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 an addition on Schedule M-1?

a. Proceeds of life insurance paid on death of key employee.
b. Excess of capital losses over capital gains.
c. Tax-exempt interest.
d. Tax depreciation in excess of book depreciation.
e. None of these choices are correct.

Answer 1

The correct answer to the question is d. The item that is an addition on Schedule M-1 is tax depreciation in excess of book depreciation.' It reconciles financial net income with taxable income when a company has taken larger depreciation deductions for tax purposes than for bookkeeping purposes.

Step-by-step explanation:

When a company calculates its taxes, it often uses different methods of depreciation for financial reporting (referred to as book depreciation) and tax purposes (known as tax depreciation). The tax method might allow for faster depreciation, resulting in a larger depreciation expense on the tax return than the one recorded in the financial statements. This difference in depreciation methods causes a temporary timing difference between book and taxable income that will reverse out over time.

Items on the Schedule M-1 of Form 1120 are used to reconcile the company's financial net income with the taxable income. We add back to the net income (as reported in the company's books) any expenses recorded on the books that are not allowed on the tax return (book-tax differences) and subtract any income that is included in book income but excludes from taxable income. In the case of tax depreciation that is in excess of book depreciation, the larger depreciation reduces taxable income but not book income, so it must be added back in the M-1 reconciliation.