However, the entity also wants to minimize its taxable income for the same period so far as allowed by federal income tax law. Generally, the entity wants to maximize the earnings shown on its financial statement so far as allowed by GAAP. Schedule M-1 (or M-3 when required) – Book to Tax Basis The accumulated depreciation on the Schedule L is to be reported on the “book” basis. For example, §179, bonus or MACRS depreciation may be allowed for tax reporting purpose but straight-line depreciation is required for book reporting purposes. In the case of depreciation, an allowable method may be used for tax reporting purposes that is disallowed for book purposes. There are situations when the books are prepared on a different basis than the tax return. The Schedule L should be prepared on the accounting basis the business entity uses for its books and records. How is Schedule L related to Schedule M-1 in a business return (1120, 1120S, 1065)?
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