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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212912  
Subject: Re: A Little Help on BRK's DTL? Date: 12/14/2012 3:37 PM
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Berkshire's net deferred tax liability was $44,514 million at 9/30/2012 vs. $37,804 million at 12/31/2011. The annual report provides a useful breakdown of deferred tax liabilities and deferred tax assets, the components of the net deferred tax liability reported on the balance sheet. This is presented in Note 15 in the 2011 annual report. However based on a quick check, similar disclosure does not appear to be in the 10-Q.

An important question involves which businesses the deferred tax liabilities are attributable to. The Chairman's letter presents a balance sheet for the Manufacturing, Service, and Retailing operations indicating that deferred tax liability for this group is $4,661 million. The BNSF balance sheet in the BNSF 10-K indicates deferred income taxes of $15,637 million. The MidAmerican 10-K shows deferred income tax liability of $7,076 million. And Note 15 in Berkshire's annual report shows that unrealized investment gains has deferred tax liability of $11,404 million. The total of these figures is $38,778 million which doesn't quite match the $37,804 million on Berkshire's consolidated balance sheet but I think is close enough in terms of getting a sense of where the deferred tax liabilities are coming from.

So in summary at 12/31/2011 (in millions):

Manufacturing, Service and Retailing: $4,661
BNSF: $15,637
MidAmerican: $7,076
Unrealized investment gains: $11,404

In terms of the question of how a change in tax rates might impact these deferred tax liabilities, I think one would need to have a sense of how effective tax rates would change for each of these four categories. If the corporate tax rate drops from 35% to 28%, the simplistic approach might be to simply reassess these deferred tax liabilities assuming that Berkshire's effective rate tracks the change in the "headline" rate. But it may or may not. And it may differ for each of the categories. I believe that MidAmerican, for example, benefits from tax incentives associated with wind and solar power. If those benefits are cut in conjunction with a tax rate decrease, then it isn't clear whether MidAmerican's effective rate goes up or down. The same could be true for BNSF. I don't know enough to be sure.

The impact on unrealized investment gains is easier to estimate. I think we can just apply the change in the effective rate to see how this figure changes since the effective rate and the actual rate are basically the same. So $11,404 in deferred taxes on unrealized investment gains implies $32,583 in unrealized gains. If the corporate tax rate drops to 28% from 35%, then the deferred tax liability would drop from $11,404 to $9,123.

In terms of overall impact, if Berkshire's effective tax rate drops as a result of corporate tax reform, we could expect the overall deferred tax liability to drop which would increase book value. However, it is not at all clear to me how Berkshire's overall tax situation would be impacted because we have no idea what "corporate tax breaks and loopholes" will be needed to make a rate cut revenue neutral.

Having connections in Washington can't hurt.
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