Fitting Permanent and Temporary Differences Together
The following illustration shows how permanent and temporary differences fit together to complete the tax accrual process.
Make note of the following comments from the above illustration:
- The starting point is pre-tax accounting income for both book and tax purposes.
- The permanent differences are subtracted from both the book and tax computations.
- The temporary differences are only subtracted from the taxable income computation.
- The permanent and timing difference (with the exception of the Dividend Received Deduction (DRD) and the NOL deductions) should add up to be the same as the adjustments that are reported on the Schedule M-1 of the Corporate Tax Return.
- In theory, the tax provision is the tax on financial statement income—taking into account those permanent differences that are excludable or non-deductible on the tax return.
