"Warren Buffett: A dream deferred" (BRK)

Ahead of the Annual Meeting Q&A, a quick hit from FT Alphaville and a couple resources:

Our colleague Stephen Foley wrote a compelling analysis last year noting how much Warren Buffett’s Berkshire Hathaway Inc had taken advantage of deferred taxes to build its empire:

“In the latest and largest example, Mr Buffett’s Berkshire Hathaway has been able to defer $61.9bn of corporate taxes, the company revealed in its annual report. This figure — about eight years worth of taxes at Berkshire’s current rate — is a reminder that Mr Buffett understands how putting off the moment when taxes are due gives him more money today to invest elsewhere.
It is also a reminder that a savvy approach to taxes has always been a feature of Mr Buffett’s career, even as Berkshire has grown to become one of the biggest corporate contributors to the US Treasury.
The total of deferred taxes reported by Berkshire for the end of 2014 is more than five times the level of a decade ago, following Mr Buffett’s move into more capital intensive businesses, with the acquisition of BNSF railways and a string of US power companies.
The US tax code encourages capital investment through the way it treats the depreciation of assets such as power plants and rail infrastructure, allowing companies to record profits that are not taxed until later in the life of these assets. Congress expanded these incentives for business investment in the wake of the financial crisis.

Digging into Berkshire’s financial statements can reveal just how much the company is benefiting from the tax code.

But first, a quick accounting review: Deferred taxes don’t constitute tax avoidance exactly (Stephen’s story separately alludes to the cash-rich split-off M&A deals that Mr. Buffett utilises to shed assets where Berkshire simply eludes any tax owed.

Deferred tax liability and assets are the result of temporary differences between accounting books and tax books. Those temporary differences will eventually reverse. The company benefits because it captures the present value of of the delay in paying the IRS (an interest-free loan).

Here’s the classic textbook example of a deferred tax liability that arises from accelerated depreciation of physical assets. For financial statements, say a $100,000 asset would be depreciated on a straight-line basis (we assume a four-year life).

For tax purposes, the asset is depreciated on an accelerated basis. MACRS is the guide for this schedule but we make up an accelerated schedule here for illustrative purposes. (Congress has recently renewed the “bonus” depreciation scheme that allows for super-charged accelerated depreciation)....MORE

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