December 6, 2017
Telecom companies’ future investment in broadband networks could be thrown for a loop by new wrinkles on write-offs in the tax overhaul legislation moving through Congress.
Language in both the House and Senate-passed measures would permit companies to write off capital expenditures. That would allow companies such as AT&T Inc., Verizon Communications Inc. and other large telecom providers to immediately write off items like expensive network equipment. But the provisions in both versions would expire after five years. That could discourage companies, including the telecom giants, from considering longer-term projects.
“When you sunset it after five years, it really limits the impact of what the expensing rule can do,” Andrew Silverman, a Bloomberg Intelligence tax analyst, told Bloomberg Law.
Another provision—also in both versions—would cap the amount of debt interest companies can deduct at 30 percent of taxable income, as opposed to the 100 percent now allowed.
Although the proposals apply to all companies, telecoms may be especially sensitive to them because they schedule capital-intensive projects years in advance that require expensive equipment often financed with debt. Any potential changes by telecom companies to their network investment time lines may impact the experience of data-hungry consumers.
The capital expenditure write-off provision—compared to the current law that only allows companies to write off that spending in staggered amounts spread through several years—could potentially be a big short-term win for an industry that’s constantly looking to repair, update and build networks.
Full expensing wouldn’t exempt telecoms and other businesses from paying taxes. It would only defer them until later, Mark Stodden, senior vice president and lead telecoms analyst at Moody’s Investors Service, told Bloomberg Law. That could set up a big tax bill down the line. But it would still trigger large telecoms to consider immediate investment, he said. “Full expensing is going to go a long way,” he said.
But it could also be their biggest headache. It’s almost a “telecom fiscal cliff when that goes away,” Stodden said.
Telecom companies typically plan their network expansion projects on five- to seven-year cycles. The five-year time limit could tempt telecoms to focus their energy on short-term projects that last less than five years. Currently, many efforts last longer than that.
If companies “only have a five-year window in which to expense things, then they might run out of time before they can use the entire tax benefit,” Silverman said.
The Senate version would gradually phase out the change after five years in order to avoid raising the federal deficit. The House version would eliminate it at that point.
Capping how much debt interest to be written off could hurt wireline telecoms with higher leverage, such as Frontier Communications Corp., CenturyLink Inc. and Windstream Holdings Inc. Those companies have debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratios of 6.6, 4.5, and 6.5 as of third quarter 2017, respectively, Bloomberg Intelligence data show.
Telecom companies “in that kind of gray area, where they’re profitable, but they’re also highly levered” could bear the brunt of that proposed change, Stodden said. “That could be the part of the Venn diagram that gets pinched.”
Wireless carrier Sprint Corp. and cable company Altice USA, which also carry high debt levels, could also stand to lose under the proposal.
“Sprint’s got a trifecta of stuff going on,” Stephen Flynn, an analyst with Bloomberg Intelligence, told Bloomberg Law. “They’ve got a lot of debt. The T-Mobile deal fell through. They’re increasing capex next year. Something like this could hurt a little bit more.”
While they agree on the cap total, the House and Senate versions differ in how they define taxable income. The House version would use the EBITDA. The Senate version uses earnings before interest and taxes. Debt-heavy businesses prefer the House provision.
Some companies, including Frontier, are fighting to keep interest payments fully deductible. The limitations on interest deductibility would amount to a tax increase of more than $300 billion over the next 10 years, the BUILD Coalition, a tax interest group, wrote in a Nov. 28 letter to Senate leaders. Frontier is a member of BUILD.
To be sure, large telecom companies generally support the Republican-sponsored tax effort, especially the GOP’s plan to make a hefty cut to the corporate tax rate—as much as 20 percent from 35 percent. That would go a long way toward making up for the other provisions, telecom analysts told Bloomberg Law.
“Being able to get all the way to 20 percent really cures a lot of the other things,” Ray Beeman, a principal at Washington Council Ernst & Young, told Bloomberg Law.
The industry’s fervent support for tax cuts is underscored by its lobbying paper trail. Cable giant Comcast Corp.—or firms on its behalf—filed more lobbying documents than any other company in the U.S. on tax policy in the third quarter of 2017, Bloomberg Government data show. Verizon Communications Inc. was in fourth place as a lobbying client, while trade group NCTA—the Internet and Television Association was in 11th place.
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