Ax Deferred Investment Options

Ax deferred investment options

Take a step back and think about pretax income first; after a merger, there have been write-ups, then book value > tax value, which leads to higher D&A, like you said.

Tax Basics for Stock Market Investors!

Therefore, pretax book income will be lower than pretax tax income, which means that on your books, you'll recognize a lower dollar amount of taxes than you actually pay to the IRS.

Thus, we create a DTL to bridge the gap between financial and tax accounting.

Ax deferred investment options

Basically, the DTL recognizes what the acquirer must eventually pay the IRS in excess of the lower taxes it will report on its income statement for accounting purposes.

Basically, your first statement is wrong ("My understanding is that a DTL is created when cash taxes < book taxes (or book income < tax income)".

You need to delineate between pretax income and after tax income, as for calculating taxes, your pretax book income will go down after a write up, and thus so will your book taxes, but not your cash taxes.

Ax deferred investment options

In a year, when you actually recognize the excess D&A expense on your books, your book taxes will be lower than the actual cash taxes you pay out, and thus your balance sheet will not balance unless you also decrease the DTL account by the difference between cash paid out and book tax expense.

Hope this helps.