What Warren Buffett Understood About the Timing of Taxes

If someone offered you an interest-free loan to buy a house, and the offer was legitimate, you would take it. As Warren Buffet has said more than once, using active tax planning to defer taxes is exactly that: An interest-free loan from the government.

Buffett usually makes these remarks in the context of how he manages his portfolio of assets.

When he “buys” or “sells” a company, subsidiary or division, it usually involves a swap of assets or stock between the entities involved, avoiding a sale that involves the exchange of actual cash. Taxes on the appreciated value of any asset swapped would only become due when the assets acquired in the exchange are ultimately sold. As Buffett holds stocks seemingly forever (‘the best time to sell a stock is never,’ he has said), those taxes may never come due!

When, however, Buffett does want to liquidate assets, he sells Berkshire Hathaway shares, on which he never pays dividends.  So, the only taxes he does pay are those on capital gains, which are lower than the regular income tax rates that apply to dividends.

I suspect Mr. Buffett may have a cadre of tax planners who continually search the 70,000-page tax codes for hidden benefits that allow him to further lower his yearly tax bill. I know I find multiple thousands of dollars each year for the businesspeople I work with, so I imagine the tax benefits his team finds likely run into the hundreds of thousands of dollars annually.

Taking just one annual example, Buffett’s company paid just $4.9 billion out of the $7.9 billion in taxes due back in 2014. It’s a guess, of course, but that $3 billion difference may have been more tax deferral than tax savings, which means the federal and state governments are lending Mr. Buffett close to $3 billion for the foreseeable future, with no interest due on that loan!

Serious Tax Planning Generates Serious Cash

You should notice that when Warren Buffett talks about saving annually on taxes, he uses the term “deferral” rather than “avoidance.” He isn’t avoiding anything. He is using the government’s own rules to properly manage his financial affairs. He doesn’t park cash overseas (he is mostly invested in stock and other non-cash assets), so he doesn’t have to worry about the tax hit of repatriated profits.

For Mr. Buffett, tax obligations don’t drive his investment decisions, but simply is just one aspect of his overall planning strategy.

It is tougher, of course, for a small businessperson who may have everything invested in one business to flexibly manage cash flow as Mr. Buffett does. But just as he doesn’t buy or sell an asset based solely on the tax implications, so a small businessperson or property owner that wants to sell should not have to delay that strategic business decision solely due to looming tax obligations.

If you are a small businessperson or property owner, take a page from Mr. Buffett. Pick a future date at which point you want to sell the asset or business you own, and actively manage it to make that future day happen exactly as you want, with money flowing into your account rather than into the taxman’s. You can also arrange it so that if you change your mind between now and that sale date, your affairs are already arranged to accommodate that change in plan.

That requires serious, detailed planning, and sticking to the plan. It also takes a team to pull it off, especially in designing the plan, and helping you stay focused on its execution!

So, pick that date and talk to all your advisors about it to get them involved. And don’t forget the Tax Planner when putting together your team of advisors!

 

About the Author…

Bruce Jones got his start in financial services in 1970 and has taught the subjects of tax management and financial strategy planning since 1974.  He is President and CEO of TaxWealth®, a tax analysis and solutions research firm which provides comprehensive income, capital gains and estate tax remedies for owners of real estate, privately-owned businesses and other capital assets. He also supports CPAs, attorneys, financial advisors and real estate and business brokerage professionals, helping to solve their clients’ tax problems.

TaxWealth works with clients and professional partners nationally from its home office in Newport Beach, California. Visit their web site at www.taxwealth.com  or call Mr. Jones toll-free at (800) 300-4723 to discuss your tax concerns.