@Amor D Just memorize this:
Dividends received deduction – Permanent Difference amount deducted is never taxable.
50% of meals and entertainment – Permanent Difference never deductible
Penalties, fines – Permanent Difference Never deductible
Life Insurance Proceeds – Permanent Difference Never taxable
Municipal Bonds – Permanent Difference Never Taxable
Macrs depreciation vs straightline depreciation – temporary difference.
Prepaid expenses – temporary difference
Bad debt – temporary difference
% Complete Vs Regular Accrual – Temporary difference
Basically, you don't have deferred taxes for permanent differences because the difference is permanent. It will never reverse.
Temporary differences will be match up at some point in time.
If I accrue bad debt of 5,000, but actually write off 3,000 of that, I have a temporary difference of 2,000. That 2,000 will be written off on my tax return in future years, but I already deducted it on my financials.
Bad Debt Dr. 5,000
Allowance Cr. 5,000
Now work out the deferred taxed calc, assuming a 30% tax and book income before taxes of 10,000 (10,000*.30=3,000 in taxes). Now we the tax man says we are only going to allow you to deduct 3,000, instead of 5,000, so that increases your book income by 2,000. This is your taxable income. Which is different than book income. (12,000*.30=3,600)
Provision for tax Dr 3,000
taxed liability Cr 3,600
Deferred asset Dr. 600 (Essentially I ended up paying the tax man an extra $600 in advance, which you can use as a credit in the future)
Now say the very next year, you accrual no bad debt, but write off that 2,000. Assuming the same facts in the previous example,but with no accrual
Provision for tax Dr. 3,000 (10,000 book income *.30) already deducted the 2k in a prior year.
Tax liability Cr.2,400 (8,000 taxable income *.30) Tax man allows you to deduct that extra 2k now
Deferred tax asset Cr. 600 (Now we paid the tax man the 2,400 and used the 600 as a credit paid earlier).
This is an example of how a temporary difference works. Can you tell i'm bored lol.
FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.
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