Question

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1?

1) Proceeds on key employee life insurance.
2) Income subject to tax but not recorded on the books.
3) Book depreciation in excess of tax depreciation.
4) Excess of capital losses over capital gains.
5) None of these choices are correct.

Answer 1

On Schedule M-1 of Form 1120, book depreciation in excess of tax depreciation is a subtraction used to reconcile book net income with taxable income. option 3.

Step-by-step explanation:

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return. The correct reconciliation process is: net income per books + additions - subtractions = taxable income. When considering the items listed, book depreciation in excess of tax depreciation is an example of a subtraction on Schedule M-1. This is because book depreciation, which is often higher than tax depreciation due to different accounting and tax regulations, will increase the net income per books, which needs to be subtracted to arrive at the taxable income.