Favorited Content Show Publication date: 31 Oct 2021 us Income taxes guide 3.4 ASC 740-10-25-30 discusses the concept of basis differences that do not result in a tax effect when the related assets or liabilities are recovered or settled. Events or transactions that do not have tax consequences when a basis difference reverses do not give rise to temporary differences. These situations are typically referred to as “permanent differences.” Below are some common examples of permanent differences in the US federal income tax jurisdiction:
3.4.1 Excess cash surrender value of life insuranceThe excess of the cash surrender value of a life insurance policy (the book basis) held by an employer over the premiums paid (the tax basis) is a basis difference. When a reporting entity owns a life insurance policy, management typically intends to maintain the policy until the death of the insured, in which case the proceeds of the policy would not be taxable. According to ASC 740-10-25-30, the excess of the book basis over the tax basis “is a temporary difference if the cash surrender value is expected to be recovered by surrendering the policy but is not a temporary difference if the asset is expected to be recovered without tax consequence upon the death of the insured.” Implicit in this guidance is the notion of an employer’s control over the decision to surrender or hold the policy until the death of the employee. If an employer does not expect to keep an insurance policy in force until the death of the insured, it must record a deferred tax liability for the excess book-over-tax basis because the basis difference in this circumstance will be taxable when it reverses. If a reporting entity previously believed it would keep a policy in force until the insured’s death but no longer believes that it will do so, then it must recognize a deferred tax liability on the basis difference even if it expects to keep the policy in force for a number of years. A reporting entity’s ability to control the decision about holding a policy until the death of the insured may be affected by the existence of any employee cancellation option. PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Please ensure Back to the Original document This view is read only. To access this content, click on "Go to content" Smith Company reported $350,000 in book income before income tax during 20X1, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 20X1 and all future years was 21%. If Smith paid no estimated taxes, what amount of income tax payable should Smith report in its December 31, 20X1, balance sheet? Multiple Choice $73,500 Stone Company reported pre-tax book income of $700,000 in 20X1, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 20X1 and all future years was 21%. If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its December 31, 20X1, balance sheet? Multiple Choice Differences Between Tax and Book Accounting in U.S. Q&A Difference between net income per company’s financial statements and taxable income reported on the tax return exist because of the difference between Generally Accepted Accounting Principles (GAAP) and tax law.
What is the difference between taxable income and book income?Book income is used by companies to report their income and expenses to shareholders. Taxable income is used by businesses to report earnings and tax liability to tax authorities.
What is a permanent book tax difference?A permanent difference is the difference between the tax expense and tax payable caused by an item that does not reverse over time. In other words, it is the difference between financial accounting and tax accounting that is never eliminated. An example of a permanent difference is a company incurring a fine.
Are permanent differences included in taxable income?In general, a permanent difference is an item of income or expense that is not allowed for income tax purposes, but is allowed for GAAP. These differences are permanent in that they are expenses that are disallowed or income that is not recognized for income tax purposes and are not merely a timing difference.
What events create permanent differences between accounting income and taxable income?A permanent difference between taxable income and accounting profits results when a revenue (gain) or expense (loss) enters book income but never recognized in taxable income or vice versa. The difference is permanent as it does not reverse in the future. Thus, book and tax will never equalize.
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