Book-Tax Differences Flashcards
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
INTEREST INCOME FROM MUNICIPAL BONDS
Permanent - the business will never be expected to eventually pay taxes on the income (never reverses)
Favorable - Income included in book income, excluded from taxable income for regular tax purposes
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
DEATH BENEFIT FROM LIFE INSURANCE ON KEY EMPLOYEES
Permanent - the business will never be expected to eventually pay taxes on the income (never reverses)
Favorable - Income included in book income, excluded from taxable income
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
INTEREST EXPENSE ON LOANS TO ACQUIRE INVESTMENTS GENERATING TAX-EXEMPT INCOME
Permanent - the business will never be allowed to eventually deduct taxes on the expense (never reverses)
Unfavorable - Deductible for books, but expenses incurred to generate tax-exempt income are not deductible for tax
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
LIFE INSURANCE PREMIUMS FOR WHICH CORPORATION IS BENEFICIARY
Permanent - the business will never be allowed to eventually deduct taxes on the expense or be expected to eventually pay taxes on the income (never reverses)
Unfavorable - deductible for books, but expenses incurred to generate tax-exempt income (life insurance death benefit) are not deductible for tax
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
BUSINESS-RELATED MEAL EXPENSES
Permanent - this expense will not factor into future taxes (never reverses)
Unfavorable - Fully deductible for books but only 50% deductible for tax
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
FINES AND PENALTIES AND POLITICAL CONTRIBUTIONS
Permanent - this expense will not factor into future taxes (never reverses)
Unfavorable - Deductible for books but not for tax
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
BUSINESS-RELATED ENTERTAINMENT EXPENSES
Permanent - this expense will not factor into future taxes (never reverses)
Unfavorable - Deductible for books but not for tax
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
DEPRECIATION EXPENSE
Temporary - the timing of the deductions will factor over other years (reverses)
INITIALLY Favorable - difference between depreciation expense for tax purposes and depreciation expense for book purposes
Ex. Let’s say a business buys equipment for $500K (let’s assume straight-line, five-year, no salvage value depreciation). Each year the company expenses on its books $100K depreciation, but it takes bonus depreciation on the asset and deducts all $500K in year one.
Year One
- More tax deduction than book depreciation expense ($500K deduction; $100K expense)
- More deduction means less taxable income; favorable
Years Two through Five
- Less tax deduction than book depreciation expense (years 2-5: $0 deduction; $100K expense each)
- Less deduction means more taxable income; unfavorable
Since total expense is $500K and total deductions are $500K – the difference is in timing only – so this is a temporary diff.
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
GAIN OR LOSS ON DISPOSITION OF DEPRECIABLE ASSETS
Temporary - Will reverse in later years
INITIALLY Unfavorable - Difference between gain or loss for tax purposes when corporation sells or disposes of depreciable property. Difference generally arises because depreciation expense, and thus the adjusted basis of the asset, is different for tax and book purposes. This difference is essentially the reversal of the book-tax difference for the depreciation expense on the asset sold or disposed of.
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
BAD DEBT EXPENSE
Temporary - Will reverse in later years
INITIALLY Unfavorable - Direct write-off method for tax purposes; allowance method for book purposes
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
UNEARNED RENT REVENUE
Temporary - Will reverse in later years
INITIALLY Unfavorable - taxable on receipt but recognized when earned for book purposes
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
DEFERRED COMPENSATION
Temporary - Will reverse in later years
INITIALLY Unfavorable - Deductible when accrued for book purposes, but deductible when paid for tax purposes if accrued but not paid within 2.5 months after year end. Also, accrued compensation to shareholders owning more than 50% of the corporation is not deductible until paid.
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
ORGANIZATIONAL EXPENSES AND START-UP COSTS
Temporary - Will reverse in later years
INITIALLY Unfavorable - Immediately deducted for book purposes but capitalized and amortized for tax purposes (limited immediate expensing allowed for tax)
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
WARRANTY EXPENSE AND OTHER ESTIMATED EXPENSES
Temporary - Will reverse in later years
INITIALLY Unfavorable - Estimated expenses deducted for book purposes, but actual expenses deducted for tax purposes
Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?
UNICAP (SECTION 263A) (requires the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property produced by the taxpayer; uniform capitalization)
Temporary - Will reverse in later years
INITIALLY Unfavorable - Certain expenditures deducted for book purposes, but capitalized to inventory for tax purpoese. Difference reverses when inventory is sold. There is an exception for taxpayers with an annual average of $25 million or less in gross receipts over the three prior years
