The requirements and methods of a basis step up are described in more detail later in this article. Tax basis can often be depreciated or amortized—therefore, more tax basis should mean more deductions. A deduction can reduce net taxable income, and therefore more deductions should mean less tax to pay. But does it always mean that?
A buyer may pay for tax basis where it knows there will be additional tax savings from an increase in deductions. However, sometimes a buyer will not expect to be able to use the additional deductions, or does not expect the use will result in meaningful tax savings. For example, a buyer’s projections of the acquired business’s performance may not result in any need for additional deductions (this can be for many reasons, such as the presence of other deductions from compensation or interest payments). Or the business or buyer may have “net operating loss carryforwards” (NOLs, which are unused losses from prior years that can be carried into, and used in, future years), and so additional deductions may not provide meaningful, incremental value (although the alternative minimum tax typically will result in a small tax charge for using NOLs). A less obvious scenario is where the increased deductions reduce income but do not actually result in any tax savings, which is discussed below.
