Thus far our discussion has centered around temporary differences—differences that reverse with time.
However, some differences are permanent—they do not reverse. Some examples of these differences are:
1. Life insurance premiums—this is permitted under GAAP but permanently prohibited under tax rules. They can neither be deducted this year nor in future years.
2. Proceeds from life insurance—this is considered a revenue item for accounting purposes but is permanently non taxable.
3. Interest on municipal bonds—this is a revenue item for accounting purposes but is exempt for tax purposes.
However, some differences are permanent—they do not reverse. Some examples of these differences are:
1. Life insurance premiums—this is permitted under GAAP but permanently prohibited under tax rules. They can neither be deducted this year nor in future years.
2. Proceeds from life insurance—this is considered a revenue item for accounting purposes but is permanently non taxable.
3. Interest on municipal bonds—this is a revenue item for accounting purposes but is exempt for tax purposes.
For permanent differences, there is no deferred tax treatment. Neither deferred tax liabilities nor deferred tax assets are recognized. The debit to Income Tax Expense is exactly equal to the credit to Income Tax Payable and they are both based on what is physically payable.
Why is there no deferred tax treatment for permanent differences? The answer is simple: To defer means to postpone until later. In this case, there is no postponement; the difference is permanent and will never be recognized.