REG Corporate Tax · Updated November 2026
Book Income Does Not Equal Taxable Income. How Do You Reconcile It?
Ask whether book income is currently too high or too low compared with taxable income, then adjust in the logical direction.
Permanent difference
Book and tax treatment never reverse, such as qualifying tax-exempt income or nondeductible expenses.
Temporary difference
Book and tax recognize the same economic item in different periods, with the difference reversing later.
Add-backs
A book expense not currently deductible for tax can require an add-back when reconciling to taxable income.
Subtractions
Book income can include amounts excluded from taxable income or recognized differently for tax.
Direction matters
Do not memorize that permanent differences always add. The direction depends on the underlying item.
The takeaway
Understand whether book income is above or below taxable income before choosing the adjustment.
Related Summit guides
FAQ
Are all book-tax differences temporary?
No.
Does tax-exempt income generally create taxable income?
No.
Can depreciation create temporary differences?
Yes.