The starting point in analyzing taxable income is Earnings Before Taxes (EBT) (v1600.00). This account aggregates all the items of income and expense and measures book (GAAP) income. There are two general categories of differences between GAAP and tax law. GAAP uses the terms permanent differences and temporary differences to distinguish between them.
A permanent difference is one which is included in taxable income but never EBT or included in EBT but never taxable income. An example of a permanent difference is municipal bond interest income. Municipal bond interest is included in EBT but is never taxable.
A temporary difference occurs when the difference between the financial and tax treatment of an item eventually reverses. Over the life of the item, there is no difference. In a given year, there can be differences. The classic example is depreciation of fixed assets. If assets are depreciated using the straight line method for financial purposes and an accelerated method for tax purposes, a difference between GAAP and taxable income is created. Over the life of the asset, the total depreciation under each method must be equal.