Technical / Accounting

Deferred Tax Assets & Liabilities: What You Need to Pass Banking Interviews

Cut through tax noise and get the exact DTA/DTL logic that actually gets tested in banking interviews.

MN·13 min read·

Tax Accounting

Tax accounting complexity stems from timing mismatches between GAAP and tax code treatment. For interviews, focus on three elements: what creates the timing difference, whether taxes were paid early or late, and how the impact flows through the statements.

Prerequisite: 3-Statement Mechanics.

Core Framework

DTA — NOL Mechanics

Scenario: Company generates an NOL. 25% tax rate.

Initiation

Loss creates a future tax shield.

DTA — Stock-Based Compensation

Scenario: SBC expense recognition. 25% tax rate.

Initiation

GAAP expenses SBC now; IRS deduction comes later.

DTL — Accelerated Depreciation

Scenario: Tax depreciation exceeds book depreciation. 25% tax rate.

Initiation

IRS allows larger deduction now; tax payment deferred.

Definition	Future tax benefit	Future tax obligation
Cause	GAAP shows less taxable income or more expense than IRS	GAAP shows more taxable income or less expense than IRS
Scenarios	1. Tax paid early Cash taxes > GAAP tax • Deferred revenue (taxed earlier) • Book expense first (bad debt, warranties) 2. Tax credit exists • NOLs • Tax credits / overpayments	1. Tax paid late Cash taxes < GAAP tax • Accelerated depreciation 2. IRS deferral allowed • Installment sales (taxed later) • Long-term contract revenue (booked first)

Income Statement	EBT (100) → Tax +25 → NI (75)
Cash Flow Statement	NI (75) → ∆DTA +25 → CFO (50) → Net cash (100)
Balance Sheet	A: Cash (100), DTA +25 / L: — / E: RE (75)

Statement	Line Items
Income Statement	EBT 100 → Tax (25) → NI 75
Cash Flow Statement	NI 75 → ∆DTA (25) → CFO 50 → Net cash 100
Balance Sheet	A: Cash +100, DTA (25) / L: — / E: RE +75

Income Statement	EBT (100) → Tax +25 → NI (75)
Cash Flow Statement	NI (75) → SBC add-back +100 → ∆DTA +25 → CFO 0
Balance Sheet	A: DTA +25 / L: — / E: APIC +100, RE (75)

Statement	Line Items
Income Statement	No SBC impact
Cash Flow Statement	∆DTA (25) → CFO +25 → Net cash +25
Balance Sheet	A: Cash +25, DTA (25) / L: — / E: unchanged

Deferred Tax Assets & Liabilities: What You Need to Pass Banking Interviews

Tax Accounting

Core Framework

DTA — NOL Mechanics

Initiation

DTA — Stock-Based Compensation

Initiation

DTL — Accelerated Depreciation

Initiation

Unwind

Unwind

Unwind

Income Statement	EBT 150 → Tax (37.5) → NI 112.5
Cash Flow Statement	NI 112.5 → ∆DTL +12.5 → CFO 125 → Net cash 175
Balance Sheet	A: Cash +12.5 / L: DTL +12.5 / E: —

Statement	Line Items
Income Statement	Higher effective tax burden
Cash Flow Statement	∆DTL (12.5) → CFO reduced → Net cash lower
Balance Sheet	A: Cash (12.5) / L: DTL (12.5) / E: —