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Andrew Lyon on total amount of corporate deferred taxes: “We have not looked at that data."

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July 25, 2011 – Comments (12)

[You would think a former treasury secretary and current PwC employee would have actually considered this "data" to be a little important.  Evidently not.]

Corporations paid roughly $190B in federal taxes in 2010 (http://money.cnn.com/2011/01/14/news/economy/corporate_tax_reform/index.htm),  yet the S&P 100 added $42.5B in deferred taxes to their balance sheets.  So what did the S&P 500 add?  $100B?  Can this be right?  Are companies collectively deferring roughly half of their federal income taxes?  It looks like it:

"In the 1960s, corporate taxes amounted to about 22 percent of overall tax receipts, and averaged 3.9 percent of gross domestic product. In the most recent decade, the figures are about 12 percent of total taxes and 2.2 percent of G.D.P.

"In other words, the corporate tax burden in roughly half what it was."

As it stands, companies "report" their deferred taxes and actual paid taxes together as total income taxes:

"Total income taxes are defined to be the sum of all taxes imposed on income by local, provincial or state, national, and foreign governments during the year. It is the total tax provision and includes current taxes as well as the change in net deferred tax liabilities for the year."

http://economix.blogs.nytimes.com/2011/04/14/a-misleading-view-on-corporate-taxes/

So as of right now, we're simply taking the total income taxes "paid" at face value.

Warren Buffett calls the deferred income tax an "interest free loan" and has used it as one of his primary methods of financing since the early 1990s (maybe longer).  Companies are essentially allowed to tell Uncle Sam to wait a while until they're ready to pay those taxes.  But when?  ExxonMobil and Berkshire Hathaway collectively have around $70B in deferred taxes on their balance sheets.  That's just TWO companies.  Exxon has more deferred income taxes than Total Debt.  Think about that.  This means that the government is their largest creditor, and they're loaning money without demanding interest.  And all the while, the Federal Reserve targets 2-3% inflation YOY. 

If the government decides to alter this rule, and forces companies to start reducing this balance because of our federal revenue crisis, it’s going to have two collective hits on the markets.  The first will be when the official ruling comes out.  The second will be when companies purposefully write down billions of dollars of bad assets (predominately goodwill and intangibles) to create "paper losses."  This will allow them to write down sizable chunks of their deferred tax liabilities without actually paying out these taxes in cash.  This is exactly what happened to companies like Time Warner, Freeport McMoRan, and AT&T in 2008.  Their income statement will look like a train wreck while their cash flow statement will still stay relatively intact.  But because the morons on Wall St. love to push "earnings," the markets will freak out and panic selling will occur.

12 Comments – Post Your Own

#1) On July 25, 2011 at 2:58 AM, TMFDiogenes (79.91) wrote:

Interesting. According to a quick CapIQ screen, the S&P 500 had about $58 billion in net domestic deferred income taxes (it had data for about 450 of those companies). The highest was AIG at $4.9 billion. (The highest private company was Wells Fargo at $4.3 billion.)

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#2) On July 25, 2011 at 4:07 AM, ElCid16 (95.97) wrote:

the S&P 500 had about $58 billion in net domestic deferred income taxes

Two questions -

Is this for 2010 only?

and

What exactly are "net domestic deferred income taxes?" 

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#3) On July 25, 2011 at 4:41 AM, TMFDiogenes (79.91) wrote:

- It's from the income statements for each company's latest annual filing, which should be 2010 annuals for most.

- Yeah that's kindof a mouthful. Here's how AIG describes the deferral figure in their 10k:

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations.

I chose domestic tax deferrals so we'd only be counting taxes owed to the U.S, rather than including taxes to foreign governments. I said "net" because some companies have negative deferrals, which presumably means they prepaid taxes. So the net $58b is the total deferals minus the prepaid taxes.

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#4) On July 25, 2011 at 4:41 AM, TMFDiogenes (79.91) wrote:

- It's from the income statements for each company's latest annual filing, which should be 2010 annuals for most.

- Yeah that's kindof a mouthful. Here's how AIG describes the deferral figure in their 10k:

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations.

I chose domestic tax deferrals so we'd only be counting taxes owed to the U.S, rather than including taxes to foreign governments. I said "net" because some companies have negative deferrals, which presumably means they prepaid taxes. So the net $58b is the total deferals minus the prepaid taxes.

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#5) On July 25, 2011 at 5:10 AM, ElCid16 (95.97) wrote:

Dude - thanks for this info.  Let's nail this down a little further...

Per my calcs, the S&P 100 added $42B in total deferred taxes in 2010.  So the S&P 500 likely added around $150B.  If you got $58B in money owed to the US for 2010, then roughly 33% of deferred income taxes on a typical company's balance sheet are taxes that are actually owed to the US.  I think that the total (accumulated) deferred income taxes for the S&P 500 are somewhere in the neighberhood of $1T.  (The S&P 100 has a balance of around $350B).  This could mean that corporations owe the US govt more than a quarter of a trillion dollars - a loan that the government "gave" to corporations, but never bothered to collect on.  $58B was added to this tally just last year.  I might be underestimating...

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#6) On July 25, 2011 at 10:07 AM, StoneyTerp12 (48.61) wrote:

Cid,

I think its an important distinction to note that the deferred taxes shown on a company's balance sheet are a GAAP (generally accepted accounting principles) concept only, and only loosely correlate to "actual" taxes.  While the deferred taxes are calculated on current tax rates, and will be realized at some point in the future, where GAAP falls down on this concept is timing.  For instance, when you mention that company's are going to write down bad assets on their balance sheets, it would be recognized for GAAP at the time of the write down.  But, for tax reporting purposes, no benefit is realized until a taxable transaction occurs, which could be tomorrow, a year from now, or 10 years from now, or maybe never. 

Another great example, and very common example, is the GAAP to tax difference in depreciation. For example, if a company purchases a desk, tax law generally requires depreciation to be calculated over a 7 year period, but with current bonus and 179 provisions, the company can deduct the entire cost in the year of purchase.  Under GAAP, that same desk would be depreciated over its economic useful life, which could be anything.  So for GAAP, that desk has created a deferred tax liability because the deductions reported for tax were greater than those reported for GAAP.  That difference gets caught up over time, but its not immediate.

I dont really know how well I'm explaining this, but my point to all of this is that its important to consider the nature of the transaction that created the deferred taxes, and just as important to consider the timing of when the taxes will have to be paid.  It should be considered on an asset by asset basis, and it should not be assumed that the taxes are due immediately (as they typically are not).

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#7) On July 25, 2011 at 4:27 PM, ElCid16 (95.97) wrote:

Stoney - thanks for the comment.

I realize that there's a difference between GAAP taxes and IRS taxes, although I'm far from being very knowledgable about it.  I do know, however, that in 2008, companies that wrote down assets and took large net profit losses wrote down huge chunks of their deferred tax liability accounts.  So it seems to me like the benefit of writing down bad assets is seen immediately.  (Maybe I'm confusing what you were saying.)

I'd also like to point out that deferred tax liabilities have made a huge jump since 2008 (up like 40%!).  And most large spikes in deferred tax liabilities come during periods of mergers and acquisitions. Even if some of the deferred taxes might not every be repaid, as you are saying, what portion will need to be repaid?  30%?  60%?

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#8) On July 25, 2011 at 4:43 PM, ed1007 (< 20) wrote:

If I buy an item for 100 bucks and then sell it for 200 I owe taxes on the 100 profit.  IF I say that it is worth $200 but do not sell it my balance sheet changes, reflecting the change in value, BUT I DO NOT OWE taxes on it, because the profit is not realized.  To make sure that I recognize that I by increase in net value accounts for the taxes I would need to pay IF I REALIZED the profit I would use keep track of the tax effect of the $100 bucks. 

This is NOT me just telling uncle sam that I owe $25 dollars in taxes and am just not going to pay it yet as you seem to indicate in your statment.  The concept of an "interest free" loan from uncle sam is grossly oversimplified here. 

 

>Even if some of the deferred taxes might not every be repaid, as you are saying, what portion will need to be repaid?<</p>

 

It is not really a TAX which was deferred.  It is a projected amount of tax that may need to be paid in the future.  The words make it sound like companies are telling Uncle Sam that they owe X but they will pay it when they get around to it. But this is not to my understanding the correct meaning of this term.

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#9) On July 25, 2011 at 4:51 PM, ElCid16 (95.97) wrote:

"Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own far more assets than our equity capital alone would permit: deferred taxes and “float,” the funds of others that our insurance business holds because it receives premiums before needing to pay out losses. Both of these funding sources have grown rapidly and now total about $100 billion. Better yet, this funding to date has often been cost-free.  Deferred tax liabilities bear no interest."

 - Warren Buffett

Sounds sort of like a loan to me... 

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#10) On July 25, 2011 at 11:08 PM, StoneyTerp12 (48.61) wrote:

I don't think I did a good job explaining myself....  I actually agree with a lot of what you said, just trying to clarify some points.  FYI, I'm a tax CPA.

 I'll try to respond to your points above.

#6 - What I was trying to say on this point was that the assets your describing as being written down are offsetting other assets that had deferred income taxes owed.  The timing of the two is not taken into account for GAAP.

#6 - I'd argue there are a lot of reasons that deferred taxes have jumped in this period, and the big one that I would point to is depreciation.  Its been a very tax deferred friendly environment in the last few years.  No doubt though that the deferred taxes are jumping.  But, these will go the other direction in the future, at least on an asset by asset basis.  In aggregate, who knows?  Its all facts and circumstances.

#7 - The point I was attempting to make (and evidently failed) is that the timing of taxable events is key to understanding the effects to cash flow.  Nothing more.  I 100% agree with your comment about it being a projected tax that may need to be paid in the future.

#8 - I'd argue he was speaking metaphorically, rather than literally.  The tax benefits in place currently are pretty beneficial, and allow the deferral of a healthy chunk of taxes.  I suppose this can be viewed as an interest free loan, as its money that doesn't have to be paid yet, but its not like the government is just handing him money.

 I hope I'm not coming off as a jerk or anything.  I in no way intend to.  I'm relatively new to the caps things and still trying to learn the ins and outs.

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#11) On July 26, 2011 at 5:37 PM, ElCid16 (95.97) wrote:

Their income statement will look like a train wreck while their cash flow statement will still stay relatively intact.  But because the morons on Wall St. love to push "earnings," the markets will freak out and panic selling will occur.

Stoney, I realize that the actual cash flows associated taxes aren't perfectly correlated with what happens on the income statement - see the comment posted above, which is from my blog post above.  My arguement is that if Congress enacts some bill that causes companies to reduce their deferred tax liability balances, writing down bad assets would be the quickest and easiest way to do this, at the expense of "paper" earnings.

 

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#12) On August 07, 2011 at 5:54 AM, ElCid16 (95.97) wrote:

Spoke to the dude that issued debt for AT&T this evening.  He basically confirmed the fact that deferred taxes were interest-free debt.  Its a government loan.  The reason that deferred taxes have risen so much in the past 2 years is the fact that the US government is trying to boost corporate profits.

End of debate.

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