Question

For each of the following situations, compute any required Schedule M-1 adjustments, indicating whether "timing" or "permanent". Include the appropriate line of Schedule M-1 for each adjustment.

Guppy Inc. made the following donations in 2021:
a. $5,000 to the Pike for Governor Committee
b. $7,500 to the Yes on Proposition A Committee
c. $25,000 of inventory (food) to a homeless foundation; the FMV of the inventory was $27,000.

Answer 1

Schedule M-1 adjustments for the given scenarios are as follows:a. Donation of $5,000 to the Pike for Governor Committee No Schedule M-1 adjustments are needed for this contribution, because this is a non-deductible expense and will not be included on the tax return. Therefore, there will be no adjustment to the book income.b. Donation of $7,500 to the Yes on Proposition A Committee No Schedule M-1 adjustments are required since this is a non-deductible expense, similar to (a).c. Donation of $25,000 of inventory (food) to a homeless foundation; the FMV of the inventory was $27,000.There will be a permanent book-to-tax difference of $2,000 for the inventory donation since the fair market value (FMV) of the donated inventory ($27,000) is greater than its book value ($25,000).Schedule M-1 adjustments for the inventory donation are: Schedule M-1, line 4, "Other Increases (Decreases)": $2,000 increase (permanent).Why permanent?Since the book value of the inventory (food) is $25,000, and the FMV of the inventory is $27,000, this generates a permanent book-to-tax difference. This is because the FMV is greater than the book value, and this difference will continue indefinitely.