Reconcilliation of Permanent Tax Differences between GAAP & IRS

CFA Level II Quant
#1

When there are temporary differences between Book Taxes & Actual Taxes, then DTA/DTLs are created to reconcile these.

However, DTAs & DTLs are not created for permanent tax differences. So how does this reconcile?

When I calculate the Free Cash Flow, I would started with the Net Income & add back non-cash expenses. So if actual tax is lesser than Book Taxes then I would need to add the difference & if actual tax is more than I would need to subtract the difference. How would I get the difference to do this operation?

For temp differences, you check the change in DTAs/DTLs in the balance sheet & figure it out, but how would you do this for permanent differences?

#2

I don’t think you have to because the permanent differences change your effective tax rate - but the temporary differences do not - hence you need to adjust for the cash taxes paid with the changes in deferred taxes. The differences due to permanent differences are already reflected in your Book taxes as well (and that is why your effective tax rate is different from your statutory tax rate)

#3

The effective tax rate on the income statement can differ from the statutory tax rate used on the tax return.