18 Differences between Book and Tax Income (Loss) Flashcards
What purpose does a Schedule M-1 serve?
It is a reconciliation of book income to taxable income.
How are nondeductible expenses treated on a Schedule M-1?
They are added to book income.
How is income that is taxable but not included in book income treated on a Schedule M-1?
It is added to book income.
How are deductions not expensed in book income treated on a Schedule M-1?
They are subtracted from book income.
How is nontaxable income included in book income treated on a Schedule M-1?
It is subtracted from book income.
True or False: Schedule M-3 is filed when a corporation has total assets of $10 million or more.
True. For corporations with total assets of $10 million or more, Schedule M-3 is prepared in lieu of Schedule M-1
Describe a temporary difference.
Temporary differences result from the same items being calculated differently for accounting (e.g. GAAP) than for tax purposes in any given reporting year. Over time, these differences eventually are recognized for both book and tax purposes; thus, the difference is only temporary.
Describe a permanent difference.
Permanent differences are items that are income or deductions in the year for either book or taxable income but not both. These differences do not reverse over time.
Provide three examples of a temporary difference.
The following are examples of temporary differences: Unearned income, warranty expense, depreciation expense, bad debt expense, charitable contribution carryforward, net operating loss carryforward, like-kind exchanges, goodwill, and capital loss carryovers.
Provide three examples of permanent differences.
The following are examples of permanent differences: Federal tax expense, life insurance for officers and key employee, fines and penalties, entertainment, meals, and municipal interest income and related expenses.
A calendar-year C corporation has total assts of $28 million. It reported net income per the books of $330,000. In addition, the following information is available:
Federal income taxes per books $65,000
Tax depreciation in excess of book depreciation $33,000
Charitable contributions per books $55,000
Calculate taxable income?
Net income per books $330,000
+ Nondeductible federal income taxes (permanent) 65,000
+ Charitable contribution deduction (temporary) 55,000
− Additional tax depreciation allowed (temporary) (33,000)
Taxable income before contribution deduction $417,000
− Contribution deduction allowed* (41,700)
Taxable income $375,300
* 417,000 × 10% = $41,700
Volunteer Inc.’s book income of $196,000 included municipal interest income of $1,100 and business meal expense of $1,400. Charitable contributions of $2,200 were carried forward from a prior year into the current year. What is Volunteer’s taxable income based on this information?
Book income $196,000
Less: Municipal interest income (1,100)
Plus: Business meal expense 700 ($1,400 x 50%)
Less: Charitable carryforward (2,200)
Taxable income $193,400
Describe two differences between Schedule M-1 and Schedule M-3.
Unlike Schedule M-1, the Schedule M-3 income and expense differences are separately reported as temporary or permanent differences. Schedule M-3 also
reconciles worldwide consolidated net income (loss) per the income statement to the net income (loss) per income statement of includible corporations. Income/Loss reconciliation items are shown as single line items.
True or False: A Schedule M-1 is required when gross receipts exceed $100,000.
False: If total assets > $250,000 but < $10 million, then Schedule M-1 is required but may file M-3. If total receipts and total assets are less than $250,000, then no reconciliation is required.
True or False: Federal tax expense is always added back to book income when determining taxable income.
False: Pay careful attention to whether the book income provided is net income or income before federal income tax. If before federal income taxes, then no permanent difference exists and you do not need to add back federal tax expense.
