Temporary differences reverse in future periods. Permanent differences do not.
Both can cause accounting income to differ from taxable income, but their treatment in deferred tax accounting is different. This article focuses on U.S. corporate accounting and taxation.
What Is a Temporary Difference?
A temporary difference arises when differences between financial statement carrying amounts and tax bases produce future taxable or deductible amounts.
A common example is depreciation. Different book and tax depreciation methods can allocate an asset’s cost to different years.
Assume a $10,000 asset is depreciated as follows:
| Year | Book Depreciation | Tax Depreciation |
|---|---|---|
| Year 1 | $5,000 | $10,000 |
| Year 2 | $5,000 | $0 |
| Total | $10,000 | $10,000 |
Tax depreciation exceeds book depreciation by $5,000 in Year 1. The difference reverses in Year 2, when book depreciation exceeds tax depreciation by the same amount.
This hypothetical example illustrates the concept; it does not describe actual depreciation or immediate expensing eligibility.
Certain accrued expenses and allowances can also create temporary differences when book recognition precedes tax deductibility. Reference: IRS, Examination Techniques
What Is a Permanent Difference?
A permanent difference results from an item receiving different book and tax treatment without a future reversal.
Examples include federal income tax expense and permanently nondeductible portions of certain meal or entertainment expenses. Income recognized for accounting purposes but permanently excluded from taxable income can also create a permanent difference. Reference: IRS, Schedule M-3 Instructions
How Do They Affect Deferred Tax Accounting?
| Feature | Temporary Difference | Permanent Difference |
|---|---|---|
| Reverses in future periods | Yes | No |
| Typical example | Book–tax depreciation difference | Permanently nondeductible expense |
| Deferred tax effect | Generally creates a deferred tax asset or liability | Generally creates neither |
Temporary differences generally produce deferred tax assets or liabilities, subject to recognition exceptions and realizability requirements.
Permanent differences do not create future tax effects, but they affect the company’s effective tax rate. Reference: FASB, Income Taxes — Topic 740 disclosure examples
What Should Companies Watch For?
An expense is not necessarily a permanent difference simply because it is nondeductible this year. Companies should determine whether it becomes deductible later, qualifies for carryforward treatment, or is permanently disallowed. Federal and state treatment may also differ.
How We Can Help
Threefold Hara CPA assists with identifying temporary and permanent differences, preparing book-to-tax adjustments, and calculating deferred tax assets and liabilities.
This article provides general information. Treatment depends on applicable accounting standards, tax laws, and the specific transaction.
Information reviewed: October 15, 2026
