ExpertHard1 markMultiple Choice
CPA · Question 37 · Area V: Entity Taxation
Which of the following is a 'permanent difference' for Schedule M-3 reconciliation purposes?
Which of the following is a 'permanent difference' for Schedule M-3 reconciliation purposes?
Answer options:
A.
Bad debt expense (Allowance method for book, Direct write-off for tax).
B.
Warranty reserves.
C.
Fines and penalties paid to a government for violation of law.
D.
Depreciation expense.
How to approach this question
Permanent = Never reverses (Fines, Meals 50%, Muni Interest). Temporary = Timing difference (Depreciation, Bad Debts, Warranty).
Full Answer
C.Fines and penalties paid to a government for violation of law.✓ Correct
C
Fines and penalties are deductible for book purposes (GAAP) but are permanently disallowed for tax purposes under IRC §162(f). This creates a permanent difference.
Common mistakes
Thinking bad debts are permanent (they reverse when written off).
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