Perhaps you already have a competitive tax rate and aren't really interested in how one of the richest men in the world, Warren Buffett, manages his finances. And then again, perhaps you are like most Americans, who were stunned by the letter that Warren Buffett wrote to Congressman Tim Huelskamp and published in the August 14 edition of the New York Times. The huge benefit of the disclosure of his income in this letter was not to display his worth, but to show his year-end tax tips and advice for small businesses.
Small Businesses Can Benefit from Buffett's Tax Tips
Granted, Warren Buffett does not classify as a small business. However, there is no reason why members of his staff and office workers can't get his 17.5-percent rate. Compared to the average rate of his employees of 33-41 percent, it is definitely worthwhile to listen to a self-made man who would really like to see the rest of the world prosper and improve their quality of life. Rather than increase the tax rate on those who are already burdened, he recommends an increase in tax brackets to gather more money from the very rich.
Small Businesses Can Pay Less than 35 Percent
The marginal tax rate of incomes over $373,650 was 35 percent in 2010. However, with a net income of $39,814,784, to get his low rate of 17.4 percent, Buffett must have qualified more for the 15-percent tax rate that applies to long-term capital gains and qualified dividends. How does a small business play these games of the very rich, you ask? That is an excellent question. Buffett has a net worth of $40 billion. How is it that his net income is less than 1 percent of his net worth? He has made sure that Berkshire Hathaway, his largest asset, does not pay dividends.
Dividends Mean Double Corporate Taxation
Because corporations are already taxed a maximum of 35 percent on their income, the rate of taxation was lowered to only 15 percent for the income payout to the shareholders in the form of dividends. This translates as a combined tax rate of 45-50 percent. This is the reason why Buffett has not issued dividends on his immensely profitable flagship investment.
Capital Gains Translate to Tax Reduction
Long-term capital gains are taxed at a rate of only 15 percent. How do you, a small business startup, benefit from that rate, especially if you have been in business for only a couple of years as opposed to a corporation, who has held on to AT&T stock since the beginning of time? Long-term does not mean the longest term possible that you have received income from an asset. Day traders may be in a stock trade for a matter of minutes, yet gross hundreds of thousands of dollars. The majority of that income is capital gain, for which they only pay 15 percent.
Show Low Percentage of Net Income Compared to Net Worth
As Bernie Kent discusses in his October 17, 2011, article, "Musings on Warren Buffett's Tax Disclosures," published in Forbes , Buffett had a low rate of taxation and impact on his income because he showed a very low percentage of net income compared to his net worth, or assets. Because he managed his capital gains, showed no dividends, and claimed a low percentage of personal income, he was able to file his taxes at a better rate than most small business owners and individuals.
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