I understand how tax credit and tax-exept income cause the difference between statutory and effective tax rate; however, I am not sure why non-deductible expenses cause statutory tax rate to be different from effective tax rate. It makes more sense that deductible expenses will cause the difference because it will change the amount of deferred tax, but I guess I am wrong? Could someone explain this? Thanks.
Think it through. If you understand how tax-exempt income causes effective/statutory rate differences, then you should see why the expense side has the same effect. As long as that pretax number on your income statement has amounts (either positive or negative) included in it that will never show up on any year’s tax return you will have effective/stautory differences
any differences between the pretax income on your financial statement and the taxable income on your tax return that are NOT expected to reverse will cause differences between your statutory tax rate and your effective tax rate… so, a non-deductible expense will show up as an expense on your fin. statements… but since they aren’t tax deductible, they WONT show up on your tax return… and unless theres upcoming changes in the law that make them non-deductible, this difference wont reverse…