Define M-1 Adjustments on Tax Returns

Schedule M-1 adjustment tie together book income and taxable income.
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The Schedule M-1 adjustments are found on the corporate tax return forms 1120 and 1120S. The Schedule M-1 is a reconciliation of the profit or loss reported on a company's books to the taxable income or loss reported on the tax reurn.

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Book Income Vs. Return Income

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In preparing the 1120 or 1120S tax return, there are some revenues and expenses that are not included on the company books. The Schedule M-1 serves as a tool to reconcile the differences between the two.

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Revenue Requirements

If a corporation has earned less than $250,000 for the year, the use of the M-1 is not necessary. If the corporation earns more than $10 million, an M-3 must be used instead.

Revenue On Books

Line 1 of the Form 1120S Schedule M-1 records the total revenue according to the Profit and Loss Statement. To this amount is added the income from the Schedule K that is not included on the books. The reasons for doing this vary widely.

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Expenses

From the amount above, the expenses that were not included on the return—but were recorded on the books for the year, such as depreciation or non-deductible travel and entertainment—are deducted. The option to include other categories requires an itemized accounting for all non-included expenses.

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Income Not Recorded

If a company has used some of its capital to invest in tax-exempt bonds or securities, the income generated isn't required to be on the Schedule K of the tax return. Form 1120S Schedule M-1, Line 5 is where this type of income goes.

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Deductions on Schedule K

If there have been deductions included on the Schedule K but not recorded on the books, such as depreciation, they would go on line 6. The result on line 7 is subtracted from the total on line 4 and reveals the taxable income or the loss.

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