SCHEDULE M-1 REVIEW

If the taxpayer is a corporation, the M-1 reconciliation should be reviewed for possible issues. Items such as the 20 percent reduction for business meals, officer's life insurance, traffic and parking tickets, (this can be quite substantial for body shops which utilize public parking for vehicle placement), and state income taxes are the usual items which should appear on the M-1 reconciliation.

In one situation, the state income taxes were missing

from the reconciliation. Under present California law, the tax for the first year a corporation commences business after 1971 is a minimum tax prepaid upon incorporation. The second year's (tax year) tax is measured by the first year's income and prepaid during the first year (income year). The franchise tax continues to be prepaid in this manner until dissolution.

For Federal tax purposes, the franchise tax is deductible in the tax (second) year, not in the income (first) year. For financial accounting purposes it is deducted in the income year, or the year in which it is prepaid. Thus, the Federal tax deduction on the 9112 corporate return should represent the franchise tax prepaid and deducted on the books in 9012. The 9112 prepayments cannot be deducted until 9212. This timing difference requires an M-1 adjustment, which can be significant when there are differing tax rates and/or income fluctuations as in the case cited. Consult Revenue Ruling 79-410.

NOTE: The Los Angeles District applies RR-410 prospectively only for many corporations. All

corporations whose initial year ends after December 31, 1979, are expected to accrue as described above, however.

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Glossary