The 2016 election has been filled with scandals, every week there seems to be something new from a leaked video, to e-mails, and finally the ever-coveted topic of tax returns. You may have seen the headline or read a quick blurb about Donald’s leaked tax return that looked something like “Donald Trump has not paid taxed since 1995 due to a net operating loss of 900+ million dollars” Wait What!? I mean that headline alone can make anyone annoyed since most of us despise paying taxes, and 900+ million dollars how do you lose that much money! But the key word here is net operating loss, so what is it?
Net Operating Loss is tax strategy; yes strategy not loophole that allows a company or person to take tax deductions that are greater than its taxable income, which basically means a company, is not profitable and incurs more expenses than revenue. Now, you can apply NOL towards your current years tax bill or use it for previous or future years, let’s take a simple example. You own a lemonade stand, and business has been rough with all the competition from Becky with the good hair at Yoncé Lemonades and a few days of you drinking your own lemonade led into you only making a $100. Now it cost you $200 to set up your stand and to gather all your ingredients. When taxes come around you might owe 30% of your profits, which would be $30, but because of Net Operating Loss, you can claim -$100 and owe zero in taxes saving you $30, and you can carry forward your losses for up to 18 years to apply to your tax return or even apply it to the two previous years, so basically 20 year swing. Now this is a very simple way of looking at NOL, obviously we recommend working with a professional to understand the value this could bring to you.
Net Operating Loss can be a hero or a villain, depending on how it is being used
Hero: When Net Operating Loss is used immediately to help a young entrepreneur to not be burdened with taxes when they are still trying to make profit. The last thing you want to worry about is a 30% tax bill when you are eating instant ramen and sleeping on your friend’s couch. NOL is also great for the economy, it allows investors to invest and create jobs without having that fear of paying taxes, and this is what drives Silicon Valley. All the venture capitalists know that they can wipe their hands clean of a deal if it goes south therefore; allowing more risk to be taken which helps bring companies like Snapchat to life.
Villain: When it is for personal benefit and the company purposely loses the money, to help offset their other or future gains. These are often people that continue to carry forward their NOL. Or even in some instances “sell” their NOL’s (by selling the loss making Company) to someone who wants to “buy” NOL’s and not pay taxes!
Net operating loss is a lot like that quote from Batman “You either die a hero, or you live long enough to see yourself become the villain” Be used to create jobs and help the economy or carry forward 20+ years and become a villain in people’s eyes. So is what Donald Trump did legal? Yes is it correct? We’ll let you determine that. Orca Financial is neutral when it comes to political candidate.
