Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book) income of a single entity?
I.Treatment of payment of penalties and fines.
II.Disallowance of 50% of the cost of business meals and 100% of entertainment.

Question

Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book) income of a single entity?
I.Treatment of payment of penalties and fines.
II.Disallowance of 50% of the cost of business meals and 100% of entertainment.
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Quizplus · Accepted Answer

Statement I is correct because tax law provisions usually disallow the deduction of penalties and fines, whereas financial accounting methods may allow them as an expense. This creates a permanent difference between taxable income and financial income.
Statement II is also correct because tax law provisions disallow the deduction of 50% of the cost of business meals and 100% of entertainment expenses, whereas these may be allowed as expenses in financial accounting methods. This creates another permanent difference between taxable income and financial income. Therefore, both statements are correct.

Income Tax Accounting Methods and Financial Accounting Methods Differ in Many