A company had a pretax accounting income of $20 million this year. This included the collection of $100 million of life insurance proceeds when several key executives died in a plane crash. This collection is not recognized as a gain for tax purposes (permanent difference). Temporary differences for the current year netted out to zero. The company has a 20% tax rate and plans to record a DTA (operating loss carryforward) for tax purposes. In the current year, the Company will report a net income of:

-$80 million

Explanation:

Since the $100 million collected from the life insurance policies are not taxable income (they are a permanent difference), the net income = $20 million - $100 million = -$80 million.

Permanent differences occur because companies are allowed by US GAAP to record some expenses or gains for reporting purposes only, but the IRS does not allow them for taxable purposes. Neither life insurance premiums for key employees nor life insurance proceeds upon death of key employees are allowed for taxable purposes. US GAAP allows a company to expense the premiums, but the IRS doesn't. The same happens to gains resulting from life insurance proceeds.

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