In tax accounting, a permanent difference is a discrepancy between an organization's income as calculated for accounting purposes and its income as calculated for tax purposes that will never reverse in future periods. Permanent differences arise when certain items are included in accounting profit but are wholly excluded from taxable income, or when some items are deductions for tax purposes but never accounted for in the profit. Common examples of permanent differences include non-deductible expenses such as fines and penalties, or tax-exempt income such as certain types of bond interest.

For instance, if a company pays a fine which is recorded as an expense in the financial statements, this will not be deductible when calculating taxable income, creating a permanent difference. Conversely, interest income from municipal bonds may be recognized in the accounting profit but not included in the taxable income. Understanding permanent differences is crucial for entities to accurately reconcile their financial income with taxable income as part of their tax compliance.