A permanent difference affects book income or taxable income without creating a future taxable or deductible reversal. It changes current tax and can explain the effective tax rate, but it does not create a deferred tax asset or liability. The tax treatment must be supplied and supported.
Test for a future consequence
ASC 740-10-25-30 explains that some basis differences do not produce future taxable or deductible amounts and therefore may not be temporary differences.
Assume $20,000 of municipal interest is tax-exempt and a $10,000 penalty is nondeductible under the supplied facts. The first reduces taxable income relative to book income; the second increases it. Neither reverses, so neither enters the deferred schedule. At 21 percent, their rate-reconciliation effects are a $4,200 benefit and $2,100 expense. Labels alone cannot establish permanence. Keep jurisdiction, legal support, period, amount, sign, and rate-table effect in the inventory.
Reconcile the permanent-item total to both the current bridge and rate table; it should not appear in the deferred rollforward.
Put the concept to work
Apply this concept
- Route permanent differences through the current bridge and rate reconciliation without creating a deferred tax asset or liability.
Learning resources
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