Final answer:
A company's effective tax rate reconciliation might include interest received from nontaxable government bonds, non-deductible fines and penalties, non-deductible life insurance premiums, and temporary differences between accounting and tax treatments of certain expenses like warranty costs.
Step-by-step explanation:
The reconciliation of a company's effective tax rate can include various items that cause discrepancies between statutory and effective tax rates. Some of these items may be non-deductible expenses, credits, or income that is treated differently for accounting and tax purposes. Specifically, the following can appear in a company's effective tax rate reconciliation:
- Interest received from nontaxable state and municipal government bonds - this interest is often exempt from federal and sometimes state taxes, affecting the tax reconciliation.
- Fines and penalties due to violations of the law - these are generally not deductible for tax purposes and therefore impact the effective tax rate.
- Non-deductible life insurance premiums paid - premiums for certain types of life insurance policies are not deductible expenses when calculating taxable income.
- Temporary differences between warranty costs deducted in the tax return and warranty expense recognized in the income statement - these differences arise because of different treatments of the same transactions for tax and accounting purposes.
By examining each of these items, one can better understand the variances contributing to a company's effective tax rate.