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The purpose of Schedule M-1 Reconciliation of Income (Loss) and Analysis of Unappropriated Retained Earnings per Books is to reconcile the entity's accounting income (book income) with its taxable income. Because tax law is generally different from book reporting requirements, book income can differ from taxable income. Here is a list of common book-tax differences found on Schedule M-1. The list is not all-inclusive.

  • Guaranteed payments (Form 1065 U.S. Return of Partnership Income only)

Income on tax return, not included on books

  • Tax gain on sale of assets in excess of book gain on sale of assets
  • Installment sales

Expenses on books, not included on tax return

  • Book depreciation in excess of tax depreciation
  • 50% of travel/meals and entertainment not deductible on tax return
  • Fines and penalties
  • Officer's life insurance premiums
  • Prepaid expenses
  • Book loss on sale of assets in excess of tax loss on sale of assets
  • Accrued vacation and bonus

Income on books, not included on tax return

  • Tax-exempt interest
  • Book gain on sale of assets in excess of tax gain on sale of assets
  • Installment sales
  • Officers' life insurance proceeds

Deductions on tax return, not included on books

  • Tax depreciation in excess of book depreciation
  • Prepaid expenses
  • Tax loss on sale of assets in excess of book loss on sale of assets
  • Accrued vacation and bonus

To enter this information into the TaxAct® 1065 program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Reconciliation of Income in the Federal Quick Q&A Topics menu.
  3. The program will proceed with the interview questions for you to enter or review the appropriate information.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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