Which of the following is an example of a permanent difference?

A permanent difference refers to a discrepancy between the accounting income and taxable income that will not reverse in future periods. These differences typically arise due to specific tax regulations that either exclude certain revenues from taxable income or disallow certain expenses from being deducted for tax purposes.

The example of tax-exempt interest on state municipal bonds represents a permanent difference because the interest income earned from these bonds is not subject to federal income tax. Therefore, this income is included in financial accounting income but excluded from taxable income, creating a permanent difference that does not reverse in subsequent periods.

In contrast, the other options represent temporary differences, which will eventually reverse. For instance, depreciation expense under MACRS (Modified Accelerated Cost Recovery System) provides a faster write-off for tax purposes compared to straight-line depreciation used in financial statements, resulting in differences that will even out over time. Bad debt expense accounted for under the allowance method is an accounting estimate that impacts both book income and taxable income over time as actual bad debts are recognized. Lastly, estimated warranty costs represent a temporary difference as they create an expense for financial reporting that adjusts taxable income in future periods when the actual warranty costs are incurred.