Let me clarify something on 338(h)(10) election provision.
My understanding is that if an m&a deal is eligible for the provision, "goodwill" will be amortized for tax purposes, but not for GAAP purposes. However, the tax amount paid will be the same, so there won't be DTL or DTA.
My questions is.... are there any instances that the same thing said above happens, but DTL or DTA will be created...?
Would appreciate any comments and thoughts from those m&a or lbo bankers.
Thanks.
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On a 338h10 election or any asset purchase structure, the seller pays capital gains tax on the so called deemed asset sale, and depending on the step ups/downs tax goodwill may or may not be created.
Differences between book and tax carrying values give rise to DTA, or DTLs, but for asset purchases, since the tax goodwill created amortizes over 15 years, and the book goodwill created sits on B/S unless impaired; as tax goodwill amortizes to zero over the 15 year tax life, book goodwill stays the same, so the DTL booked at close will keep increasing until the tax goodwill amortizes to zero - at which point you have a permanent book/tax difference shown as a permanent DTL until the next book goodwill impairment write down if any.
So for asset purchases permanent DTLs may be created depending on the chance of future book goodwill write downs to make the tax and book basis for goodwill the same, otherwise this is an unusual situation of a permanent difference between book and tax thus a permanent DTL.
Just to clarify basics for you DTA and DTL are created due to "Timing differences" between the income statement and the tax code. Just view the tax code being a lot more conservative and they use a direct write off method. where as management/income statement have certain allowances for say warranty expense/allowance for uncollectible debt" depreciation methods, i believe tax code uses MACRS depreciation and management use straight, DDB, or SOYD
Please tell me this is not one of possible tech questions during an interview...
Based on the info you gave, my opinion is that there won't be circumstances where you create DTA / DTL. Simply because as dipset1011 stated, these are considered "Permanent Differences" since the difference between book and tax income won't reverse in the future. Meaning that there won't be anytime where the amort. will be done in GAAP and not in tax... in this scenario it's always going to be deductible for tax but not for GAAP, meaning it's a "Permanent Difference". DTA / DTL only arises when you have "Timing Differences", such as the so classic MACRS vs. straight depreciation for example. Hope this helps.
One more thing: that's why people tend to say that the 338(h) 10 election is the perfect world, because you pay less taxes and it actually reduces your effective tax rate...
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