How Sprint plucked a $7.2 billion profit from Trump’s corporate tax reform

Donald Trump’s federal corporate tax cut delivered a $7.2 billion profit to Sprint during the final months of last year, the Overland Park-based company said Friday.

Sprint’s surprising profit dwarfed its typical financial results. A year ago, Sprint had lost $479 million in October, November and December.

At $7.2 billion, the recent profit exceeded the $5.93 billion Sprint took in by providing wireless services to customers during those three months.

So where’d all this profit come from?

It came almost entirely from a $7.1 billion tax benefit tied to tax reform. Without that benefit, profits measured $104 million for the quarter.

As shocking as the number might seem to outsiders, Wall Street analysts essentially ignored it. None asked questions about the sudden profit surge during a session with CEO Marcelo Claure and newly named finance chief Michel Combes.

In a similar session with reporters, Combes provided an explanation why.

Only $300 million of any type of tax benefit is expected to come to Sprint as cash, Combes said. And that will filter in over five years.

The difference stems from the corporate alternative minimum tax. It’s similar to the alternative minimum tax for individual taxpayers, which requires them to calculate their tax bill two ways and pay the higher amount.

Trump’s reform got rid of the corporate AMT, saving Sprint and other companies money, but left the individual AMT in place.

Combes said most of Sprint’s tax benefit behind its reported profit surge involved no cash for the company.

“The rest,” he said, “is mainly an accounting impact, the $7.1 billion which is included in our accounts, and is a non-cash benefit.”

In short, Uncle Sam isn’t writing a $7.1 billion refund check for Sprint.

Skipping over the accounting itself — and a conversation with Sprint’s tax department proved how deep those weeds are — the tax benefit comes mostly from two sources.

About $2 billion of it comes mostly from a company’s ability, when calculating its federal income taxes, to use losses suffered in one year to offset profits it makes in a later year.

For example, a company that suffers a $1 million loss one year and makes a $1 million profit the next hasn’t really earned anything over two years. The tax code recognizes that.

If Sprint is to ever collect on these kinds of tax benefits, it will have to start making a real profit so it will have something to offset.

“As Sprint, in the future, will become net profitable, then we will be able, I expect, to recover these losses,” Combes told reporters.

The biggest tax benefit Sprint reported — $5 billion worth — was tied to deferred tax liabilities the company reports in its financial statements.

Under the new corporate tax rate of 21 percent, these deferred tax liabilities aren’t as burdensome as they had been under the old 35 percent rate. The $5 billion portion of Sprint’s tax benefit and profit came from remeasuring those liabilities at the new lower rate.

Verizon, similarly, reported a $16.8 billion profit boost thanks to corporate tax reform and said most of that was from “re-measurement” of its net deferred tax liabilities at the new lower rate.

One caveat: These deferred tax liabilities aren’t necessarily real taxes the companies owe. They stem from differences in how Uncle Sam counts the value of key assets the companies hold and how they’re valued under the accounting rules for shareholders.

Setting aside all the tax reform impacts, Sprint generated $727 million in earnings by operating its business and before covered costs not directly tied to operations, such as interest on its debts.

Revenues in the quarter were $8.239 billion, down from $8.549 billion in the quarter a year ago. Sprint reports its earnings on a fiscal year that begins April 1 and ends March 31. The $7.2 billion profit came in its third fiscal quarter.

The enormous reported profit overshadowed Sprint’s news that it also added customers during the quarter, including 184,000 high-value phone subscribers that are most coveted in the industry. Prepaid phone subscribers, who generate less revenue for carriers, increased by 63,000 in the quarter.

Sprint ended December with 54.581 million wireless customers, making it the fourth largest carrier in the nation. The total was up from 53.271 million a year ago.

Mark Davis: 816-234-4372, @mdkcstar