Final answer:
A permanent difference is a difference between pretax accounting income and taxable income that never reverses, such as non-deductible expenses or tax-exempt income. This is distinct from temporary differences which cancel out over time.
Step-by-step explanation:
A permanent difference in the context of taxable income and financial reporting is a difference between pretax accounting income and taxable income that never reverses. Unlike temporary differences which reverse over time, such as with depreciation methods differing for tax and book purposes, a permanent difference remains over the long term. This can include expenses that are non-deductible for tax purposes or income that is exempt from taxation.
Understanding the difference between taxable income and accounting income is crucial for financial reporting. Taxable income is calculated as adjusted gross income minus deductions and exemptions, and it incorporates different tax rates for varying income levels. When discussing fiscal policy, this concept gains even more importance. For example, a permanent tax cut or spending increase is likely to have a stronger, enduring impact on individual and business behavior than a temporary change because it stays in effect for the foreseeable future.