CFA Level I · CFA Level I Exam · Analysis of Income Taxes
Which of the following items would most likely create a permanent difference between accounting profit and taxable income?
Tax-exempt interest income most likely creates a permanent difference. It appears in accounting profit but is never taxed, so the difference never reverses and no deferred tax is recognized. Warranty accruals and accelerated tax depreciation only shift timing and reverse later.
- ATax-exempt interest income from municipal bondsCorrect
- BWarranty expense recognized before it is paid
- CAccelerated depreciation claimed on the tax return
Explanation
Tax-exempt interest is included in accounting profit but never in taxable income, so the difference never reverses and creates no deferred tax. Warranty expense timing and accelerated tax depreciation are temporary differences that reverse in later periods.
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