Every year, investors in Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) wait anxiously for the Oracle of Omaha's annual letter to shareholders. Inevitably, Buffett shares priceless pearls of wisdom about his views on the markets, Berkshire's businesses, and investing in general.
This year, Buffett had something else to talk about: taxes. The Tax Cuts and Jobs Act of 2017 had a huge impact on corporate America, and Berkshire Hathaway was among the companies that saw the biggest gains from the legislation. As you'll see in further detail, the savings that Berkshire Hathaway got from tax reform amounted to more than $29 billion, and shareholders can expect to save billions more in the future from the moves that the tax law changes made.
How tax reform helped Berkshire Hathaway
The primary provisions of tax reform that affected Berkshire Hathaway were the reduction in the corporate income tax rate from 35% to 21% and the deemed repatriation of past earnings on overseas subsidiaries. In Berkshire's case, the corporate tax cut was a big benefit that far exceeded the added cost from the deemed repatriation tax.
Specifically, Berkshire's annual report says that upon the enactment of the tax reform law, the company recorded a reduction $35.6 billion in deferred income tax liabilities because of the drop in the corporate tax rate. However, Berkshire shareholders won't get to keep all of that money. Berkshire estimates that $6 billion in tax savings that's allocable to Berkshire's regulated utility subsidiaries will end up going back to utility customers when rate-setting regulatory agencies consider the impact of tax reform on utility profits. That leaves a net of $29.6 billion that Berkshire claimed as an income tax benefit.
Offsetting that amount was the income tax charge stemming from having to pay deemed repatriation tax on foreign subsidiary earnings. Berkshire doesn't intend to actually repatriate that money, but that won't stop it from having to pay the tax. Accordingly, Berkshire's charge amounted to $1.4 billion. Take those two figures and net them out, and Berkshire Hathaway's direct income tax benefit from tax reform in 2017 was $28.2 billion.
How ketchup added some extra flavor to Buffett's tax savings
Finally, Berkshire holds an investment in Kraft Heinz (NASDAQ:KHC) that stemmed from Buffett's previous investment in the ketchup maker before Kraft Foods merged with it. Berkshire treats the earnings that the investment in Kraft Heinz brings in as "other earnings" and often handles financial items related to the food business separately from its other investments and wholly owned subsidiaries.
Kraft Heinz also got a big positive impact from the reduction of corporate income tax rates, and Berkshire listed that savings separately from its other positive impacts from tax reform. Approximately $900 million in additional tax benefits came primarily from Kraft Heinz earnings. That just adds some extra spice to what has already been a lucrative investment for Berkshire and Buffett.
Berkshire wins despite Buffett's views
Some will find it ironic that Berkshire managed to benefit so much from a law about which Buffett was largely skeptical. Buffett acknowledged during the debate on tax reform that a cut in corporate tax rates would help Berkshire and other corporations immensely, but he was far from convinced that the bill was in the American public's best interest. Citing what he described as the failure of trickle-down economics in the rising wealth inequality of the richest Americans, Buffett thinks that tax cuts weren't really needed to help the economy grow.
Nevertheless, Berkshire Hathaway's win from lower tax rates has produced not only a massive one-time benefit but also anticipated tax savings for years to come. Given Berkshire's methods to minimize and defer taxes as long as possible, the rewards of Buffett's approach in waiting long enough will be a much smaller tax bill whenever the Oracle of Omaha chooses to make shifts in major investments down the road.