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.


Book Income Vs. Return Income

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.



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.



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.


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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