Permanent difference definition
/What is a Permanent Difference in Tax Accounting?
A permanent difference is a business transaction that is reported differently for financial reporting and tax reporting purposes, and for which the difference will never be eliminated. A permanent difference that results in the complete elimination of a tax liability is highly desirable, since it permanently reduces a firm’s tax liability. Consequently, it is a key goal of tax planning. The following transaction types represent permanent differences when accounted for within the United States:
Meals and entertainment. These expenses are only partially recognized for tax reporting purposes.
Municipal bond interest. This is income for financial reporting purposes, but is not recognized as taxable income.
Penalties and fines. These expenses are recorded for financial reporting purposes, but are not allowable expenses for tax reporting purposes.
There are also permanent differences related to the purchase of life insurance on employees, as well as the income derived from such insurance.
Permanent differences are caused by statutory requirements. This means that the permanent-difference status of a business transaction can change at any time, if the government elects to alter the tax code.
The amount of tax expense and tax liability noted in a company's income statement and balance sheet (respectively) is based on book income, plus or minus any permanent differences.
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Variations in Permanent Differences
The transactions noted above may not be permanent differences in other countries, since they may not use Generally Accepted Accounting Principles to record transactions for financial reporting purposes, and their tax regulations likely differ from those used in the Internal Revenue Code in the United States. Thus, a transaction in one location may generate a permanent difference, which may not be the case in another location.
Permanent Difference vs. Temporary Difference
A temporary difference is the difference between the carrying amount of an asset or liability in the balance sheet and its tax base. It can be either of the following:
Deductible. A deductible temporary difference is a temporary difference that will yield amounts that can be deducted in the future when determining taxable profit or loss.
Taxable. A taxable temporary difference is a temporary difference that will yield taxable amounts in the future when determining taxable profit or loss.
A permanent difference differs from a temporary difference, where the disparity between tax and financial reporting is eliminated over time.