What do "temporary differences" refer to in tax accounting?

"Temporary differences" in tax accounting refer to variations between the tax basis of assets and liabilities and their reported amounts in the financial statements. These differences arise because certain income and expense items are recognized in different periods for tax purposes compared to financial reporting purposes.

For example, a company might expense costs for financial reporting at a different time than it deducts them for tax purposes. These differences are not permanent and will eventually reverse over time, meaning that they will lead to taxable income or tax deductions in different reporting periods. Examples include differences arising from depreciation methods for tax and accounting and unearned revenue that may be recognized collectively in one period for accounting but taxed in the period received.

Understanding these temporary differences is crucial for accurately preparing tax provisions and financial statements, as they impact deferred tax assets and liabilities on the balance sheet.