7.5 Reconciling Book and Taxable Income

Question 1

How does income per books reconcile with income per tax for M-1?

Answer 1

To reconcile income per books with income per tax, the following adjustments are made to net income (loss) per books:
+Net income (loss) per books
+Federal income tax
+Excess of capital losses over capital gains
+Income subject to tax not recorded on books
+Expenses recorded on books not deducted on the tax return [including contributions in excess of 10% taxable income limitation, book depreciation expense in excess of allowable tax depreciation, disallowed travel and entertainment costs (50% of meals and entertainment expenses are nondeductible), life insurance premiums on key personnel when the corporation is the beneficiary, political contributions, and interest expense to carry tax-free interest instruments (e.g., municipal bonds)]
–Income recorded on books not subject to tax (including prepaid rent or interest previously received and recorded for tax purposes but not earned until the current year, life insurance proceeds received on the death of key personnel, and tax-exempt interest)
–Deductions on this return not charged against book income (e.g., depreciation)
=Taxable income