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

Well, I have.  And it’s not pretty.

[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 (,  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 well over one-half of their federal income taxes?  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.”

So your average bear, you would just take the total income taxes “paid” at face value.  I’m not.

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.  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.


About dwkmusings

Student in Georgetown University's McDonough School of Business MBA Program
This entry was posted in Investing/Finance. Bookmark the permalink.

One Response to Andrew Lyon on total amount of corporate deferred taxes: “We have not looked at that data.”

  1. dwkmusings says:

    See my previous blog for more information on deferred taxes.

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