Breaking Into Wall Street - Intangible Asset amortisation creates DTA but considered non-tax deductible?

Based on the most helpful WSO content, here's what you need to know:

Your confusion stems from the distinction between temporary and permanent differences in tax accounting. Let’s break it down:

1. Stock-Based Compensation (SBC):

   • SBC is indeed a temporary difference. While it may not be tax-deductible immediately, it becomes deductible when the options are exercised. This creates a Deferred Tax Asset (DTA) because the company will benefit from reduced taxes in the future when the deduction is realized.

2. Intangible Asset Amortization:

   • Intangible asset amortization is typically considered a permanent difference if it is non-tax-deductible. This means the tax authorities do not allow it to be deducted, and there is no future tax benefit associated with it. As a result, it does not create a DTA.

3. BIWS Case with Jazz Pharmaceuticals:

   • If Brian includes both the intangible asset amortization ($102.1) and SBC ($112.5) in the calculation of excess cash taxes over book taxes, it could be a misstep if the intangible asset amortization is indeed non-tax-deductible (permanent difference). Only the SBC should contribute to the DTA calculation, as it represents a temporary difference.

4. Key Takeaway:

   • You are correct in your understanding that intangible asset amortization, if non-tax-deductible, should not create a DTA. The only DTA in this scenario should arise from the SBC award, calculated as $112.5 × tax_rate.

This distinction between temporary and permanent differences is crucial in understanding tax accounting and deferred tax implications. If Brian's treatment of intangible asset amortization as a temporary difference is inconsistent with its non-tax-deductible nature, it would indeed be an error.

Sources: Write Down of PPE by 100, Interest deductibility, Difficult Accounting Technical - IBD, Hardest Technical I've Gotten At a BB, Trick (?) Technical Question