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Much has been written and said about the possibility Republican presidential nominee Donald Trump may have gone 18 years without paying federal income taxes thanks to $916 million loss reported in 1995.

While it is not known for sure whether Trump avoided paying federal income taxes for 18 years, if he did avoid paying, it was likely perfectly legal.


The NOL Rule

The loss referred to above is one called a net operating loss. If an individual – in this case, Donald Trump – loses money in a business or businesses he owns, he can deduct that loss from income from the year in which the loss occurred. He can also deduct it from income for 2 years previous to that year and for up to 20 years into the future if the amount of the loss justifies it.

The purpose of this rule is to help business owners get through periods of little or no business income. The problem with Trump’s alleged deduction is the amount – almost $1 billion. The average claim for individuals who have net operating losses is $98,000.

Corporate Tax Avoidance

On a scale even larger than that of Donald Trump, many major publicly held corporations have net operating losses and those losses are used to reduce taxable income. Corporations, of course, have other tax avoidance tactics, such as storing profits overseas, moving headquarters to tax-friendly countries and so forth.

Two years ago Reuters reported that of 288 profitable Fortune 500 companies, 26 of them paid no federal corporate income tax over a 5-year period from 2008 to 2012. Of that group, 111 of them paid no federal income in at least one of the five years in the period measured.

More Than One Way To Tax

Without denying charges Trump may have paid no federal income taxes for 18 years, Trump spokespeople said he did pay lots of taxes over the years. These could have included state taxes, sales taxes and any number of other taxes most individuals and companies pay.

The same can be said for corporations although on average effective corporate tax rates for many companies have gone down over the years. Procter & Gamble Co. (NYSE:PGC), for example paid 40% of total profits in federal taxes in 1969. More recently, the company paid 15%.


Overhaul Needed

The main reason companies like General Motors Co. (NYSE:GMC), Xerox Corp. (NYSE:XRXC), American Airlines Group Inc. (TSX:AALC) and others paid no federal income taxes as recently as 2015 is not simply because of net operating losses or a tax loophole here and there.

The main reason is because American multi-national corporations have the ability to move capital all over the world and corporate tax code has not kept up. What is needed is a complete overhaul of the corporate tax code. Until then, experts say, there will be less revenue available in the U.S. to pay for infrastructure, education and a whole host of other services.

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