Tax Allocation for Differences in Original Bases

Abstract

In 1967, the Accounting Principles Board issued Opinion No. 11, wherein it required comprehensive interperiod tax allocation for timing differences but not for permanent differences between taxable income and pretax accounting income.' Timing differences arise when revenues or nontax expenses are recognized for tax purposes in one year and for financial accounting purposes in another year. Permanent differences arise when revenues or nontax expenses are recognized for tax purposes but are never recognized for financial accounting purposes, or vice versa. The Accounting Principles Board considered timing differences and permanent differences independently of one another. However, they may be interrelated. Depreciable assets offer an example of interrelated timing and permanent differences. Ignoring salvage values, permanent differences arise when depreciable assets have different original bases for tax purposes than for financial accounting purposes. Over the lives of such assets, total depreciation expense for tax purposes will differ from total depreciation expense for financial accounting purposes by the difference in original bases. Timing differences will arise simultaneously if such assets are subject to different depreciation methods for tax purposes than for financial accounting purposes.2