Permanent/Temporary Differences

Question 1

What is a permanent Difference?

Answer 1

Permanent difference NEVER “reverse”

-Permanent difference occur when GAAP or the income tax code, but not both, recognizes an item.

Question 2

What are common permanent differences on the CPA exam:

Answer 2

1) Tax exempt interest
2) Fines and penalties
3) Life insurance premium on key employees (proceeds from policy)
4) Meals (50% not deductible)
5) Dividends received deduction (DRD)

Question 3

What is a dividend received deduction?

Answer 3

When one corporation receives a dividend. A portion of the dividend is tax free. Typically like 80%.

Corporations must be domestic to qualify.

The permanent difference will be the 80% that is not deductible.

Question 4

What are the disclosure requirement

Answer 4

Need to include the statutory rate, effective rate

Effective rate - (Income tax expense/pre-tax income

Question 5

What are common temporary differences?

Answer 5

1. Depreciation expense
2. Revenue recognition- When cash is collected, that’s when you are taxed
3. Warranty expense and bad debt expense- Accrued for financial reporting, recognized on cash basis
4. Income from investments- only the dividends are taxable not the portion of the income.