Reporting and Compliance for Book-Tax Differences Course Series

Schedules M-1 and M-3 reconcile book income to taxable income reported on the return. Only corporations with $50 million or more of assets are required to file Schedule M-3. Thus, the majority of the approximate two million corporate tax returns filed annually complete the Schedule M-1 rather than the Schedule M-3. It is important to first understand the Schedule M-1 reporting process before tackling the more complex reporting requirements of the Schedule M-3.

This course begins with looking at Schedule M-1, which reconciles book and taxable income for corporations with assets less than $50 million. It is important to first understand the Schedule M-1 reporting process before tackling the more complex Schedule M-3 reporting requirement for corporations with assets greater than $50 million. We’ll look at which corporations are required to complete Schedule M-1and which are exempt from the requirement, and which corporations must file Schedule M-3. We’ll also explore how to report book/tax differences on Schedule M-1, how to identify and disclose temporary differences, how to identify and disclose permanent differences, and how financial income reported on Schedule M-1 is used to reconcile beginning and ending retained earnings on Schedule M-2. This section concludes with a comprehensive example of Schedule M-1 and M-2 computation and reporting requirements is provided to reinforce your knowledge of the tax compliance process when disclosing book-tax differences.

Next we begin looking at Schedule M-3, Part 1 filing and reporting requirements. We look at a comprehensive example of Schedule M-3, Part I to reinforce your knowledge of the reporting and tax compliance process, and we’ll also explore what disclosures are required regarding the accounting method used to determine financial income, how to compute the net income (loss) from the income statement used to reconcile book income to taxable income, and how financial income reported on Schedule M-3 is used to reconcile ending retained earnings reported on Schedule M-2.

Moving on to Schedule M-3, Part 2, which requires the disclosure of detailed information regarding book-tax differences when reporting income (loss) items. We’ll look at the Schedule M-3, Part II filing and reporting requirements, including the four column reporting format for reconciling book income to taxable income, adequate and separate disclosure requirements for book-tax differences, disclosure of common book-tax income differences, and disclosure of financial income items even when there is no book-tax difference.

On to Schedule M-3, Part 3, which requires the disclosure of detailed information regarding book-tax differences when reporting expense/deduction items. Here we’ll cover the Schedule M-3, Part III filing and reporting requirements, including the four column reporting format for reconciling book income to taxable income, adequate and separate disclosure requirements for book-tax differences, disclosure of common book-tax expense/deduction differences, disclosure of financial expense/deduction items even when there is no book-tax difference, reconciling net book income reported on part II with net income reported on part I, and reconciling net taxable income reported on part II with taxable income reported on form 1120.

Next we’ll explore some of the unusual and nonrecurring disclosure requirements for Income (Loss) and expense/deduction items reported on the financial statements that must also be disclosed on Schedule M-3 that we haven’t looked at yet. Most of these topics relate either to industry specific book-tax differences or to items that are not usually encountered in the annual accounting cycle. Nevertheless, when these items occur, they must be separately and adequately disclosed on Schedule M-3 as either “temporary” or ‘permanent” differences. It is important to “get the numbers right” when completing Parts II and III of Schedule M-3.

We then move on to the requirements for corporations with $50 million or more of assets who are required to file the more complex Schedule M-3. Completing the Schedule M-3 can be confusing when the corporation prepares consolidated financial statements since some entities eligible for consolidation on a financial basis are not eligible for consolidation on a tax basis, which is why we’ll cover the Schedule M-3 filing and reporting requirements for a consolidated group, including, which entities in the consolidated financial statements are included/excluded on the consolidated tax return. Schedule M-3, Part I reporting requirements for a consolidated group, reconciliation of net income per books to reported on Schedule M-3 to Schedule M-2, reconciliation of retained earnings on Form 1120, schedule M-3, Parts II and III disclosure requirements for the consolidated return, the parent and other members of the consolidated group, adjustments for inter-company transactions, temporary versus permanent deferrals on Parts II and III of Schedule M-3, and how to report the current and deferred US tax expense for a consolidated group on Schedule M-3.

Finally, we cover the disclosure requirements for uncertain tax positions of temporary and permanent differences between financial and tax accounting. We’ll explore the tax accrual process for an uncertain tax position when preparing the corporation’s financial statements and the requirements to adequately disclose an uncertain tax position on Schedule UTP. A comprehensive example of Schedule UTP disclosures is provided to reinforce your knowledge of identifying and reporting uncertain tax positions for both financial accounting and tax accounting purposes.