Iām sure it is far more complicated than Barronās implies:
Berkshire, however, may have to start paying taxes on annual unrealized gains in its $327 billion equity portfolio starting in 2023 based on the new 15% corporate minimum tax that was included in the new Inflation Reduction Act signed recently by President Joe Biden. The tax applies to companies with over $1 billion in annual earnings.
What a potential game changer.
Dalio talks about either civil war and unrest vs leaders who are prepared to tax and redistribute wealth to address great wealth inequality in his book the changing world orderā¦never a better time than the present.
Isnāt Berkshireās effective tax rate generally above 15%?
Ray Dalio hired the ex FBI director James Comey to head his tax dept of Bridgewater
Many hedge fund owners setup LLCs (some even setup the LLC as foreign entity and they themselves get foreign citizenship), so their massive income is somehow converted to company ownership and get paid out as some sort of dividends or ultimately results in long term capital gain tax rate when they cash out.
Assuming that the tax would apply to Berkshireās unrealized stock gains, it seems likely that the impact would be pretty modest.
The only obvious implementation would be that one pays some amount of tax on unrealized gain,
but then the cost basis for tax purposes is adjusted upwards by some amount.
The key point being that, if the price fluctuates between $50 and $100 annually, you donāt pay tax on the same $50 gain every two years, just once.
Parhaps much like the way a ā2 and 20ā incentive fee is calculated for hedge funds with a high water mark.
So, worst case is that some tax is paid which would have been paid later.
What could make it worse?
The first rule to find out is whether itās at a corporate level, or at a segment level.
The parent can handle it, but it would be a big deal for BHE as a unit.
But of course it would also make most tax credit programs meaningless.
Politicians generally like tax creditsā¦often a kind of pork thatās not too hard to get through the sausage making machine.
Berkshireās top level tax rate in a normal year is already pretty high.
So if itās applied at the top corporate level, it would apply to Berkshire only in years that the stock portfolio falls a lot.
Then the finer points come in.
Do you get a refund the next year on unrealized loss as the price drops from $100 to $50, or do the revenooers hold onto that money?
Do you get a refundable tax credit if itās ultimately sold at a price lower than the highest assessed price to date?
It will be fun to watch, but I really doubt it will be fatal.
There is a faint chance that upcoming regulation aimed at reining in private equity firms might be more of a worry.
Prohibiting ābolt onā acquisitions by large companies, say.
Jim
Excerpt:
āIn an analysis published in Tax Notes International in November 2021, Martin Sullivan, a tax expert and chief economist at Tax Notes, estimated that Berkshire would have owed one of the largest amounts of taxes among megacap companies based on a 15% minimum corporate tax for period from 2018 through 2020. Its annual tax bill would have risen by an average of $3.2 billion over the period.ā
Yes, I suppose the devil is in the details as always, but this could be painful. Has not our overall effective tax rate been 18-20% (since 2017)?
The FASB rules stating that income should include the swings in unrealized gains/losses is idiotic. But I think that such income due to unrealized gains/losses is calculated net of any (deferred) taxes that would have been owed for GAAP purposes. Hence my guess is that the 15% minimum tax will not meaningfully affect BRK but I am not a tax expert.
Just want to add I have no idea whatās in the hundreds of pages of IRA. But I would be shocked if Berkshire is affected in any meaningful way whether it is unrealized gains or other unrealized ābookā income. For instance, insurance companies estimate their future liabilities from contracts and thus estimate underwriting profit/loss for book purposes. Does the govt tax the ābook profitsā even though the contracts havenāt been settled? I donāt think so.
The market reaction so far seems to support this thesis.