Question

A permanent difference is a difference

a. that is always included on the tax return.
b. between pretax accounting income and taxable income that never reverses.
c. deducted each year on the tax return.
d. that is included at different times in financial reporting income and taxable income.

Answer 1

A permanent difference is a difference between financial reporting income and taxable income that is included at different times. It can occur due to various reasons such as expenses that are deductible for tax purposes but not for financial reporting purposes, or revenues that are recognized for financial reporting purposes but not taxable.

Step-by-step explanation:

A permanent difference is a difference between financial reporting income and taxable income that is included at different times. These differences can occur due to various reasons such as expenses that are deductible for tax purposes but not for financial reporting purposes, or revenues that are recognized for financial reporting purposes but not taxable. This results in a permanent difference between the two types of income.

For example, let's say a company has a warranty expense that is deductible for tax purposes when the expense is incurred, but it is not recognized as an expense for financial reporting purposes until the warranty is actually fulfilled. This creates a permanent difference in the timing of the expense recognition for tax and financial reporting.

It's important for companies to understand and account for permanent differences in order to accurately calculate their taxable income and financial reporting income, and to properly comply with tax laws and accounting standards.