Question & Answer: Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: Schedule M-3 required instead of Schedule M-1…..

The following information for 2016 relates to Purple Corp, a calendar year, accrual method taxpayer.
Net Income per books (after-tax)                                                                                            $250,000
Federal income tax per books                                                                                                  122,250
Meals & Entertainment (amount deducted on GAAP financial statements)                                 8,400
Depreciation (amount deducted on GAAP financial statements)                                              145,000
Depreciation (amount calculated for tax purposes under MACRS)                                          130,000
Fine for Speeding tickets                                                                                                              6,250
Amortization (GAAP)                                                                                                                           0
Amortization (Tax)                                                                                                                      10,750
Country Club Dues                                                                                                                     11,000
Accrued Vacation not deducted on 12/31/15 Return                                                                  15,000
Accrued Vacation @ 12/31/16 (7,500 paid by 3/15/17)                                                              25,000
Allowance for Bad Debts on Balance Sheet @ 12/31/15                                                           13,200
Allowance for Bad Debts on Balance Sheet @ 12/31/16 15,750
The M-1’s for most of the Income Statement items (expenses) are just the amount of the expense, but for the Balance Sheet items we usually have to take the change in the value from the prior year to the current year.

TAXABLE INCOME should equal 403000

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Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: Schedule M-3 required instead of Schedule M-1 if total assets are $10 million or more-see instructions 1 Net income (loss) per books 2 Federal income tax per books 3 Excess of capital losses over capital gains 4 Income subject to tax not recorded on books 7 Income recorded on books this year not included on this return (itemize) Tax-exempt interest this year (itemize): 8 Deductions on this return not charged against book income this year (itemize): a Depreciation b Charitable contributions $ 5 Expenses recorded on books this year not deducted on this return (itemize) a Depreciation b Charitable contributions . $ c Travel and entertainment. $ Add lines 7 and 8 Income (page 1, line 28-line 6 less line 9 9 6 Add lines 1 through 5 10

Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: Schedule M-3 required instead of Schedule M-1 if total assets are $10 million or more-see instructions 1 Net income (loss) per books 2 Federal income tax per books 3 Excess of capital losses over capital gains 4 Income subject to tax not recorded on books 7 Income recorded on books this year not included on this return (itemize) Tax-exempt interest this year (itemize): 8 Deductions on this return not charged against book income this year (itemize): a Depreciation b Charitable contributions $ 5 Expenses recorded on books this year not deducted on this return (itemize) a Depreciation b Charitable contributions . $ c Travel and entertainment. $ Add lines 7 and 8 Income (page 1, line 28-line 6 less line 9 9 6 Add lines 1 through 5 10

Expert Answer

 

1. Country club dues is taken as personal expenditure
2. Accrued vacation of 12/31/15 $15,000 will be deducted
in 2016, but will not be there in the books of 2016
3. Difference in accrued vacation as of 12/31/15 and 12/31/16
is taken as addition (25,000 – 15,000 = $10,000)
4. Difference in allowance for bad debts as of 12/31/15 and
12/31/16 is taken as addition (15,750 – 13,200 = $2,550)

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