Can Warren Buffett owe billions of dollars? Berkshire Hathaway shareholder concerns grow

Warren Buffett always likes to say that his favorite time horizon for holding a stock is "forever." This simple strategy has not only provided him with great investment performance, but also the ability to avoid paying billions of dollars in taxes in some cases. But lawmakers want to shine a light on this through a new law. What will this mean for Berkshire Hathaway stock itself? And should investors react to it?

Warren Buffett likes to buy shares of companies like Apple $AAPL+0.5%, Coca-Cola $KO-0.5% and American Express $AXP+0.1%, which have very strong brands and Berkshire Hathaway can hold them for a long time without having to worry about these companies losing the long-built loyalty of their customers. It's not for nothing that Berkshire has owned Coke and American Express for over 30 years.

One of the benefits of this approach has been minimizing taxes, since Berkshire Hathaway $BRK-B-0.2% only paid taxes when it sold the shares it held at a profit. According to Buffett's annual letter to shareholders, Berkshire had unrealized gains of about $245 billion in its stock portfolio at the end of last year, almost all of which was held in Apple, Coke, American Express and Bank of America $BAC+1.3%.

Berkshire reports a deferred tax liability on its balance sheet related to these gains, but under the old accounting rules these taxes may never be paid or will not be paid until many years from now.

New rules (and debts) on the horizon?

Berkshire, however, may have to start paying taxes on annual unrealized gains on its $327 billion stock portfolio starting in 2023 under the new 15% corporate minimum tax that was included in the new inflation reduction law recently signed by U.S. President Joe Biden. The tax applies to companies with annual profits of more than $1 billion.

Given the size of Berkshire's portfolio, annual profits, especially during a bull market, can be extremely high. For example, in 2021, Berkshire had unrealized investment gains of $58.6 billion in its stock portfolio due to last year's market rise. No taxes were paid on these "paper" gains.

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

"For ordinary tax purposes, gains are taken into account only when they are 'realized,' that is, when a security is sold or 'otherwise disposed of. If a company recognizes a gain for accounting purposes but not for tax purposes, a deferred tax liability arises. Now, with a minimal accounting tax, this deferred tax liability becomes an actual or current tax liability," Willens wrote in an email to Barron's.

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 owe one of the largest amounts of tax among giant corporations based on the 15% corporate minimum tax for the 2018 to 2020 period. Its annual tax bill would increase by an average of $3.2 billion over that period.

The good news for shareholders, however, is that the Berkshire Hathaway group is so capital strong that this new law shouldn't complicate its business either. So as spectacular as those billions of dollars of debt sound, I certainly wouldn't sell $BRK-B-0.2% stock.