A favorable temporary book–tax difference is so named because it causes taxable income to decrease relative to book income in the current year.
Question
A favorable temporary book–tax difference is so named because it causes taxable income to decrease relative to book income in the current year.
Solution
A favorable temporary book-tax difference is called "favorable" because it results in a decrease in taxable income compared to book income in the current year. This means that a company will owe less in taxes in the current year, which is financially beneficial.
Here's a step-by-step explanation:
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A book-tax difference occurs when the amount of income reported for financial accounting purposes (book income) differs from the amount of income reported for tax purposes (taxable income).
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A temporary book-tax difference is one that will reverse in the future. This means that an item of income (or expense) will be reported on the financial statements in one year, but will not be reported on the tax return until a future year.
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A favorable temporary book-tax difference occurs when taxable income is less than book income. This could happen, for example, when a company takes a larger expense deduction on its tax return than is allowed for financial accounting purposes. This reduces taxable income in the current year, resulting in a lower tax bill.
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This is considered "favorable" because paying less tax in the current year is beneficial for the company. However, it's important to note that because this is a temporary difference, the company will have to pay more tax in a future year when the difference reverses.
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