Question

Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book) income of a single entity?

a)Treatment of payment of penalties and fines.
b)Disallowance of 50% of the cost of business meals and 100% of entertainment.

Answer 1

Income tax accounting methods and financial accounting methods can differ in terms of taxable income and financial (or book) income for a single entity. Two tax law provisions that create permanent differences between taxable income and financial income are the treatment of payment of penalties and fines and the disallowance of a portion of the cost of business meals and entertainment.

Step-by-step explanation:

Income tax accounting methods and financial accounting methods can differ in terms of taxable income and financial (or book) income for a single entity. There are certain tax law provisions that can create permanent differences between the two. Two such provisions are the treatment of payment of penalties and fines and the disallowance of 50% of the cost of business meals and 100% of entertainment.

For example, if a company pays a penalty or fine, it may be deductible for financial accounting purposes but not for income tax purposes, creating a permanent difference between taxable income and financial income. Similarly, the disallowance of a portion of the cost of business meals and entertainment for income tax purposes creates a permanent difference.