I was hoping to find an example dealing with interest on a municipal bond
Permanent differences do not cause deferred tax liabilities or assets. These occur if a revenue or expense item:
Therefore, permanent differences result from revenues and expenses that are reportable on either tax returns or in financial statements but not both. Permanent differences arise because the tax code excludes certain revenues from taxation and limits the deductibility of certain expenses.
These differences are permanent because they will not reverse in future periods.
No deferred tax consequences are recognized for permanent differences; however, they result in a difference between the effective tax rate and the statutory tax rate that should be considered in the analysis of effective tax rates.
Interest on municipal bonds:
Municipal bonds are debt instruments a local government issues to fund a project, such as a new highway. Under GAAP, you add this income to net income. For federal tax, it’s generally never taxed (although this may not be true in some states). Likewise, any expenses incurred in obtaining tax-exempt income are deductible for book but not tax purposes.
Example:
A company owns a $50,000 municipal bond with a 4% coupon and has an effective tax rate of 50% and a statutory tax rate of 40%. Calculate the deferred tax created by this bond.
Solution:
The bond does not result in deferred tax, as the difference it causes is a permanent difference that will not reverse. As a result, no deferred tax is recognized.
Create a numerical example of a permanent tax difference and how it is treated on the...
. How are scholarships received treated for tax purposes? For example, look at difference between tuition and fees vs. room and board. What are some common examples of income, and what are some common examples of items excluded from income? For example, included items would be income such as alimony received from pre-2019 divorces, gambling winnings, wages, unemployment compensation, etc. and excluded items would be income such as life insurance proceeds, child support payments, medical reimbursements to cover medical expenses,...
MC Qu. 09 Which of the following does not... Which of the following does not create a permanent book-tax difference? points Multiple Choice Print Federal income tax expense. Municipal bond interest income. Charitable contributions in excess of the 10% of taxable income limitation. Fines and penalties.
General Question/Exercise 16-7 Identify Permanent versus Temporary Differences Identify in the following circumstances whether the difference is a permanent (P) or temporary (T) difference. MACRS depreciation is used for tax purposes but straight-line is used for financial reporting. Magazine subscriptions are taxable when received but recognized for financial reporting as the magazine is delivered. Interest expenses associated with obtaining a loan to invest in tax exempt securities. Warranty expense recorded for financial reporting when products are sold but recorded for...
Equivalent Taxable Yield • rm = r(1-t) r = rm/(1-t) Example: Suppose your tax rate is 25% on a taxable corporate bond. A municipal bond is available paying 4% interest. What interest rate would you have to receive on the corporate bond for it to be equivalent to the municipal bond?
Grand Corporation reported pretax book income of $617,500. Tax depreciation exceeded book depreciation by $500,000. In addition, the company received $280,000 of tax-exempt municipal bond interest. The company’s prior-year tax return showed taxable income of $82,000. Compute the company's current and deferred income tax expense or benefit.
For federal tax purposes, how are start-up costs treated for a business? Capitalized or expensed? Do research on this using the IRS Publication 535 (2018), Business Expenses website and share your findings.
Book/Tax Differences Temporary Permanent Difference Reason Book 4,800 1,000 20 5,820 Sales Installment sales Interest Income Required: Determine which book/tax differences are temp or perm Calculate and enter Federal income tax expense Prepare journal entry to record tax expense Calculate Effective Tax Rate Prepare Deferred Tax Reconcilation for Financial stmt footnote Tax 4,800 300 5 5 5,105 (700) (15) (700) Payments not received municipal bond interest 2,350 2,350 Assumptions: DTA and DTL beginning balances = 0 All DTAs and DTLs...
Relix, Inc., is a domestic corporation. Relix, Inc., reported two permanent differences between book and taxable income. It earned $2,375 in tax-exempt municipal bond interest, and it incurred $780 in nondeductible business meals expense. Relix's book income before tax is $4,800. Assume a 21% Federal corporate tax rate. Provide the information for the income tax footnote rate reconciliation for Relix. For dollar amounts, round to the nearest dollar and use rounded amounts in subsequent computations. For the percentage answers, round...
Q1 Give a numerical example of cost function and analyze this cost function? Discuss how is this cost function used in decision making Q2 Find a numerical example of cost-volume-profit (CVP) analysis, and analyze how CVP analysis is used for decision making?
What is the primary difference between an in-state 4.2% YTM Revenue Municipal Bond, a 2.65% YTM U.S. T-Note, and a BB-Rated 6.72% YTM Corporate Debenture (assuming each has 8 years to maturity and Muni uses a tax-equivalent yield) in terms of tax treatment of coupon interest and default risk (how each is collateralized)…assuming a marginal tax rate of 28%?