Book/Tax Treatment of CDI and Goodwill - Revisited

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Daniel C. Dibella, CPA

We first wrote about the book and tax treatment of core deposit intangibles and goodwill back in 2009, and five years later one of the most common questions remains: How will goodwill and the core deposit intangible (CDI) be treated for book and tax purposes? The answer for book purposes depends on whether we’re discussing goodwill or CDI. The answer for tax purposes depends on whether the acquisition is structured as a stock purchase or as an asset purchase (including asset acquisitions resulting from 338(h)(10) elections and sales of QSUB banks).

CDI

Book – When a CDI is acquired, the treatment for books is the same whether the acquisition is structured as a stock or asset purchase: the CDI is amortized over the economic lives of the various core deposit types, as determined by a valuation analysis. Typically, this results in an amortization period of five to ten years. While some banks choose to amortize each component of the CDI separately, others choose to amortize the entire CDI over the weighted average economic life of all core deposit types.

Tax – If an acquisition is structured as a stock purchase, no amortization of the CDI is allowed. If an acquisition is structured as an asset purchase, the CDI is amortized straight-line over a period of 15 years.

Deferred Income Taxes – A CDI acquired in an acquisition structured as a stock purchase will result in a deferred tax liability (DTL) at inception. The DTL will decrease over the book life of the CDI as the book basis of the CDI decreases through amortization. Book amortization will be added back to net income when determining taxable income, resulting in an increase in current income taxes payable and a corresponding decrease in the DTL.

A CDI acquired in an acquisition structured as an asset purchase does not result in a deferred tax asset (DTA) or a deferred tax liability (DTL) at inception. However, a DTA will be created and will increase over the book life of the CDI as book amortization will be greater than tax amortization, reducing the book basis more quickly. Once the CDI is fully amortized for book purposes, the DTA will decrease to zero over the remaining tax life as amortization reduces the tax basis to zero.

Goodwill

Book – When goodwill is acquired, the treatment for books is the same whether the acquisition is structured as a stock or asset purchase: no amortization is allowed, but the goodwill is tested annually for impairment and written down if necessary.

Tax – If an acquisition is structured as a stock purchase, no amortization of goodwill is allowed. If an acquisition is structured as an asset purchase, goodwill is amortized straight-line over a period of 15 years.

Deferred Income Taxes – Goodwill acquired in an acquisition structured as a stock purchase will not result in a deferred tax asset (DTA) or a deferred tax liability (DTL) at inception. However, if an impairment charge is recorded for book purposes, a DTA will result as the impairment charge cannot be recognized for tax purposes and book basis will be less than tax basis. As the DTA will not be recognized unless the bank is acquired in the future, the DTA must be assessed for realizability.

Goodwill acquired in an acquisition structured as an asset purchase does not result in a deferred tax asset (DTA) or a deferred tax liability (DTL) at inception. However, a DTL will be created and will increase over the tax life of the goodwill as tax amortization will reduce the tax basis while book basis does not change. However, if an impairment charge is recorded for book purposes, the DTL will decrease (or potentially convert to a DTA) depending on the new book basis of goodwill as compared to its tax basis.

As always, consult your accounting and tax professionals when contemplating the effects that CDI and goodwill may have on a potential sale or purchase.