The annual Berkshire Hathaway (BRK) meeting, complete with the usual Buffett-worship, is going on now in Omaha, Nebraska. As fascinating to me as Buffett’s investment success and methodology, is his tax savvy. It’s been said that Buffett “plays the tax code like a fiddle” and that he “knew more about tax law than any lawyer in the country.”
The best example is how Buffett has compounded his retained earnings by not paying out any dividends to shareholders. As with all “C-Corps”, Berkshire Hathaway pays tax at the corporate level. Then, when dividends are distributed to shareholders, the shareholders pay tax individually. This amounts to double taxation and is the reason why many people structure their businesses as flow-through entities like LLC’s and S-Corporations.
But Berkshire has never paid a dividend to shareholders – instead, Buffett has reinvested all earnings in the business. Here’s how this worked out for Buffett in 2007:
In 2007, Berkshire Hathaway earned a profit of $13.213 billion. If the company paid out dividends at the same rate as General Electric – 50% – Buffett would have personally received a dividend check of $1.86 billion. His tax rate on these earnings would be approximately 21% (15% Federal and 7% Nebraska), thus Buffett would have paid a whopping $390 million in federal and state taxes! So, by not issuing a dividend, Buffett saved himself $400 million this year. The compounded effect of not paying dividends has added many, many billions to Buffett’s net worth. Pretty smart.