United States | Donald Trump’s finances

Taxing patience

The candidate either made a huge loss or concocted one

Man contemplating $1 billion loss
|WASHINGTON, DC

MITT ROMNEY, at least, knew it was coming. “I think we have good reason to believe that there’s a bombshell in Donald Trump’s taxes,” the 2012 Republican nominee warned in February. On October 1st the New York Times revealed Mr Trump’s 1995 state tax returns, which had been sent to the newspaper anonymously. They show a $916m loss—entered part-manually, because, his accountant said while confirming the leak’s authenticity, the figure was too big for his software to process. Set against later income, the loss could have allowed Mr Trump not to pay federal income taxes for many years.

Unlike any other major-party nominee since 1976, Mr Trump has kept his returns under wraps. His fondness for so-called “pass-through” businesses explains this. These shunt profits and losses directly onto their owners’ tax returns (in contrast to corporations, which file their own papers). Pass-throughs have become curiously common in America. According to one recent study, such firms now account for over half of all business income.

Pass-through firms, like any other, can offset taxable profits in one year with losses from another. In general, this rule makes sense economically. Without it, firms might be loth to sell in volatile markets. Making $50m profit one year and losing $49m the next would incur more tax, over both years, than earning $20m for two years running. For that reason, offsetting is common. Of the 35 countries in the OECD, 21 allow corporations to use losses from at least 20 years earlier to offset profits, according to Kyle Pomerleau of the Tax Foundation, a think-tank.

Individuals, however, can face stricter laws. In Britain, for instance, corporations can roll forward losses indefinitely, but individuals can do so only for four years. America makes no such distinction. When Mr Trump filed his mammoth loss, losses could be rolled forward 15 years or rolled back three, meaning that if he earned on average less than $51m a year in regular income, Mr Trump might not have paid income-tax for nearly two decades.

Mr Trump may also have benefited from another peculiarly American generosity: towards property moguls. Since 1986 most taxpayers have been unable to deduct losses which exceed their investment in a business, says Steve Rosenthal of the Tax Policy Centre, another think-tank. Real-estate investors are exempt.

That matters because buildings are particularly good at generating paper losses. Investors can generally claim that non-residential property is depreciating over 39 years, even if its market value in fact rises. In theory, any capital gain is taxed later, when the property changes hands. But investors can avoid such a charge by replacing any building they sell with another of a “like-kind”. When the investor eventually dies and passes on his portfolio, the capital gains are forgotten.

Mr Trump’s returns account for fully 1.9% of all similar losses filed in 1995. Without further revelations it will be impossible to say for sure which was more exceptional: his struggles, or his tax-planning. Meanwhile, he must battle another scandal. On September 30th New York’s attorney-general, who backs Hillary Clinton for president, ordered the Trump Foundation to cease fund-raising immediately, because it had not registered with or filed accounts to the charities regulator. When it does, perhaps Mr Trump will recommend his personal accountant.

This article appeared in the United States section of the print edition under the headline "Taxing patience"

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