Why is a deferred tax liability created for Goodwill?
Most companies use straight-line depreciation for financial statements and accelerated depreciation for income tax returns. So this means they have more taxes in the P&L statement as compared to the actual taxes paid. So they created a deferred tax liability for this because eventually they do have to pay this tax. When they do pay this extra tax, at that time, the DTL in the books will progressively reduce. This I fully understand.
However, I don’t understand creation of deferred tax liability for goodwill. Goodwill can be amortized in tax returns so companies pay less tax. Goodwill cannot be amortized in accounting statements. So they will have more taxes in the P&L statement as compared to actual taxes paid. However, these aren’t taxes which will need to get paid later (unlike the accelerated depreciation case). So what is the basis for creating the Deferred Tax Liability? When will liability be decreased progressively?
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