Question

Describe a few common permanent and temporary book-tax differences. How does an unfavorable book-tax difference affect retained earnings and the corporation’s tax liability? Why do you think that a political contribution is an unfavorable permanent tax difference?  Do you agree or disagree with the current tax treatment of political contributions?

Answer 1

Describe a few common permanent and temporary book-tax differences

Temporary: when income or expenses are recorded by different methods in the the books for reporting purpose and for tax return purpose. Another difference can be because of the difference in the depreciation method followed. In books, methods like WDV or SLM are followed whereas for tax purpsoe accelerate method could be used which reduces the tax liability. It also occur when income is not recognized until it is earned, whereas for taxes, income is recognized when it is received

Permanent: Expenses like fines and penalties on income tax can be deducted as expensesf from the financial statements but same are not deductable from the tax return calculations, this lead to permanent differences. Similarly, start up costs can also not be reduced from the tax returns but are shown as expenses in FS

Permanent differences occur only for the tax year in which they occur. Temporary differences occur over several years, ending when the differences reverse.

How does an unfavorable book-tax difference affect retained earnings and the corporation’s tax liability?

Unfavorable differences postpone the timing of deductable expenses. This increases the net income and consequently the tax liability.

Why do you think that a political contribution is an unfavorable permanent tax difference?

It is because they are not deductable at all from the income for the tax purpose and can be deducted in FS to show true and fair values. This lead to unfaviorable situation where income liable for tax is more then income as per FS. I believe it is a correct method as this do not encourage much unrequired funding to political parties and limits the lobbying money power of big companies.