Berkshire Hathaway Could Owe Billions on Stock Gains Under the New Tax Law

One of the benefits of this approach has been that it minimized taxes since Berkshire Hathaway (BRK/A, BRK/B) only paid taxes when it sold stock holdings at a gain. Berkshire was sitting on about $245 billion of unrealized gains in its stock portfolio at the end of last year with nearly all that total in Apple, Coke, American Express, and Bank of America (BAC), according to Buffett’s annual shareholder letter.

Berkshire shows a deferred tax liability on its balance sheet related to those gains but under old accounting rules, those taxes might never be paid or paid many years from now.

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.

Given the size of Berkshire’s portfolio, the annual gains can be large in a bull market. Berkshire, for example, had $58.6 billion of unrealized investment gains in 2021 in its stock portfolio thanks to the market rally last year. No taxes were paid on those paper profits.

That likely will change when the alternative corporate minimum tax takes effect in 2023. Robert Willens, a New York tax expert, says if Berkshire had $50 billion one year in unrealized gains, it would likely have a $7.5 billion tax bill.

“For regular tax purposes, gains are only taken into account when they are ‘realized,’ i.e., when the security is sold or ‘otherwise disposed of.’ When a corporation records a gain for book purposes, but not for tax purposes, a deferred tax liability is created. Now, with the minimum tax on the books, that deferred tax liability will become an actual or current tax liability,” Willens wrote in an email to Barron’s.

But the new rules are complex and the math may not always be as simple as that. There might be years when Berkshire wouldn’t owe taxes on unrealized gains because of the size of its regular tax bill.

And Willens says that Berkshire would be eligible for a tax credit if it pays tax on unrealized gains in its equity portfolio in one year based on the 15% corporate minimum tax and then incurs unrealized losses in a subsequent year. “That credit would then be used in future years, but only in those future years in which its regular tax liability is greater than its minimum tax liability; and only to the extent the regular tax liability exceeds that year’s minimum tax liability,” he wrote.

In 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.

Berkshire officials didn’t return calls or emails seeking comment.

For the past several years, Berkshire has reflected changes in the value of its equity portfolio in its financial results, including its calculation of net income, based on rules mandated by generally accepted accounting standards (GAAP).

This has resulted in huge swings in Berkshire’s reported earnings and drawn the ire of CEO Buffett who tells investors to focus on the company’s core operating results and tune out the paper investment gains and losses.

The reported income related to paper equity gains didn’t result in a current tax bill, but that apparently is about to change in 2023.

Write to Andrew Bary at [email protected]