Congress poised to gift billions to ISPs

Legislation currently wending its way through Congress could extend 100% bonus depreciation of property for US businesses. That could add billions of dollars to the coffers of Internet service providers (ISPs) like Verizon, AT&T and Charter Communications.

"All said, AT&T, Verizon, and Charter stand to see a meaningful benefit if the new tax package can fully make it through the remainder of the legislative process," wrote the financial analysts at TD Cowen.

Thomson Reuters defines bonus depreciation as "a tax incentive designed to stimulate business investment by allowing companies to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability."

The new legislation would "provide significant financial benefits to ISPs," summarized Blair Levin, a policy adviser to New Street Research and a former high-level FCC official, in a note to investors.

Charter CFO Jessica Fischer agreed. "We do expect there to be a material benefit to cash taxes if the legislation were to go through," she said during the company's quarterly conference call, according to Seeking Alpha.

Billions in cash taxes

The House last week approved wide-ranging tax legislation that included a measure to extend 100% bonus depreciation for property placed into service by January 2026. As noted by the financial analysts at Wells Fargo, that bonus depreciation was set to decrease to 60% in 2024, from 80% in 2023.

"Bonus depreciation provides meaningful tax benefits for wireless and broadband providers with heavy capital investments," explained the TD Cowen analysts. "As the current legislation stands, 100% bonus depreciation is being phased out, creating significant cash tax headwinds in 2024."

The amounts are significant. The analysts estimated that AT&T will face $1.5 billion in higher cash taxes in 2024 if the legislation doesn't pass. Verizon would face up to $2 billion in higher taxes, while Charter would face up to $1.9 billion.

"The bonus depreciation phase-out would not have a meaningful impact on T-Mobile, as the company does not expect to be a significant cash taxpayer in 2024," they added.

The financial analysts at Well Fargo speculated about what network operators might do with their financial windfall, including using the money to expand their networks more quickly, to improve their financial footing, and potentially to engage in stock buybacks.

Indeed, during its recent analyst event, Verizon officials said the company would use the extra cash to invest into its network, to increase its shareholder dividend, and to pay down debt.

'Odds slightly favor passage'

However, the legislation hasn't yet been signed into law. It still must pass through the Senate and be signed by President Biden.

And given the upheavals this week in Congress – chaos that has affected everything from border security legislation to financial aid for Ukraine – there's a good chance that might not happen.

"There are enough uncertainties that no one should have a high level of conviction," wrote Levin, the policy adviser to New Street Research, citing the ongoing turmoil in Washington that has made "this Congress the least productive in history."

"Still, we think the odds slightly favor passage, as the Senate has an institutional desire to do something that will eventually lead to passage of the House bill or something close," he added.