In 2019, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of business meals expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?
What will be an ideal response?
$225,000 favorable; all adjustments are permanent book-tax differences
| Description | Adjustment (Favorable)/Unfavorable | Explanation | |||
| (1) | Death benefits | $ | (250,000 | ) | Death benefits for key employees are excludable from income for tax purposes. |
| (2) | Life insurance premiums | 20,000 | Expenses that produce income exempt from tax are not deductible for tax purposes. | ||
| (3) | Half of meals expense | 5,000 | $10,000 is expensed for book purposes, but only half is deductible for tax purposes. | ||
| Total favorable book-tax difference | $ | (225,000 | ) | Sum of (1) through (3) | |
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