Final answer:
The federal income tax deduction that a corporation takes under ASC 740 is a temporary (option 3) book-tax difference. This arises from the timing differences in recognizing income or expenses between tax reporting and financial accounting standards. An individual owning and operating a corporation as the sole employee would be subject to corporate income tax, payroll taxes, and taxes on dividends.
Step-by-step explanation:
When discussing the federal income tax deduction that a corporation takes under ASC 740, it addresses the differences between tax reporting and financial accounting. The type of book-tax difference it represents is a temporary book-tax difference. Temporary differences occur when there is a difference in the timing of when income and expenses are recognized for financial accounting purposes versus when they are recognized for tax purposes.
One common example of a temporary difference is with depreciation. For financial reporting purposes, a company may use the straight-line method of depreciation, while for tax purposes, it may use an accelerated method. This creates a temporary difference between the book value and tax value of the asset until the depreciation method converges over time.
In the specific scenario where an individual owns a corporation and is the only employee, various federal taxes will be applicable. These could include income tax for the corporation on its earnings and, for the individual as an employee, payroll taxes (which consist of Social Security and Medicare taxes). Moreover, the individual would be responsible for taxes related to any dividends received as an owner.
These obligations illustrate the complex tax landscape corporations and their employees navigate, highlighting the importance of understanding both temporary and permanent book-tax differences and planning accordingly to comply with tax laws while optimizing tax liabilities.