CEO Warren Buffett has long said that his favorite investment retention period is forever.
He likes to buy stocks in companies like
(AXP), with durable franchises that Berkshire Hathaway can maintain for a long time. Berkshire has owned Coca-Cola and American Express for over 30 years.
One of the benefits of this approach was that it minimized taxes, as Berkshire Hathaway (BRK/A, BRK/B) only paid taxes when it sold stock at a gain. Berkshire had about $245 billion in unrealized gains in its equity portfolio at the end of last year, with nearly all of that total in Apple, Coca-Cola, American Express and
bank of america
(BAC), according to Buffett’s annual letter to shareholders.
Berkshire shows a deferred tax liability on its balance sheet related to these earnings, but under old accounting rules, these taxes may never be paid or paid many years from now.
Berkshire, however, may have to start paying taxes on annual unrealized gains on its $327 billion equity portfolio starting in 2023, based on the new 15% corporate tax minimum that was included in the new Equity Act. Inflation Reduction, signed recently by President Joe Biden. The tax applies to companies with more than $1 billion in annual earnings.
Given the size of Berkshire’s portfolio, annual gains can be large in a bull market. Berkshire, for example, had $58.6 billion in unrealized investment gains in 2021 in its equity portfolio, thanks to the market rally last year. No tax was paid on these paper profits.
That will likely change when the alternative corporate minimum tax goes into effect in 2023. Robert Willens, a New York tax expert, says that if Berkshire had $50 billion a year in unrealized gains, it would likely have a $50 billion tax bill. $7.5 billion.
“For regular tax purposes, gains are only considered when they are ‘realised’, ie when the security is sold or ‘otherwise disposed of’. When a corporation records a gain for accounting purposes but not for tax purposes, a deferred tax liability is created. Now, with the minimum tax on the books, this deferred tax liability will become an actual or current tax liability,” Willens wrote in an email to of the Barrão.
But the new rules are complex and the math is not always that simple. There may be years when Berkshire did not owe taxes on unrealized gains due to the size of its regular tax account.
In an analysis published in Tax Notes International in November 2021, Martin Sullivan, tax expert and chief economist at Tax Notes, estimated that Berkshire owed one of the highest amounts of tax among mega-cap companies based on a corporate tax. 15% minimum for 2018 to 2020 period. Your annual tax bill would have increased an average of $3.2 billion over the period.
Berkshire officials did not return calls or emails seeking comment.
In recent years, Berkshire has reflected changes in the value of its equity portfolio in its financial results, including the calculation of net income, based on rules required by generally accepted accounting standards (GAAP).
That has resulted in wide swings in Berkshire’s reported earnings and has drawn the ire of CEO Buffett, who tells investors to focus on the company’s key operating results and adjust for the gains and losses of paper investing.
Reported income related to paper capital gains did not result in a current tax bill, but that is apparently about to change in 2023.
Write to Andrew Bary at firstname.lastname@example.org