2015: Is the cash flow from annual increase in deferred taxes sustainable?

JONATHAN BRANDT: For a variety of reasons, bonus depreciation on fixed assets investments in the noninsurance businesses perhaps being the most important, Berkshire’s cash taxes have been meaningfully lower than reported taxes for the last several years.

The cumulative difference between cash taxes and reported taxes, which could be viewed as another form of float, now stands at around 37 billion.

Do you consider any portion of the cash flow from annual increase in deferred taxes to be economic earnings?

Is this a sustainable dynamic, or do you expect the relationship between cash and reported taxes to ever flip, for instance, if bonus depreciation ever expires?

Given Berkshire’s massive appetite for capital spending at the utility and the railroad, is it possible, instead, that its deferred tax liability will never have to be paid, no matter what Congress does with bonus depreciation? And is it perhaps even likely that this form of float will continue to grow?

WARREN BUFFETT: Probably the most likely answer — there’s two forms of float from deferred taxes.

One is the unrealized appreciation on securities, and they’re — who knows what happens? I don’t think the appreciation is going to disappear, but we may decide to realize some of it from time to time. In fact, we could realize a lot of it.

If you move over to the depreciation, which you’re talking about, on the 37 billion — because the total deferred taxes, as I remember, maybe 60 billion or something like that — that is a factor of accelerated depreciation. And one form or another of accelerated depreciation has been around a long time.

Occasionally the — I think the bonus depreciation one year went to 100 percent. I could be wrong on that.

The — certainly in our utility business, that helps our customer and it doesn’t help us, basically. I mean, we get a — we will get a return on equity, and that is not — that’s not free equity to us, or anything of the sort.

The regulatory commissions take that into account. Return on invested capital, in terms of how the surface transportation board would look at it, again, I don’t think we benefit enormously by that.

But it does mean there’s less cash going out the door and we, therefore, don’t need to borrow as much money for capital investment as otherwise.

But I don’t think I would look at that as a hidden form of equity. I’d rather have the deferred taxes than not have them, but it’s not meaningful there.

Now what could happen, is that, overwhelmingly, those deferred taxes were probably, entirely even — to the extent they’re in the United States — were accrued at a 35 percent rate.

So if the corporate rate changed, then you would have a major change in the deferred tax item. And there’s always a possibility of that.

CHARLIE MUNGER: But it would be a book entry. It wouldn’t mean much.

WARREN BUFFETT: It wouldn’t mean much. Yeah, yeah.

We do — the float from the insurance business, we regard as a terrific asset. The deferred tax liability is a plus, but it’s not — it’s not a big asset.