A deferred-tax valuation allowance booked then released breaks two years of EPS

Claim

Qualcomm booked a $5.7B non-cash tax charge ($5.29/share) in FQ4 FY2025 when the One Big Beautiful Bill Act forced a valuation allowance against future deferred tax assets — and then appears to have substantially released it in FQ2 FY2026.

Fiscal quarter	Pretax income	Tax provision	GAAP net income	GAAP dil. EPS
FQ4 FY25 (Sep-25)	$2,971M	+$6,088M	−$3,117M	−$2.89
FQ1 FY26 (Dec-25)	$3,547M	+$543M	$3,004M	$2.78
FQ2 FY26 (Mar-26)	$2,232M	−$5,138M	$7,370M	$6.88
FQ3 FY26 (Jun-26)	$2,462M	+$460M	$2,002M	$1.87

Corroborating balance-sheet movement: non-current deferred tax assets ran $743M (Sep-25) → $5,968M (Mar-26), and the FQ2 cash-flow statement shows a −$6,148M deferred-tax line. Effective tax rate by fiscal year: 2.19% (FY24) → 56.24% (FY25) (roic.ai).

(The release is inferred from the tax provision, the DTA balance and the deferred-tax cash-flow line moving together; the charge itself is confirmed in Qualcomm's FY2025 Q4 release. Confirm the exact release mechanism in the FQ2 FY26 10-Q before quoting it as fact.)

What breaks

• FY2025 GAAP EPS $5.01 understates the year by ~$5.29. Normalized net income was ~$11.2B against $10.14B in FY2024 — underlying earnings grew ~11% in a year that screens as a 45% collapse.
• FY2026 GAAP EPS will overstate the year by roughly the same amount.
• Net-income CAGR across the pair is pure noise. Qualcomm's 3-year net-income CAGR reads −24.6% while its 3-year FCF CAGR reads +23.3% — same company, same window.
• The TTM trap: a trailing window containing both the charge and the release nets them out. QCOM's TTM EPS of $8.75 and P/E of 18.6x look unremarkable and are right by coincidence, not by construction. Roll the window one quarter either way and it is off by ~$5.
• ROE inherits it twice: through net income and through an equity base that absorbed the swing ($21.2B Sep-25 → $27.7B Jun-26).

How to apply

• On any name with an effective tax rate outside ~10–30%, stop and find out why before using EPS, P/E, ROE, or a net-income growth rate. The tax rate is the cheapest tell there is and it sits in roic.ai get_profitability_ratios.
• Use operating income for the trend and FCF for the level. Both are untouched here: Qualcomm's FY2025 operating income rose to $12.39B while net income fell 45%, and FCF was never affected — the charge was non-cash.
• Check whether the change is permanent or reversing. A valuation allowance is an estimate about future taxable income, so it can and does come back. A one-way charge (a fine, an impairment) needs one adjustment; a round trip needs two, in opposite directions.
• The forward consequence is usually the opposite sign to the headline. Qualcomm guided to a 13–14% effective tax rate and lower cash taxes afterward — the "disaster" year set up a tailwind.

Related: [[pitfall-unrealized-equity-marks-break-headline-pe]] · [[pitfall-government-warrant-derivative-inverts-gaap-eps]] · [[pattern-ai-build-inflates-earnings-while-destroying-fcf]] · [[principle-primary-source-beats-vendor]]

History

• 2026-08-04 — Found during /analyze QCOM when FY2025 net income fell 45% on rising operating income. static — the mechanism is in the accounting standard, not the cycle.