ExpertHard1 markMultiple Choice
CPA · Question 37 · Area V: Entity Taxation
Which of the following items is a permanent difference for Schedule M-1 purposes?
Which of the following items is a permanent difference for Schedule M-1 purposes?
Answer options:
A.
Warranty expense recorded for book purposes but not deducted for tax.
B.
MACRS depreciation exceeding book depreciation.
C.
Penalties paid to the government.
D.
Bad debt expense using allowance method for book.
How to approach this question
Permanent = Never reverses (e.g., Fines, Meals 50%, Muni Interest). Temporary = Reverses over time (e.g., Depreciation, Warranty, Bad Debt).
Full Answer
C.Penalties paid to the government.✓ Correct
C
Fines and penalties paid to a government for the violation of any law are never deductible for federal income tax purposes (IRC §162(f)). This creates a permanent difference between book and tax income.
Common mistakes
Confusing temporary timing differences (like warranty reserves) with permanent disallowances.
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