Should Donald Trump’s (or Anyone Else’s) Net Operating Losses Really Be Getting So Much Attention?

Daniel Willingham

By Daniel Willingham

Perhaps the most talked-about subject of the Tax Code right now is the allowance of net operating losses (NOLs). This is no doubt due in large part to the October 1 New York Times article that claims Donald Trump recognized roughly $915 million in losses on his 1995 tax returns, giving rise to his ability to use NOLs to offset taxable income in other years.

Like many stories we hear from the media, the truth about NOLs is much more complex than most pundits have suggested. It is interesting that in all the chatter surrounding NOLs, I have yet to hear a single commentator cite Tax Code Section 172, which does have the heading “Net Operating Loss Deduction.”

Section 172 defines NOLs as the excess of deductions over gross income. Because a deduction by definition reduces taxable income, when a taxpayer’s deductions are greater than his income in a given year, he needs to apply the deductions against income in other tax years. Otherwise, the taxpayer would completely lose a deduction to which he is entitled solely because he did not receive enough income. Continue reading »