This is a microcosm of what American politics have become in an era of the Internet (where anyone can post anything) and opinion marketed as news. Some guy that has no clue what he is taking about packages facts they do not understand, puts a spin on those facts designed to incite those that know even less about the subject than he then feeds those facts to people of ignorance hungry for something to support their preconceived ideas of the world. Anyone that takes this as some type of indictment of Buffett has been had.
Let's start with the simple items:
1. Berkshire Hathaway is a public corporation, not Buffet’s personal holding company.
a. Berkshire has 1,200 institutional holders. All of the insiders, including Buffet, collectively hold less than 14% of the business. They do not have control. In fact, Buffet isn’t even the largest holder of BH, the Bill Gates Foundation is. It has 3 times the number of shares of Buffet.
BRK-A Major Holders | Berkshire Hathaway Inc. Common Stock - Yahoo! Finance
b. As a public corporation, it has a duty to its shareholders to maximize shareholder value, usually through maximizing profits. A part of maximizing profits is minimizing tax (see discussion of deferred taxes).
2. All corporations have two sets of books.
a. Accounting for income taxes and accounting for shareholders (generally accepted accounting principles or GAAP) are different things. Often there are different rules about expense and revenue recognition. For example, the IRS allows for more aggressive write-offs of equipment (even expensing) then GAAP which requires they be depreciated over useful lives.
b. Companies seek to maximize book profit and minimize taxes, so they are far more aggressive on expense recognition on the tax books and less aggressive on the book books….
c. The IRS and GAAP each require an accounting of the reconciliation between book income and tax income. On the tax return, this is on schedule M-1. On the books, its called deferred tax accounting, which is usually found on the balance sheet with a very extensive explanatory footnote.
d. Illustration: If you had $100 in revenue, $40 in cost, you would have a $60 profit. At a 35% tax bracket, the tax would $20. However, if your bought a $40 computer and expensed that year for tax purposes (and over 5 years for book purposes) suddenly you have different results. The tax books would show $20 of taxable income and $7 in tax; the book books would show $52 in taxable income and $18.20 in tax as follows:
Deferred tax revenue.jpg
So, given the company only paid $7.00 in taxes, but accrued $18.20, the difference is recorded as a deferred tax liability. They did not pay all of the tax associated with the profits of business, but elected to defer payment. This deferment can go on for years. This is the way every responsible company operates.
Of course, the above example is very basic. It gets a lot more complicated with international conglomerates such as BH, which does acquisitions and has holdings in insurance and railroads (very complex). The BH tax situation is very complex.
This brings us the assertion that BH is not paying its taxes.
Update: Warren Buffett’s Company Owes Nearly $1 Billion in Taxes | TheBlaze.com
What an absurdly naïve statement! Whoever came up with this knows zero about corporate finance and/or knows they play to an audience that knows even less. Let’s start with the assertion that they owe $1B in back taxes…. No, the deferred tax liability (taxes according to the books, that are not yet paid) is actually $35B, but there is not abnormal about that. The $1B being discussed in the article has NOTHING to do with taxes owed, in fact, unrecognized tax benefits are the opposite of owing money; it’s a potential tax liability offset (receivable), that because of accounting convention, is not on the books (just footnoted). See footnote 15 to the Berkshire Hathaway audited financial statements, which reconciles the company’s long-term and current deferred tax situation (between books and tax)
Then there is this whole dialogue about IRS audits. Again, this is silliness. A company with a $34B in deferred tax liabilities often are under constant audit. In fact, often the IRS maintains a de-facto office inside the corporate headquarters.
Sorry, but this whole thing is a bit analogous to someone looking at the balance sheet, seeing liabilities and yelling “hey, they aren’t paying their bills”
I appreciate the fact that people want to argue tax policy, and I further appreciate the fact that taxes are complex, maybe too complex, but people should use restraint and not talk authoritatively about things they knew little about.
Sorry cons, but on this one, you were conned.