DTL/DTA
I am super confused going through the M&A advanced questions in BIWS. I cannot figure out these DTAs/DTLs and I thought I had a good grasp. I understand conceptually was a DTA and DTL is but am confused about the answer to this question: "Could DTLs and DTAs arise in an asset purchase?" The answer is "No" essentially citing that in a stock sale the assets are written up creating a difference between the book basis and tax basis of assets, but in an asset sale the book basis and tax basis are the same. I am confused because everywhere I look it and the way I have learned it is that in a stock sale assets are NOT written up so how can this be. Please help
Deferred tax assets and liabilities are temporary book-tax differences which will ultimately resolve to zero. A DTA is basically a prepaid asset which will ultimately be used up while a DTL is an incurred liability which will ultimately require cash payment. A book tax difference is when book income is different from tax return income. An example is Section 179 expensing. You get an upfront tax benefit by expensing, but the books only take gradual depreciation. For those future years, your books will say you are getting depreciation which can lower your taxable income, but no way, Jose, there’s nothing more to expense, you already took it all in Year 1. This is a DTL for the future years which ultimately resolves to $0 when the asset is depreciated fully. If you have separate books from an acquisition of the equity, you inherit their book-tax differences. If you buy the assets, you don’t inherit the seller’s book tax differences.
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