What are deferred tax assets and liabilities in IB interviews?

A deferred tax asset arises when a company pays more in cash taxes now than GAAP requires, creating a future tax benefit (e.g., NOL carryforwards). A deferred tax liability arises when a company pays less in cash taxes now than GAAP shows, creating a future tax obligation (e.g., accelerated depreciation for tax purposes).

When a company generates a net operating loss, it records a DTA equal to the loss times the tax rate. This DTA represents future tax savings. When the company becomes profitable, the DTA unwinds: it reduces cash taxes paid, decreases the DTA on the balance sheet, and reduces CFO by the reversal amount on the cash flow statement.

Accelerated depreciation allows larger tax deductions in early years than GAAP straight-line depreciation. This means the company pays less cash tax now than book tax expense shows, creating a DTL. The DTL reverses in later years when tax depreciation drops below book depreciation, causing higher cash tax payments.

GAAP expenses SBC immediately on the income statement, but the IRS only allows the deduction when options are exercised or shares vest. The company records a DTA for the tax benefit it will receive later. When the tax deduction is realized, the DTA unwinds, reducing cash taxes and generating a cash inflow through CFO.

In a stock deal with no step-up in tax basis, the acquirer writes the target's assets up to fair value for book purposes while the tax basis carries over. Depreciation on the write-up is never deductible, so a DTL equal to the write-up times the tax rate is recorded in the purchase price allocation. It is a liability assumed at close, so it raises the goodwill plug by that amount, while the write-up itself pulls the full write-up out of goodwill. The DTL reverses as the written-up asset depreciates on the books, with no effect on cash taxes.