Why do deferred tax liabilities (DTLs) and deferred tax assets (DTAs) get created in M&A deals?

These get created when you write up assets – both tangible and intangible – and when you write down assets in a transaction. An asset write-up creates a deferred tax liability, and an asset write-down creates a deferred tax asset.

You write down and write up assets because their book value – what’s on the balance sheet – often differs substantially from their “fair market value.”

An asset write-up creates a deferred tax liability because you’ll have a higher depreciation expense on the new asset, which means you save on taxes in the short-term – but eventually you’ll have to pay them back, hence the liability. The opposite applies for an asset write-down and a deferred tax asset.