In short
A temporary difference is a difference between an asset's or liability's tax basis and its carrying amount in the financial statements that will reverse in future years, creating taxable or deductible amounts then.
Key takeaways
- Taxable temporary differences create deferred tax liabilities; deductible ones create deferred tax assets.
- Examples: depreciation timing, warranty accruals and rent received in advance.
- Permanent differences, such as tax-exempt interest and fines, never reverse and create no deferred taxes.
Where it's tested
FAR: Income Taxes (Deferred Tax Accounting) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company recognizes a warranty expense of $40,000 for book purposes in the current year, but the deduction is not allowed for tax purposes until the warranty claims are actually paid in future years. What is the tax effect of this temporary difference?