Miscrosoft Case Study
C. Corporate M-1 and M-3 Reconciliations of Book and Taxable Income
1. Schedule M-1 – Schedule M-1 is a very important part of Form 1120, as it reconciles book income to taxable income. This reconciliation, along with the balance sheet and analysis of unappropriated surplus (Schedule M-2) must be completed if total business assets exceed $25,000 (even on a Schedule 1120-A).
2. This schedule is required for corporations with $10 million assets or less.
3. Examine the sample M-1 reconciliation below carefully. In reviewing this example, note the following:
The starting point is book income before book tax liability The book tax liability is added back (because this is not deductible for tax) Next, capital losses deducted on the books are added back, since these are not deductible for tax purposes The next section is for additions, which can be either (1) income subject to tax but not reflected on the books (e.g., certain advance payments) or (2) expenses deducted on the books but not allowed for tax purposes (e.g., contributions exceeding the 10% limit, 50% of meals and entertainment, etc.). The next section (lines 7 and 8) report reductions in reconciling book income with taxable income. These can be either (1) income on the books that is not subject to tax (e.g., tax-exempt interest) or (2) deductions on the eturn not reflected on the books (e.g., excess tax depreciation, contributions carried over from prior year) After adjustments, the final income number on line 10 should agree with taxable income before special adjustments on line 28 of the Form 1120
4. Note that the income number reconciled to is before any special deductions such as the dividends received deduction, so this can never be a reconciling item.
5. A common adjustment item is for life insurance on company officers. The premiums paid on such policies, if the corporation is the beneficiary, are not deductible (though they are deducted on the books).
1. Schedule M-1 – Schedule M-1 is a very important part of Form 1120, as it reconciles book income to taxable income. This reconciliation, along with the balance sheet and analysis of unappropriated surplus (Schedule M-2) must be completed if total business assets exceed $25,000 (even on a Schedule 1120-A).
2. This schedule is required for corporations with $10 million assets or less.
3. Examine the sample M-1 reconciliation below carefully. In reviewing this example, note the following:
The starting point is book income before book tax liability The book tax liability is added back (because this is not deductible for tax) Next, capital losses deducted on the books are added back, since these are not deductible for tax purposes The next section is for additions, which can be either (1) income subject to tax but not reflected on the books (e.g., certain advance payments) or (2) expenses deducted on the books but not allowed for tax purposes (e.g., contributions exceeding the 10% limit, 50% of meals and entertainment, etc.). The next section (lines 7 and 8) report reductions in reconciling book income with taxable income. These can be either (1) income on the books that is not subject to tax (e.g., tax-exempt interest) or (2) deductions on the eturn not reflected on the books (e.g., excess tax depreciation, contributions carried over from prior year) After adjustments, the final income number on line 10 should agree with taxable income before special adjustments on line 28 of the Form 1120
4. Note that the income number reconciled to is before any special deductions such as the dividends received deduction, so this can never be a reconciling item.
5. A common adjustment item is for life insurance on company officers. The premiums paid on such policies, if the corporation is the beneficiary, are not deductible (though they are deducted on the books).