Which of the following is a 'permanent difference' for Schedule M-3 reconciliation purposes?

Answer options:

Bad debt expense (Allowance method for book, Direct write-off for tax).

Warranty reserves.

Fines and penalties paid to a government for violation of law.

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

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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