Question

How do you prepare the Schedule M1 and M2?

Answer 1

Schedule M: Schedule M1 of the form 1120 is the link for reconcilliation between financial accounting and tax reporting. Schedule M1 is prepared as follows:

ITEMS--PLUS

Book Income (Starting Point)

Federal Income Tax

Net Capital Loss

Taxable Income not on the Books

Taxable Income (Ending Point)

ITEMS-MINUS

Book Income not on Tax Return

Expenses for Tax not in the Books

Book Expenses not on Tax Return

SCHEDULE M2

It is an analysis of unappropriated retained earnings per books. Schedule is prepared as per following steps:

• Determine balance at the beginning of the year for Line 1 and net income (loss) per books for Line 2 of Schedule M-2.

• Itemize any increase in line 3

• Line 4 = Line 1 + 2 + 3
• Write any distributions in Line 5a for cash, 5b for stock and 5c for property.
• Line 7 = Line 5 + 6
• Line 8 = Line 7 - 4

2.