Question

A permanent difference is a difference between pretax financial income and taxable income in an accounting period that will never reverse in a later period. Which of the following is not an example of a permanent difference?

a) Depreciation on tax returns
b) Interest income on municipal bonds
c) Expenses related to fines and penalties
d) Amortization of goodwill
e) Net operating loss carryforward

Answer 1

The item that is not an example of a permanent difference is the net operating loss carryforward because it is a temporary difference that can be used to reduce future taxable income.

Step-by-step explanation:

A permanent difference is a discrepancy between the book income reported on financial statements and the amount of income that is taxable under the tax code which, as the name suggests, does not reverse in future periods. An example of a permanent difference includes items like interest income on municipal bonds, which is often tax-exempt, and expenses related to fines and penalties, which are not deductible for tax purposes. In contrast, temporary differences, such as depreciation on tax returns, amortization of goodwill, and net operating loss carryforward, will reverse in the future when they affect taxable income.

Given the choices provided, the item that is not an example of a permanent difference is e) Net operating loss carryforward. This is because a net operating loss (NOL) can be used to reduce taxable income in the future, which indicates that it is indeed a temporary difference rather than a permanent one.