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Tax change effects on berkshire


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Since I am not American I might be off in the tax proposal. However, if I understand correctly, the most important new tax bill points consist on the following:

 

 

1) Real estate: reduction in the amount of mortgage interest that can be deducted, a new cap on property tax deductions and limits to the capital gains exemption used by homeowners when they sell.

 

EFFECTS ON BERKSHIRE:

a) Positive for Clayton homes: since Clayton is focused on low cost homes it should not be affected, while competitors are

b) Negative for Berkshire Hathaway homeservices: lower comission/transaction; less transactions?

c) Negative? to other construction related subsidiaries: less deductions might mean smaller homes - less bricks, less paint?

 

2) Corporate taxes: reduced to 20 percent from 35 percent

EFFECTS ON BERKSHIRE

a) Positive? for BRK Energy: regulated after tax income means rate adjustment and no effect. Non regulated rates should be eaten up by competition (free market). Lower taxes means competitors will find it harder to use tax credits while Berkshire still has plenty of taxes to pay

b) Neutral do BNSF: regulated rates

c) Neutral to insurance underwriting: gains eaten up by competition.

d) Positive to insurance subsidiaries: higher investment income than competitors' to be enhanced by lower corporate taxes

e) Positive to competition protected businesses: BRK focus on competitive advantages might shield some of the tax reduction from competition

f) Previous point repeats on BRK portfolio: Coca Cola and other competition protected businesses.

g) Positive on BRK portfolio: if a long held stock seems grossly overvalued there is now more incentive to take advantage.

h) Positive on BRK portfolio: past non realized capital gains are now worth more- Unimportant if holding period forever, highly important if not

i) Positive to BRK on general: lower debt versus competition meant less tax efficiency for BRK. Lower taxes reduce this disadvantage to higher leverage competitors, while keeping the safety of an high cash balance

 

 

Other important points?

Thank you

 

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  • 4 weeks later...

I expect, that the positive effect of the taxreform on the BRK protfolio is immediatly leading to gains in the stockprice:

 

If corporate tax is 20 % instead of 35 % this means app 35 to 40B to add on the bookvalue:

End of 2017 Q3 bookvalue was 308,257. So it means app 12 % to add.

 

This week - 27th Nov to 1st Dec - we got already an increase of 6,4 % in stockprice after it came out that taxreform got more likely.

 

Furthermore BRK will get more flexible in investing: the hurdle to sell an "old position" with big deferred taxes inside, is lower now; reinvest in a new project gets more easy.

 

The total effects are enormous in my opinion.

 

Here is an article from Jan 2017 who discussed BRK and taxreform:

 

https://seekingalpha.com/article/4037907-berkshire-hathaway-potential-95-billion-book-value-growth-year-end-2017

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Copying from General News topic:

 

Isen't Berkshire World Champion in deferring taxes by the way? -I do not recall ever having read any other balance sheet with such a large figure stated for deferred taxes.

 

I haven't seen a company with that big of a deferred tax liability either.  Obviously it is a consequence of rarely, if ever, selling anything large and a half century of acquisitions.  Even Precision Castparts came with ~$7.5 Billion of "income tax, principally deferred" - so a lot of this liability is never to be realized even if the equity portfolio was completely liquidated.

 

At the last 10Q there was $82.2 Billion of unrealized appreciation in equity securities and another $1 Billion on the bond portfolio.  At 35% that amounts to a $29 Billion deferred tax liability.  At 20% it is $16.65 Billion, a savings of over $12 Billion if the tax plan passes and Berkshire gets the 20% rate.

 

Year end gains look to be higher still, at least so far.

 

Berkshire's tax rate bounces all over the place between 30% and 20% most of the time.  But the tax liability on the unrealized investment gains is usually calculated right at 35%.

 

I can't speak to the rates used to calculate the rest of that income tax liability.  But it isn't nearly as important since it won't be spent.  The equities may actually be sold, resulting in a real cash savings.  I don't see them selling the land under BNSF's tracks or the property plant and equipment of PCC.

 

Well said, globalfinancepartners,

 

We also know that a significant part of the deferred taxes are related to BNSF and Berkshire Hathaway Energy - companies primarily operating in the US.

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You will see a drop of almost $30bn in Berkshire's deferred tax liability...which flows directly into an increase in book value.  That is why the stock has been on a tear recently.  It's a really big deal.  Assuming a drop in the DTL, the B-Shares trade at just 1.4x BV.  Not unreasonable by any stretch.  Buffett should start buying back Berkshire's stock...

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ValueMaven, how you calculated "almost 30B" ?

 

If there is a taxliability of app 80 B based on 35 % corporate tax, the profit is 228,57 B  (80 / 0,35)

If the corporate tax goes down to 20 % the taxliability goes down to 228,57B x 0,2 = 45,71 B

 

So the difference is 34,3 B (80-45,71B) and the BV increase by these 34,3 B.

 

Also we have to add the latest developments in the portfolio, which we dont know jet, we just can estimate them. So I think its minimum 35 to 40 B to add to BV.

 

See BRK 3Q 2017 page 4 "Ïncome taxes, principally deferred" is 86,559 B: 

 

http://www.berkshirehathaway.com/qtrly/3rdqtr17.pdf

 

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You will see a drop of almost $30bn in Berkshire's deferred tax liability...which flows directly into an increase in book value.  That is why the stock has been on a tear recently.  It's a really big deal.  Assuming a drop in the DTL, the B-Shares trade at just 1.4x BV.  Not unreasonable by any stretch.  Buffett should start buying back Berkshire's stock...

 

I love seeing BRK on a tear, as I own a ton. But the value creation might be overestimated in reality. As BRK has a number of

permanent stock holdings that will never get sold - so the economic impact is zero even though BV increases.

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