Question of the day
2026-10-10
What is the difference between a TEMPORARY difference and a PERMANENT difference, and which one creates deferred taxes?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
A temporary (timing) difference is an item recognized for both book and tax but in DIFFERENT PERIODS — it reverses over time, so the total tax over the item's life is the same (e.g. depreciation method differences, reserves, deferred revenue). Only temporary differences create deferred tax assets/liabilities. A permanent difference is income or expense that hits ONE set of books but NEVER the other and never reverses — e.g. tax-exempt municipal bond interest (book income, never taxed), non-deductible fines/penalties, the non-deductible portion of meals/entertainment, most goodwill impairment, and the GILTI/§162(m) limits. Permanent differences do NOT create deferred taxes; instead they drive the gap between the statutory rate and the effective tax rate.
Want 10 of these a day, scheduled so they stick?
A free account gets you Daily 10 — ten questions a day from the full 2,300+ bank, spaced-repetition scheduled. No credit card.
Tomorrow's question, in your inbox.
One real IB interview question every morning — free, one-click unsubscribe, nothing else ever.