How Warren Buffett Avoids Paying Millions in Taxes

Warren Buffett's major acquisitions have as much to do with tax dodging as they do profits.

Mar 23, 2014 at 12:10PM

Buffett Car

Photo: DonkeyHotey

In recent years, Warren Buffett's acquisitions have only gotten bigger. Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) bought out the entirety of Burlington Northern Sante Fe in 2010 for $44 billion. A year later, it bought Lubrizol for $9 billion.

It's often said Berkshire Hathaway, which persistently has plenty of cash available for new acquisitions, is too large not to buy whole companies. It makes sense -- subtracting the $20 billion Buffett likes to keep on hand for insurance reasons, Berkshire Hathaway has $28 billion on hand it could deploy tomorrow, if Buffett wanted to.

But size isn't the only reason Buffett prefers to own whole companies than shares in companies. And in fact, Berkshire Hathaway has made several 100% acquisitions throughout its history. The first one was in 1967, when it acquired National Indemnity.

So why does Buffett really buy big? It's the tax man's share.

Examining his holdings
Berkshire Hathaway currently owns a massive stake in Wells Fargo (NYSE:WFC), one of the nation's largest banks. This year, Berkshire Hathaway will collect more than $580 million in dividends on its more than 483 million shares.

In the process, Berkshire Hathaway will also cut a check to the IRS worth just under $61 million -- 10.5% of dividends received from Wells Fargo.

The reason is somewhat convoluted. As a corporation, Berkshire Hathaway has to pay corporate taxes on 30% of dividends received from minority stakes like it has in Wells Fargo. With corporate tax rates at 35%, that works out to 10.5% of all dividends.

Public companies aren't the only ones that pay dividends back to Berkshire Hathaway. Its wholly owned companies -- from small See's Candies, to gigantic Burlington Northern Sante Fe -- will send their annual tributes back to Omaha.

But when the See's or BNSF dividend checks are finally cashed, Berkshire Hathaway won't have to dole out a portion to the tax man. In fact, when Berkshire Hathaway owns 80% or more of any company, dividends paid back to Berkshire Hathaway are tax-free.

Why it matters
Buffett has long preferred to buy at least 80% of companies when he can, citing the inherent tax advantages of doing so. The fact is 80% of a business can generate a substantially larger, after-tax gain for Berkshire Hathaway than 79% ownership. 

But what's truly impressive is Warren Buffett hasn't completely turned away from great stocks. Berkshire Hathaway owns several. Despite the additional tax burden at Berkshire Hathaway -- one which virtually no other investor endures -- Berkshire has easily crushed the market. Buffett not only beat the market, but he did it with an added handicap.

Knowing what we do about the tax code, we can rest assured Berkshire's future acquisitions will likely be big -- 80% or more of large, industrial companies all around the world. 

The greatest advice Buffett has ever given
Warren Buffett has made billions through buying companies and investing, and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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