Deferred taxes in an acquisition
The DTL on write-ups, its unwind, and the step-up.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: deferred taxes in an acquisition.Updated 2 October 2026
What it does
In a stock deal the buyer inherits the target’s tax basis, so the write-ups to fair value will never be deductible: a deferred tax liability is booked against them at the tax rate, and it unwinds through the deferred tax line as the write-ups amortise, leaving the liability on any indefinite-lived intangible in place. In an asset deal, or a share deal treated as one by election, the basis steps up to the price: no liability arises at close, goodwill and intangibles are deducted over the tax life, and the deductions save cash. Reported earnings are charged the same in both; cash taxes are not.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 44–47: Tax rate, Tax life of acquired intangibles and goodwill in an asset deal (years), Discount rate for the tax savings, Seller’s extra tax on an asset sale rather than a share sale
- Allocation, row 6: Tax basis stepped up to fair value (1 = yes)
- Allocation, row 16: Less the deferred tax liability on the write-ups (none if the basis steps up)
- Allocation, rows 23–25: Goodwill created by the deferred tax liability (stock less asset deal), Present value of the asset deal’s tax savings, Value of the step-up after the seller’s extra tax: the room to share in price
- Deferred tax, rows 6–9: Deferred tax liability, opening, Unwind: the book charge x the tax rate, Deferred tax liability, closing, Cash tax saved by the write-ups
- Deferred tax, rows 12–20: Inventory step-up, deducted as the stock is sold, PP&E write-up, deducted over its life, Intangibles and goodwill, deducted over the tax life, Tax deductions from the step-up…
What a reviewer looks for
- Booking a liability on the write-ups in an asset deal.
- Unwinding the liability on an indefinite-lived trade name.
- Treating the structure as changing reported earnings rather than cash taxes.
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Vocabulary: Deferred Tax (DTA and DTL), Step-Up in Tax Basis, Goodwill.