Warren Buffett's company owes a large amount of taxes due to the sale of highly-appreciated Apple stocks.

Berkshire Hathaway will contribute to solving the $2 trillion federal deficit next year, as CEO Warren Buffett's company owes a large amount of taxes due to the sale of appreciated Apple stocks.

Berkshire Hathaway achieved $59.6 billion in taxable gains from stock investments in the second quarter, most of which likely came from the sale of Apple stocks. Berkshire Hathaway almost halved its holding of Apple stocks in Q2, reducing its holdings to about 0.4 billion shares and selling 0.389 billion shares.

The significant gains are due to Berkshire Hathaway's low-cost basis of holding Apple stocks, which is about $34 per share. Although Berkshire Hathaway did not disclose the average selling price of Apple stock, Barron's estimated that the average selling price obtained by Berkshire Hathaway in the second quarter was about $186 per share, resulting in an EPS slightly higher than $150, which is about $59 billion. Berkshire Hathaway's holding of Apple stock was mainly accumulated from 2016 to 2018.

Assuming a combined income tax rate of 25% for federal and state taxes, including the 21% corporate tax rate, the tax owed may be about $15 billion, most of which is paid to the US Treasury.

Berkshire Hathaway's gains from the sale of Apple stock in the first quarter were smaller, achieving $14 billion in tax-bearing returns, and the company also needed to pay taxes.

Companies, like individuals, need to pay taxes for the sale of appreciated securities.

The tax owed related to Apple stocks will increase Berkshire Hathaway's cash tax payments, which totaled nearly $8 billion last year. Among US companies, Berkshire Hathaway is already one of the companies that pays the most taxes to the Treasury, and this year's taxes related to Apple may rank among the top.

Buffett often said that he was proud of the taxes paid by the company to the US Treasury, because Berkshire Hathaway could only succeed by operating in the United States.

At this year's shareholder meeting, Buffett mentioned the possibility of a higher corporate tax rate when talking about the sale of Apple stock, saying, "We have always hoped to pay a lot of federal income tax through Berkshire Hathaway." He pointed out that Berkshire Hathaway paid more than $5 billion to the Treasury last year.

Berkshire Hathaway's tax issues are relatively complicated because its income tax expenses in the income statement include cash taxes and deferred taxes.

Berkshire Hathaway's deferred tax on income is mainly derived from unrealized gains in its stock investment portfolio. When Apple or other stocks appreciate, Berkshire Hathaway will reserve about 25% of the gains into income tax reserves. This means that Berkshire Hathaway's stockholders' equity is not affected by the sale of Apple stock.

As of the end of 2023, Berkshire Hathaway's deferred tax related to investments on its balance sheet is about $57 billion. This reflects the tax that may need to be paid if the company sells its significantly appreciated Coca-Cola, American Express, Bank of America, and Apple stocks.

"Cash will be used to pay taxes, but profits will not be affected," said New York tax expert Robert Willens, who estimates that Berkshire Hathaway will pay a tax rate of about 25% for Apple stock returns.

Based on the data in Berkshire Hathaway's financial statements, it seems that the company has not yet paid taxes on the sale of Apple stock. Willens believes that Berkshire Hathaway will pay the estimated tax related to the sale of Apple stock in the second half of the year.

"Failure to fully estimate tax payments will result in fines for underpayment of taxes, and I am sure Berkshire Hathaway hopes to avoid this situation," said Willens.

Willens and others were surprised that Buffett, who always avoids taxes, was willing to sell Apple stock. Like many individual investors, Buffett is not willing to sell highly appreciated stocks or pay taxes.

Like other corporate leaders, Buffett also uses tax laws to reduce taxes. For example, when Berkshire Hathaway sold its shares of The Washington Post in 2014, it used a tax-free stock swap to sell the highly appreciated stock.

Berkshire Hathaway's utility business also received a large amount of wind power construction crediting from the federal government. The total amount of crediting in the first six months of 2024 was about 0.8 billion US dollars. Due to these offsets, the tax-after-profit of Berkshire Hathaway Energy's utility business is higher than the pre-tax profit, which is very rare among large companies.

Willens said, "I guess Mr. Buffett thinks that the reasons for selling Apple's stocks are so convincing that he's willing to endure the tax consequences of selling such a high-growth-value stock."

Willens said, "Basically, Buffett decided he'd rather own cash, which is worth close to 80% of our estimated value of Berkshire's Apple stake, than own Apple." The sale brought Berkshire's total cash amount to 277 billion US dollars as of June 30, setting a new record for Buffett's use in stock or long-term acquisitions.

Editor/Lambor