Essay: Permanent Differences and Deferred Taxes

Sample Essay

Unlike temporary differences permanent or non-temporary differences do not result in deferred tax assets or liabilities. The amounts of permanent differences are recorded in only one set of records; only in GAAP income statement or the tax returns. The permanent differences though do not have any deferred tax consequences but the effective tax rate of the company is affected.

The tax exempt revenues included in the income statement decrease the effective tax rate while expenses which are not tax deductible increase the effective tax rate. Tax-free revenues such as interest on non-tax bonds and non-tax deductible expenses such as government fines are included in the shareholder’s income statement but are not included in tax returns which result in permanent differences and do not increase or decrease deferred tax assets or liabilities.

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