(MENAFN- Straits Research)
The CEO of Berkshire Hathaway, Warren Buffett, enjoys keeping favourite stocks for a very long time.
CEO of Berkshire Hathaway Warren Buffett has frequently stated that his preferred holding term for investments is eternity. He like investing in stocks of firms with long-lasting brands that Berkshire Hathaway can hold, such as Apple (ticker: AAPL), Coca-Cola (KO), and American Express (AXP). Coke and American Express have been owned by Berkshire for more than 30 years.
This strategy had the advantage of minimising taxes since Berkshire Hathaway (BRK/A, BRK/B) only had to pay taxes when it sold stock holdings for a profit. At the end of the previous year, Berkshire had over $245 billion in unrealized profits in its stock portfolio, almost all of which was held by Apple, Coke, American Express, and
According to Buffett's annual shareholder letter, Bank of America (BAC).
In relation to those earnings, Berkshire shows a deferred tax liability on its balance sheet, although under previous accounting standards, the taxes might not be paid at all or not for many years.
On the other hand, depending on the new 15% corporation minimum tax that was included in the new Inflation Reduction Act that was recently signed by President Joe Biden, Berkshire would have to start paying taxes on yearly unrealized gains in its $327 billion equity portfolio starting in 2023. Companies having annual revenues of $1 billion or more are subject to the tax.
Given the extent of Berkshire's holdings, annual returns in a bull market can be substantial. For instance, Berkshire's stock portfolio had $58.6 billion in unrealized investment gains in 2021 as a result of the market upswing the previous year. On such fake earnings, no taxes were paid.
When the alternative corporate minimum tax is implemented in 2023, that is probably going to change. If Berkshire had $50 billion in unrealized gains in a single year, according to Robert Willens, a New York tax specialist, it would probably owe $7.5 billion in taxes.
Gains are only considered for normal tax purposes when they are“realised,” that is, when the security is sold or“otherwise disposed of.” A deferred tax liability develops when a corporation reports a gain for accounting purposes but not for tax purposes. That deferred tax liability will now become an actual or current tax duty because the minimum tax is on the books, Willens said in an email to Barron's.
However, the new regulations are intricate, and the math might not always be so straightforward. Due to the scale of its usual tax burden, there may be certain years when Berkshire does not have to pay taxes on unrealized gains.
Martin Sullivan, a tax expert and chief economist at Tax Notes, estimated that Berkshire would have owed one of the highest amounts of taxes among megacap companies based on a 15% minimum corporate tax for the period from 2018 through 2020 in an analysis that was published in Tax Notes International in November 2021. Over the time period, its annual tax burden would have increased by an average of $3.2 billion.
Officials from Berkshire did not respond to calls or emails for comment.
In accordance with the requirements of generally accepted accounting standards, Berkshire has been reporting changes in the value of its equity portfolio in its financial results for the previous few years, including the calculation of net income (GAAP).
Large swings in Berkshire's reported profitability as a result of this have angered CEO Buffett, who advises investors to concentrate on the company's fundamental operating results and tune out the gains and losses of paper investments.
There is now no tax obligation associated with the reported income from paper equity gains, but that is reportedly going to change in 2023.
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