I received the following question:
Bonnie the news outlets are reporting that Trump may have gotten away with not paying taxes for 18 years. Is this a loophole or the IRS not doing there (sic) job?
Loophole. if you suffer a Net Operating Loss and it’s not absorbed in the current tax year, you can carry back the loss 2 years then carry forward any remainder into future years for up to 20 years. Little guy can do it too. So say you start a biz, and use up all your savings to get it off the ground but you don’t make any money for the first 5 years. in fact, your expenses exceed your income by say $50,000. But you have no other taxable income because you are living off withdrawals from your savings account and maybe your family is helping you out – none of that is taxable. So your income tax return shows negative income of $50,000. To encourage biz, the IRS allows for the carrying of that income back two years to when you were making money. You basically redo your tax return using form 1045 and subtract that $50,000 from the income for the two years prior and get a refund of the taxes you paid that year. if you don’t use up all the loss in that year (maybe you only made $30,000 that year so you have $20,000 leftover) then you keep carrying the loss to subsequent years until you use it up.
I would love to hear your opinion of this tax law. Write to me at email@example.com.