second, you must perform more than 750 hours of service during the year.

"There is a whole set of laws designed to prevent people from using losses to offset other sources of income unless you make your living in the real estate world," said Tony Nitti, CPA and partner in RubinBrown's tax services group in Denver.

Depreciation discounts

NYT's Jim Stewart: 2017 tax reform enhanced provisions that helped developers like Trump
NYT's Jim Stewart: 2017 tax reform enhanced provisions that helped developers like Trump

Depreciation, the reduction of an asset's value over its useful life, is another tax planning strategy that has emerged from the Times' reporting on Trump's returns.      

"Businesses get to deduct most ordinary business costs in the year that the expenditures occur, but if a purchase is useful for a long time – like machinery, furniture or a warehouse – then a different set of rules apply," York said.

In this case, a business owner is deducting a fraction of the cost of the item over time. It could be as long as nearly 40 years when it comes to rental real estate.

Items that depreciate on a much shorter schedule – machinery, furniture and computers, for instance – can be fully deducted as early as the year they're put into service, thanks to the Tax Cuts and Jobs Act.

Of course, it costs money to save money: You have to buy the equipment or take out a mortgage for your commercial rental in order to use depreciation to save on taxes.

"In the early years of a mortgage, if you didn't put much down, you're getting more in depreciation deductions than you are paying principal on the mortgage," said Ed Zollars, CPA at Thomas, Zollars & Lynch in Phoenix and an instructor at Kaplan Financial Education.

Josh Brown: What Trump's tax bill means for your money
Josh Brown: What Trump's tax bill means for your money