Tax‑Affecting D&A in Unlevered FCF — Interview Guide
2025-08-21
Technical
DCF
Accounting
• 1 min readHow depreciation/amortization affect taxes in UFCF, and edge cases for tax shields and purchase accounting.
D&A tax shield in UFCF
Unlevered FCF taxes are computed on EBIT after adjusting for non‑cash items. Depreciation and amortization reduce taxable income and create a tax shield: Cash Taxes = (EBIT − D&A) × Tax Rate. In UFCF, you add back D&A after applying taxes to EBIT.
Reference formulas
| Item | Formula | Notes |
|---|---|---|
| Cash Taxes | (EBIT − D&A) × t | t = statutory or blended rate |
| UFCF (simple) | EBIT × (1−t) + D&A − Capex − ΔNWC | Add back D&A post tax |
| Tax Shield | D&A × t | Economic benefit from non‑cash expense |
Edge cases
- Purchase accounting: stepped‑up amortization increases D&A → higher tax shield
- NOLs: if significant, cash taxes may be lower than book taxes; disclose clearly
- Tax vs book depreciation schedules: align to cash reality in sensitivity
Downloads
Grab a UFCF worksheet with tax‑shield roll‑forward here.
Download interview prompts + answer keys here.