Permanent Difference
AdvancedA permanent difference is an item of income or expense that is treated differently in the accounts and for tax and will never reverse, such as a fine that is expensed in the accounts but is never deductible for tax.
Some items appear in accounting profit but are never taxed, or are expensed but never allowed as a tax deduction. Because these differences never reverse, they do not create deferred tax assets or liabilities.
Common examples include fines and penalties, which most tax systems do not allow as deductions; some entertainment expenses; certain tax-exempt income, such as interest on some government bonds; and some dividends received from other companies.
For example, a company pays a regulatory fine of 10,000. It is an expense in the accounts, but tax rules never allow it to be deducted. The company's taxable profit is permanently 10,000 higher than its accounting profit for that item.
Permanent differences are an important reason why a company's effective tax rate in its accounts differs from the statutory rate. They appear in the tax reconciliation in the notes to the financial statements. The term is widely used in US practice; IFRS does not use the label but deals with the same items as exceptions to deferred tax.
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