Which of the following items is not a permanent book–tax difference?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which item is not a permanent book–tax difference among the given choices. The options are:
- Tax-exempt life insurance proceeds
- Nondeductible meals expense
- Accrued legal settlement not paid in the current tax year
- Excess tax benefits from the exercise of NQOs

Option analysis:
Option 1: Tax-exempt life insurance proceeds
- This is typically a permanent difference. The proceeds from a life insurance policy owned by the company are generally excluded from taxable income but may be included in book income under certain accounting treatments, creating a permanent divergence between book and tax accounting.
- Why this can be confusing: the key idea is that tax-exempt income that is not recognized for tax purposes but is recognized in financial statements tends to be permanent because it does not reverse over time.

Option 2: Nondeductible meals expense
- Nondeductible meals expenses are, in many tax scenarios, treated as permanent differences because the expense is not deductible for tax purposes while it is recognized in book income.
- Important nuance: even though business meals often have partial deductibility (e.g., 50% deductible under many regimes), a truly nondeductible meals item would still create a permanent gap between book and tax treatment, since no tax deduction is allowed for that amount.

Option 3: Accrued legal settlement not paid in the current tax year
- This typically represents a temporary difference. A company may recognize an expense in the financial statements when the obligation is incurred (accrual basis), but for tax purposes the deduction is generally allowed when the settlement is actually paid or when the liability is settled, leading to a timing difference that reverses in the future.
- The key concept: timing differences that reverse later (as payments occur) are temporary differences, not permanent.

Option 4: Excess tax benefits from the exercise of NQOs (non-qualified stock options)
- These benefits generally create a permanent difference. The excess tax benefits reduce taxes payable and influence tax expense differently than book accounting, and such benefits do not typically reverse over time in the same way other temporary items do.
- The overarching idea: items that affect tax expense or benefits in ways that do not reverse with future periods are treated as permanent differences.

Summary of reasoning across options:
- The first, second, and fourth items involve differences between book and tax treatment that typically do not reverse in future periods, i.e., permanent differences.
- The third item involves timing of deduction (accrual vs. payment) and tends to reverse when the settlement is paid, making it a temporary difference.

If you were selecting the item that is not a permanent book–tax difference, you would be looking for the option describing a temporary difference (the one where the deduction reverses in a later period).

Which of the following items is not a permanent book–tax difference?单项选择题

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