Question

What is Favorable / Unfavorable Book-Tax Differences? I don't understand when an item is favorable or...

What is Favorable / Unfavorable Book-Tax Differences? I don't understand when an item is favorable or unfavorable.

For example (from my book), Interest income from municipal bonds. The income is included in book income, but excluded from taxable income for regular tax purposes... and it is a Favorable difference.

Question: Why is it a favorable difference and how exactly does it effect book and tax income?

Please give detail information that is easy to understand! THANK YOU

Homework Answers

Answer #1

Solution:

"Favorable" book-tax differences are subtractions from book income when reconciling to taxable income. On the other hand, unfavorable book-tax differences are additions to book income when reconciling to taxable income.

from above we can say that favorable book-tax differences decrease taxable income and unfavorable book-tax differences increase taxable income.

In the given example, Interest income from municipal bonds is exempt for tax purpose, therefore same is reduced from book income to arrive at taxable income. As it reduces the taxable income, therefore this is a favorable difference.

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