Permanent differences vs. Temporary Difference

Permanent differences
The difference between income tax expense and taxes payable that never reverse should not be treated as a DT asset or DT liability and should be used to adjust the effective tax rate.

Examples:
· tax-exempt income {interest from munis, insurance claims}
· non-deductible expenses {employee perks and insurance premium}

Temporary differences
The difference between income tax expense and taxes payable reverse themselves over time.

Examples:
· depreciation {use of accelerated depreciation in tax accounts versus SL in financial accounts creates a DT liability}
· revenue recognition {booking sales sooner in financial accounts than tax accounts creates a DT liability}
· warranties and customer compensations {create DT assets}.