Complete the Schedule M-1 for the tax period ended 12/31/2021 using the following facts: Net income per books and financial statements = $100,000 Federal income tax per books at 12/31/2021 = $20,000 State income tax per books = $10,000 Capital gains = $5,000 Capital losses = ($6,000) Tax depreciation in excess of book depreciation = $3,000 Book increase to allowance for bad debts = $2,000 Interest income from tax-exempt securities = $4,000 Book increase to self-insurance reserve = $2,000 Interest expense incurred on loan to acquire tax-exempt securities = $500 Legal expense per books incurred in defending title to property = $3,000 Tax Amortization of start-up expenses over 180 months = $1,200 ($23,000 total cost expensed per book in 2017, less $5,000 per IRC 195 and reversed on Schedule M-1) Claims reserve, which was added back for tax purposes in prior years, had a credit balance of ($500) on January 1, 2021 and a debit balance of $500 on December 31, 2021. Contribution expense per books = $22,000

I included a fillable Schedule M-1 for you to complete. Please save your work in case there is a problem - I have never assigned a PDF to be completed. In times past, I have simply asked students to write the value for each line number. I think completing the PDF is better practice for students.

HINTS:

Legal expense per books incurred in defending title to property = $3,000 Line 10 should = $127,170. Some items have no effect of Schedule M-1. Do not forget to net cap gains/losses. Remember that for bad debts, GAAP follows the allowance method where tax accounting follows the direct write-off method. The book increase to self-insurance reserve has no equivalent deduction for tax accounting because taxpayers cant deduct amounts credited to a reserve set up for self-insurance. Taxpayers can only deduct actual losses., which creates an unfavorable book tax difference that is itemized under Line 5 of Schedule M-1. Similarly, the legal expense to defend property title is not currently deductible on the current year return (it is capitalized for tax accounting), which means the book expense creates a unfavorable book tax difference that is itemized under Line 5 like the increase in self insurance reserve. When the facts state - Tax Amoritization - that means a tax benefit/deduction that is not a book benefit/deduction. For the claims reserve, remember you are debiting a credit balance, so you are increasing the January amount by the December amount. Not all of the contribution expense per books is currently deductible because of the 10% limitation. You will need to calculate the taxable income for purposes of determining the limitation in the manner in which I discussed in the corporate operations lecture. As a hint, you will add SCH M-1 Lines 1, 2, 3, 4 (nothing on 4, so 0), and Line 5 (except Line 5.b. obviously because you are trying to figure out the amount that goes there), then subtract amounts on Line 7 and 8 to arrive at the Taxable Income Before Charitable Contribution, which you multiply by 10% (the limitation). Subtract that amount from the total contribution of $22,000 to arrive at the correct amount of contribution carryover.