Schedule M 1- Reconciliation Of Income

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Schedule M-1- Reconciliation of Income (Loss) M-2- Analysis of Unappropriated Retained Earnings per Books Foreign corporations who are required to complete Form 1120-F, Section 11, are also required to complete Schedules M-1 and M-2. M-1 is a reconciliation of book income to taxable income, and M-2 is the analysis of unappropriated surplus. Both, along with the balance sheet are to be completed if total business assets are more than $25,000. If business assets are less than $25,000 at the end of the year, Schedules M-1, M-2 is not required. The process for Schedule M-1 is as follows: Line 1- starts with net income, which is shown on the financial statement for book purpose. All book/tax differences must be described in a way that will be clear and precise for the IRS in arriving at taxable income. The taxable income on M-1 should match taxable income on line 28 of Form 1120. Line 2 –Federal Income Tax per books Line 3-Excess of capital losses over capital gains Line 4 –Income subject to tax not recorded on books this year (itemized) This includes income items that are accelerated for tax purposes due to the use of different processes between book and tax or that results from a certain statutory law. Types of taxable income not recorded on the books would be: gain recognized in the following years on installment sale, tax gain on the disposal of assets in excess of the book gain, prepaid interest or rent that has been collected. Line 5-Expenses recorded on books this year

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