The BP Tax people are busy.

The $40 billion that BP, maybe, will put up over 5 years will mostly be paid for by a reduction in federal income taxes. In the near term it increases BP’s cash flow by several $billion and cuts their taxes, which they pay to the feds, to zero. Hard to believe? But true.

The tax accountants and lawyers at BP are busy. I will not attempt to explain all the intricacies, but I did just review BP Q1 and Q2 financials and cash flow for 2010. My numbers are rounded. If you wish to work at the decimal level, Google BP financials.

Here is what they appear to have done and it is perfectly legit. BP declared the full $40 billion as an expense in the year it is accrued, which is this year. The declaration produces a net loss of $7 billion and a net tax loss carry forward of another $7 billion for the first two quarters of 2010.

Generally, BP pays abut $8-10 Billion annually in taxes. This year for sure they will pay no fed income taxes, and probably next year they will pay none either. Now look at the cash flow. They only had to write checks for $5 billion this year. Get it. They wrote checks for $5 billion and saved $7 billion in income taxes. Next year looks pretty good too for BP. No income taxes and a several billion dollar increase in cash flow. And if the $40 billion is never used up and I believe it will not, then BP one or two years from now will have a huge profit year because they expensed more than they actually had to pay out.

There are two big financial concepts here that a person needs to understand: Income and cash flow. You pay income tax on Income not cash flow. The $40 billion will simply reduce BP’s tax payments and produce several billions in extra cash flow for BP this year. I know it is hard to believe, but that is the American accounting system at work. From their point of view, they could care who they write the check to—to Obama for taxes or to the people of the gulf for claims.

Obama with a little financial help could have structured a better deal, but he went for the press buzz on the $40 billion. BP moaned and groaned to make Obama look good, and then they went to the books for a complete elimination of income taxes and a significant increase in cash flow.

It was good press for Obama, but the American tax payer foots most of the BP bill.