Billionaire Warren Buffett: GOP Tax Bill Is 'Huge Tailwind' For American Businesses

Nathan Reiff has been writing expert articles and news about financial topics such as investing and trading, cryptocurrency, ETFs, and alternative investments on Investopedia since 2016.

Warren Buffett, the billionaire chair and CEO of Berkshire Hathaway (BRK.A), praised the new GOP tax law, calling it a "huge tailwind" for American businesses. This is a surprising shift for Buffett, who previously did not support the Republican tax plan.

Nonetheless, Buffett's own business stands to benefit from the law, which effectively lowers the federal corporate tax rate from 35% to 21%. The 87-year-old mogul explained why the tax rate change would be such a boon for American corporations, including his own.

'That's a Lot of Money'

"It certainly means corporations will pay quite a bit less in tax than they otherwise would," he told CNBC. "When we make money in 2018 domestically, and subject to a lot of little things here and there, basically we'll be paying at 21% instead of 35%. That's a lot of money."

Berkshire Hathaway released its annual report to company shareholders just two days before Buffett sat down to discuss the tax reform.

In the report, it was shown that the company's net worth climbed to $65.3 billion for the 2017 tax year. A whopping $29 billion of that was due to the updates in the tax code.

$29 Billion Tax Windfall

How did Berkshire Hathaway manage to reap $29 billion in benefits as a result of the tax code reform, which was only recently enacted? Buffett explained: "We had about $100 billion of unrealized gain in equities. When they're sold, you pay tax on that. And previously when the tax was 35%, we would have had a $35 billion reserve for taxes against that as a liability. That would drop to about $21 billion."

He added: "So $14 billion, roughly, was a reduction in the amount of tax that when we sell those securities we will pay. It wasn't cash now. But it reduced a liability. When you reduce a liability net worth goes up."

Buffett continued by explaining "the other important point related to the same thing, deferred income taxes, [is] when we buy some kind of fixed asset. It's particularly a tailwind if you've got. lots of deprecation and taken bonus deprecation upfront. So it's a big item there."

Of course, the money is not cash in hand at this point. Rather, the tax reform means Berkshire stands to save large amounts of cash as time goes on.

According to its annual shareholder letter, Berkshire Hathaway has stockpiled a $116 billion purse to spend on acquisitions, although Buffett backed off last year because of high prices. The billionaire has generally been against lowering taxes for the wealthy. He supported Democrat Hillary Clinton in the 2016 presidential election. (See also: Two Things We Learned From Billionaire Warren Buffett's Annual Shareholder Letter.)

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The 90/10 investment strategy is an asset allocation model advocated by Warren Buffett. It puts 90% into stock index funds and 10% into short-term government bonds.

Bonus depreciation is a tax break that allows businesses to immediately deduct a large percentage of the purchase price of eligible assets.

IRS Schedule K-1 is a document used to describe the incomes, losses, and dividends of a business's partners or an S corporation's shareholders.

The general business credit is the total value of the separate business tax credits a business claims on its tax return for a specific year.

Chapter 11 is a type of bankruptcy generally filed by businesses and involves a reorganization of their assets and debts under court supervision.

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