What is defined as the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years?

Question

Options

• Apermanent difference
• Btemporary difference
• Cdeferred tax difference
• DNone of the above

• A
  3% (1)
• B
  80% (24)
• C
  10% (3)
• D
  7% (2)

Explanation

Temporary difference (B) is the precise term defined in accounting standards (ASC 740 / IAS 12) for the gap between an asset or liability's tax basis and its book (financial statement) value - a gap that will reverse and create taxable or deductible amounts in future periods, giving rise to deferred tax assets or liabilities.

Why the distractors are wrong:

• A (Permanent difference): A permanent difference also creates a gap between book and tax income, but it never reverses - it has no future tax consequence (e.g., tax-exempt municipal bond interest). The definition explicitly requires future taxable/deductible amounts, which permanent differences lack.
• C (Deferred tax difference): This is not a standard accounting term; it conflates the result (a deferred tax asset/liability) with the cause (the temporary difference). Using invented terminology on an exam is a red flag.
• D (None of the above): Eliminated because B matches the definition exactly.

Memory tip: Think "temporary = it will turn around someday." If the timing mismatch between book and tax treatment eventually reverses, it's temporary. If it never reverses, it's permanent. The word "future" in the definition is your signal - permanent differences have no future tax effect.

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