| M-1: | |||||||||
| Determine the amounts to be included on Reliant's current year Schedule M-1, and if | |||||||||
| so, whether to add or to subtract from Reliant's book income in order to determine their taxable income: | |||||||||
| Amount (if any) Added or Subtracted | |||||||||
| 1. Reliant's disbursements included reimbursed employees' expenses for business | |||||||||
| meals of $25,000. The reimbursements were not treated as employee compensation. | |||||||||
| 2. Reliant's books indicate interest income of $15,000; $8,000 is from corporate | |||||||||
| bonds and $7,000 is from state governmental bonds. | |||||||||
| 3. Book depreciation on computers was $10,000. These computers were depreciated | |||||||||
| $30,000 under MACRS for tax purposes. | |||||||||
| 4. Reliant's books showed as income $500,000 for the term life insurance policy on | |||||||||
| the corporate officer. Reliant was the policy owner and beneficiary. | |||||||||
| 5. Reliant's books showed a $4,000 short term capital gain, and a $2,000 capital loss. | |||||||||
| 6. Reliant's books showed federal tax expense of $200,000. | |||||||||
| 7. During the year, Reliant paid $25,000 of life insurance premiums on a policy | |||||||||
| for its corporate officers. | |||||||||
| 8. Reliant's books indicated an $18,000 state income tax expense. Estimated | |||||||||
| state tax payments were $15,000. | |||||||||
| 9. During the year, Reliant received a federal tax refund of $25,000 which is included | |||||||||
| as income in their books. | |||||||||
| 10. Reliant's taxable income after the charitable contributions and the dividends | |||||||||
| received deduction was $400,000. Charitable contributions totaled $70,000. | |||||||||
| 11. Reliant received $25,000 of municipal, tax exempt interest. | |||||||||
| 12. Reliant paid $30,000 of interest expense to purchase municipal, tax exempt bonds. | |||||||||
1. Reimbursement of Business meal expenses to Employees not treated as Employee Compensation Expense:-
The above mentioned expense is included under Line 5 "Travel and Entertainment" of Schedule M-1 Travel and entertainment expense.
The deduction of 50% will be allowed from Net income(loss) from books for tax purpose only when a direct relationship can be established to the trade or business of Reliant. To determine the book income 100% of expense was taken into account.
Thus while calculating taxable income of Reliant, 50% of the expense will be added to the Book income.
2. Interest Income of $15000.
a. Interest from corporate bonds od $8000- Interest from Corporate bonds are taxable under both State and Federeal Tax laws.
No treatment of Interest from corporate bonds while calculating Taxable income as it has already been included in Book Income.
b. Interest from state governmental bonds- Interest from State or local bonds are covered under "tax exempt interest" in line 7 b of Schedule M-1.
Thus while calculating Taxable income, interest from state governmental bonds will be dedcuted from Book income.
3. Depriciation on Computer Aseets
Depriciation as per books is $10,000 whereas as per MACRs for tax purpose depriciation is $30,000. The tax to book adjustment is made through line 8a "depriciation" of Schdule M-1 where the tax depriciation is greater than book depriciation.
Thus a deduction of $20,000 (MACRs depriciation $30000- Book depriciatoon $10000) will be allowed from Book income while calculating Taxable Income.
4. Income for term life insurance policy on corporate officer
The income of $500,000 for term life insurance policy on corporate officer is included under line 7b "Other" of Schedule M-1.
Thus while calculating Taxable income, income from term life insurance policy on corporate officer will be dedcuted from Book income.
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