hard · Private Equity accounting-flow

By how much does this misstate the year-1 cash tax, and in which direction?

1. It understates cash taxes by $5M, because the $8M fee and $12M intangible amortization ($20M total) are non-deductible and must be added back to the tax base, raising taxable income by $20M and tax by 25% × $20M = $5M
2. It overstates cash taxes by $5M, because non-deductible amortization still shields cash income from tax, so subtracting the $8M fee plus $12M intangible amortization from the tax base double-counts the tax shield twice over
3. It understates cash taxes by $2M, because only the $8M financing-fee amortization is genuinely non-deductible here, while the $12M intangible step-up amortization is wrongly assumed to remain fully deductible
4. It is correct as computed, because the analyst assumes all book amortization, including the financing-fee and purchase-accounting intangible step-up amortization, reduces taxable income for cash-tax purposes regardless of deductibility rules

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