Berkshire Hathaway’s Deferred Taxes
Whatever tax bill is enacted, it appears that there will be some reduction in the top corporate tax rate. I would like to explain the effect of this and will do it using Warren Buffett’s Berkshire Hathaway (“BRK”).
Some information: Last year BRK earned $24 billion in profits. Its deferred tax liability was $78 billion. The stock is priced at about 19 times earnings.
BRK’s deferred taxes was based on a tax rate of 35%. If the rate drops to 20% that will cause a reduction in the deferred tax liability of $33 billion. That is about a third more than all of last year’s profits. This will create a one-time swelling of the profits and presumably would have an effect on the P/E and price of the stock.
I do not know what effect this would have on the BRK stock price but would be surprised there was no reaction to the increased earnings. This is an exaggerated illustration but I believe shows how the reduced corporate tax rates would affect companies.
Another comment relates to companies that have a deferred tax asset. Any decrease in tax rates would reduce the value of this asset resulting in a loss of expected tax refunds, an operating loss and a reduction of book value. Not good! Note to the extent the deferred asset is for unused tax credits, then there would be no loss of benefits.
Tax reform, tax policy or tax reductions directly affect the federal government’s revenues, but they also have other effects and sometimes unintended consequences – good and bad. The immediate adjustment of corporate earnings is one of them.
Just another thing to be concerned about or to observe as a point of interest.
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