news that donald trump claimed a $916 million net operating loss on 1995 state tax returns has led to speculation that he could have wiped out his tax liabilities for more than 15 years. net operating loss carry-overs are legal behavior and have long been a feature of the tax code. here are some basics: q. where did the concept originate to allow certain losses to be carried over to other tax years? a. the revenue act of 1918 introduced the idea of allowing taxpayers to carry over net-operating losses, known as nol, to other tax years, temporarily allowing for an nol to be carried back one year and then forward one year. today, carry-over periods reach 20 years; losses can be carried back two years. q. what<u+2019>s the idea behind it? a. allowing businesses to carry forward (and carry back) loss helps them better weather the economy<u+2019>s inevitable ups and downs, advocates argue. it lets businesses and their owners smooth out their incomes and tax bills over multiple years, giving them a better chance at long-term survival. some economists argue that the carry-over also can help counteract economic downturns. q. who tends to use it the most? a. cyclical businesses that can suffer heavy losses in downturns, such as consumer-goods makers. owners of real-estate investment firms, with big interest and depreciation deductions, also can benefit. other rules benefit real-estate investors such as donald trump, including the ability to use losses to offset other kinds of income. q. do taxpayers ever claim losses that didn<u+2019>t exist? a. because the nol carry-over is a potentially lucrative break, it has occasionally led people to concoct schemes aimed at generating big nol<u+2019>s on paper that they then use to claim big refunds of prior-year taxes. q. how controversial has this provision been in congress? a. there has been debate, but the basic principle of business nol carry-over has been embraced and expanded in recent years by both parties. q. is there any push now to take this away, or modify it? a. progressives often criticize the nol break as a giveaway to business, but there has been little serious effort in congress to take it away. some states have reduced the benefits of the nol break, principally for budget reasons, and often state rules aren't as generous as the federal rules. write to john d. mckinnon at john.mckinnon@wsj.com
an explainer on the tax benefit donald trump may have used - wsj
john d. mckinnon