1)Explain what are book-tax differences? Contrast “Permanent” differences with “Temporary” (or “Timing”) differences between book and tax

Book – Tax differences

In book accounting the balance sheet and income statements are prepared as per GAAP. But in tax accounting income and deductions reported on tax return in accordance with the tax rules and regulations.

Differences exist because of difference in accounting treatments in GAAP and Tax law. To determine taxable income many corporations start with income computed under generally accepted accounting principles. And then make adjustments for book –tax reporting differences.

Book – Tax differences may be favorable or unfavorable for the tax payer depending on the adjustment either increase or decrease to the book income.

Unfavorable

Increase book income to compute tax income, because of the increase it is unfavorable to the tax payer.

Favorable

Decrease book income to compute tax income, is favorable because book income decreased to compute tax income.

Book – Tax differences also categorizes as permanent and temporary

Permanent

Differences arise in one year and the difference never reverse. It is the nonreversible financial accounting and tax accounting differences.

E.g. Fines and penalties nondeductible for tax purposes but is deducted in books to find net income.

Temporary

Differences arise in one year and the same reverse later. This difference arises mainly because of difference in estimate between the financial accounting and tax accounting.

E.g. Depreciation expenses .In most of the cases methods and assumptions are differ and will equate over time.