Schedule M Guidance

Schedule M Guidance
Caution: While every effort is made to ensure that this document contains the most current and accurate
information available, the user is advised that items contained herein may be outdated. The user continues to
be personally responsible for meeting all applicable professional standards (including those applicable
standards set forth in the Tax Practice Manual), including the obligations to: ensure the current accuracy and
applicability of the document; collaborate with colleagues who possess the relevant skills and knowledge
pertinent to the area of inquiry; and obtain all required approvals.
FOR INTERNAL USE ONLY
Updated: November 14, 2011
Schedule M Guidance
i
Table of Contents
Overview .................................................................................................................................... 1
Introduction to Schedule M......................................................................................................... 1
LD100A Master Trial Balance ................................................................................................. 3
LD100C Amount Subject to Book Reclass Summary .............................................................. 3
LD400 Book to Tax Reconciliation .......................................................................................... 3
LD450 Schedule K Workpaper ................................................................................................ 4
LD500 Equity Rollforward ........................................................................................................ 4
LD600 Sec. 444 Election of Taxable Year other than Required Taxable Year .......................... 4
Sch E Officers Compensation ................................................................................................. 4
Schedule Ms .............................................................................................................................. 5
MP100A Federal Income Tax* ......................................................................................................... 5
MP100B State and City Income Taxes* ........................................................................................... 6
MP100C Foreign Income Taxes ...................................................................................................... 7
MP100D Foreign Withholding Tax ................................................................................................... 8
MP200 Club Dues ............................................................................................................................ 9
MP210A Other Interest Expense ................................................................................................... 10
MP201B Other Interest Income ...................................................................................................... 11
MP220 Lobbying Expense ............................................................................................................. 12
MP230 Meals and Entertainment* ................................................................................................. 13
MP230A Skybox Rental Expense .................................................................................................. 15
MP240 Business Gifts .................................................................................................................... 16
MP250 Key Man Life Insurance ................................................................................................... 17
MP260 Fines and Penalties* .......................................................................................................... 18
MP270 Punitive Damages .............................................................................................................. 19
MP300 - Tax Exempt Interest* .......................................................................................................... 20
MP300A Tax Exempt Dividends .................................................................................................... 21
MP300B Other Tax-Exempt Interest Income ................................................................................. 22
MP310 Section 965(F) DRD .......................................................................................................... 23
MP400 Outstanding Stock-Issuance, Repurchase and Refinancing Redemption ........................ 24
MP410 Stock Options .................................................................................................................... 25
MP420 Nondeductible Compensation ........................................................................................... 26
MP430 Parachute Payments ......................................................................................................... 27
MP500 Goodwill Amortization* ....................................................................................................... 28
MP510 Exchange Gain/Loss .......................................................................................................... 29
MP520 Leased Inclusion Costs* .................................................................................................... 30
MP600 - Credit Expense Addback .................................................................................................... 31
MP610 Domestic Production Activity Deduction ............................................................................ 32
MP700 Environmental Remediation Costs .................................................................................... 33
MP800 or MT110 Acquisition/Reorganization Costs ..................................................................... 34
MPB25A Bank Life Insurance ........................................................................................................ 35
MPB25B Bank-Owned Life Insurance Income ............................................................................... 36
MPB30A Sec 291 Interest Expense Disallowance ........................................................................ 37
MPB30B Sec 265 Interest Expense Disallowance ........................................................................ 38
MPX100 Deemed Inclusions .......................................................................................................... 39
MPX200 Distribution of PTI ............................................................................................................ 40
MPX210 PTI Exchange Gain/Loss................................................................................................. 41
MPX300 - Branch Remittance Gain/Loss ......................................................................................... 42
MPX400 Section 78 Gross-Up ....................................................................................................... 43
Schedule M Guidance
ii
MPX500 Reverse Section 901 Taxes ............................................................................................ 44
MPX600 FSC Commission ............................................................................................................ 45
MPX700 Section 965 DASTM Gain/Loss ...................................................................................... 46
MPX800 Gross Foreign Dividend Not Previously Taxed ............................................................... 47
MPX900 Excess Distribution 2 ....................................................................................................... 48
MTA10A Accrued Bonus* .............................................................................................................. 49
MTA10B Accrued Payroll ............................................................................................................... 51
MTA10C Accrued Deferred Compensation ................................................................................... 52
MTA10D Accrued Rabbi Trust ....................................................................................................... 53
MTA10E Accrued Benefits ............................................................................................................. 54
MTA10F Accrued Vacation* ........................................................................................................... 55
MTA10G Accrued ASC 715 (formerly FASB 106) ......................................................................... 56
MTA10H Accrued Severance ......................................................................................................... 57
MTA10I Accrued Commissions ...................................................................................................... 58
MTA10J or MT120 - Accrued Professional Fees* ............................................................................. 59
MTA10K Accrued Directors Fees................................................................................................... 61
MTA10L Accrued Related Party Compensation ............................................................................ 62
MTA10M Accrued Retirement ........................................................................................................ 63
MTA10Q Accrued Related Party Bonus ........................................................................................ 64
MTA10R Accrued Related Party Vacation ..................................................................................... 65
MTA10S Accrued Pension/Profit-Sharing ...................................................................................... 66
MTA10T Accrued 401(k) ................................................................................................................ 67
MTA20A Accrued Workers Compensation .................................................................................... 68
MTA20B Accrued Charitable Contribution ..................................................................................... 69
MTA20C Accrued Coupons ........................................................................................................... 70
MTA20D Accrued Discounts .......................................................................................................... 71
MTA20E Accrued Environmental Clean-Up ................................................................................... 72
MTA20F Accrued Promotions ........................................................................................................ 73
MTA20G Accrued Rebates ............................................................................................................ 74
MTA20H Accrued Insurance .......................................................................................................... 75
MTA20I Accrued Self-Insurance .................................................................................................... 76
MTA20J Accrued Advertising ......................................................................................................... 77
MTA20K Co-Op Advertising ........................................................................................................... 78
MTA20L - Accrued Interest ............................................................................................................... 79
MTA20M Accrued Management Fees ........................................................................................... 80
MTA20N Accrued Personal Property Taxes .................................................................................. 81
MTA20O Accrued Payroll Taxes .................................................................................................... 82
MTA20P Accrued Royalties ........................................................................................................... 83
MTA20Q Related Party Accrued Interest ....................................................................................... 84
MTA20R Accrued Development Costs .......................................................................................... 85
MTA20S Accrued Sales Tax .......................................................................................................... 86
MTA300 Accrued Real Property .................................................................................................... 87
MTB10A FHLB Stock Dividend ...................................................................................................... 88
MTB10B FHLB Stock Redemption Gain Of Sale ........................................................................... 89
MTB200 Non-Accrual Interest ........................................................................................................ 90
MTB30A Bad Debt Provision ......................................................................................................... 91
MTB30B Tax Loan Loss Reserve Method .................................................................................. 92
MTB30C Tax Loan Loss Spec Charge Off ................................................................................. 93
MTB30D - Tax Reserve Recap 481(A) .......................................................................................... 94
MTB400 - Accrued SIP Adjustment .................................................................................................. 95
MTB450 SERP Expense ................................................................................................................ 96
MTB500 Loan Costs ...................................................................................................................... 97
MTB510 Tax Loan Fees ................................................................................................................. 98
MTD10A Deferred Rent Expense .................................................................................................. 99
MTD20A Deferred Revenue ......................................................................................................... 100
MTD20B Unearned Rent Income* ............................................................................................... 101
Schedule M Guidance
iii
MTD20C Unearned License Fee ................................................................................................. 102
MTD20D Unearned Income ......................................................................................................... 103
MTD20E Unearned Interest ......................................................................................................... 104
MTD300 Deferred Intercompany Profit ........................................................................................ 105
MTD400 or MT280 Unrealized Book Gain(Loss) ......................................................................... 106
MTF100 Amortization* ................................................................................................................. 107
MTF110 Intangible Assets Roll-Forward ...................................................................................... 109
MTF200 Intangible Basis Difference ............................................................................................ 110
MTF30A Book Depreciation* ........................................................................................................ 111
MTF30B_4562 Tax Depreciation* ................................................................................................ 112
MTF30B_4626 Alternative Minimum Tax and ACE Data Entry ................................................... 115
MTF310 Fixed Assets Roll-Forward............................................................................................. 116
MTF35A Book Depletion .............................................................................................................. 117
MTF35B Tax Depletion ................................................................................................................ 118
MTF400 - Fixed Asset Basis Difference ......................................................................................... 119
MTF410 Imp of Long Lived Assets ASC 360 (formerly FAS 144) ............................................ 120
MTF420 - Other Impairment of Assets ............................................................................................ 121
MTF50A Book Gain/(Loss) on Sale of Fixed Assets* .................................................................. 122
MTF50B_4684 Casualties and Thefts ......................................................................................... 123
MTF50B_4797 Tax Gain/(Loss) on Sale of Fixed Assets* .......................................................... 124
MTF60A Book Gain/(Loss) on Sale of Capital Assets ................................................................. 125
MTF60B_Sch D Tax Gain/(Loss) on Sale of Capital Assets ....................................................... 126
MTI100 LIFO ................................................................................................................................ 127
MTI200 263A UNICAP Adjustment* ............................................................................................ 128
MTI300 Capitalized Interest ......................................................................................................... 130
MTI400 Lower of Cost/Market Write-Downs ................................................................................ 131
MTM100 IRC Section 481(a) Adjustment* ................................................................................... 132
MTM20D Income/Loss from Domestic Schedules K-1 ................................................................ 133
MTM20F Income/Loss from Foreign Schedule K-1 ..................................................................... 134
MTM20Z Income/Loss from Other Schedules K-1 ....................................................................... 135
MTM300 Installment Sales* ......................................................................................................... 136
MTM400 Equity Earnings of Subsidiary ....................................................................................... 137
MTM500 Minority Interest ............................................................................................................ 138
MTM600 Hedging Transactions ................................................................................................... 139
MTM610 - OID & Other Imputed Interest ........................................................................................ 140
MTM620 - Mark to Marked Income/(Loss) ...................................................................................... 141
MTM700 Inc Recognition from LT Contracts ............................................................................... 142
MTM71A Sale versus Lease ........................................................................................................ 143
MTM71B Purchase versus Lease ................................................................................................ 144
MTM800 Accrual to Cash Adjustment ......................................................................................... 145
MTP10A Prepaid Advertising* ...................................................................................................... 146
MTP10B - Prepaid Insurance* ........................................................................................................ 148
MTP10C Prepaid Supplies ........................................................................................................... 149
MTP10D Prepaid Rent Expense .................................................................................................. 150
MTP10E Prepaid Legal Fees* ...................................................................................................... 151
MTP10F Prepaid VEBA ............................................................................................................... 152
MTR10A Bad Debt Reserve* ....................................................................................................... 153
MTR10B Inventory Reserve ......................................................................................................... 155
MTR10C Obsolescence Reserve ................................................................................................. 156
MTR10D Sales Returns & Allowance Reserve ............................................................................ 157
MTR10E Warranty Reserve* ........................................................................................................ 158
MTR10F Contingency Reserve* .................................................................................................. 160
MTR10G - Restructuring Reserve* ................................................................................................. 161
MTR10H Litigation Reserve* ........................................................................................................ 162
MTS100 Stock Options ................................................................................................................ 163
MTT100 State Taxes* .................................................................................................................. 164
Schedule M Guidance
iv
MTT200 Capitalized Real Estate Taxes ...................................................................................... 165
OT100 Federal Tax Payments ..................................................................................................... 166
Additional Hedge Fund Partnership Schedule Ms .................................................................... 167
MP100 Federal Tax Exempt Interest and Income ....................................................................... 167
MP110 Syndication Fees ............................................................................................................. 168
Additional Partnership Schedule Ms ......................................................................................... 169
Sch B Other Partnership Information ........................................................................................... 169
KP100 Partner Information ........................................................................................................... 170
KP200 Partner Contributions ....................................................................................................... 171
KP300 Partner Distributions ......................................................................................................... 172
KP400 Transfer of Interest ........................................................................................................... 173
KP500 Partnership Liabilities ....................................................................................................... 174
KP600 Guaranteed Payments Detail ........................................................................................... 175
KP700 Foreign Partner Withholding ............................................................................................ 176
MP440 or MP120 Guaranteed Payments .................................................................................... 177
MP450 Syndication Costs ............................................................................................................ 178
Additional S Corporation Schedule Ms ..................................................................................... 179
LD550 AAA Reconciliation (S Corporation) ................................................................................. 179
Sch B Other S Corporation Information ....................................................................................... 180
KS100 Shareholder Information ................................................................................................... 181
KS200 Shareholder Contributions................................................................................................ 182
KS300 Shareholder Distributions ................................................................................................. 183
KS350 Taxability of Distributions to Shareholders ....................................................................... 184
KS400 Ownership and Transfers ................................................................................................. 185
KS500 Schedule K Allocations ..................................................................................................... 186
KS600 Shareholder Foreign Withholding ..................................................................................... 187
MP450 Shareholder Fringe Benefits ............................................................................................ 188
OT200 Composite Tax Payments ................................................................................................ 189

Schedule M Guidance
1
Overview
This document was compiled from two legacy data sources:
o The Hows and Whys of Calculating Some Common Schedule M Adjustments
o The DCW Tax Law
This document does not cover every situation, but is a tool for gaining a general understanding of Schedule Ms
that are often encountered in business compliance. Specialists should always be consulted when appropriate.
The rules discussed in the document are generally applicable, but are not intended to cover all exceptions.
Introduction to Schedule M
Form 1120 Schedule M-3
Schedule M-3 reconciles financial statement net income (loss) for the consolidated financial group to taxable
income on Form 1120, page 1, line 28. Corporations with consolidated assets that equal or exceed $10 million
are required to file Schedule M-3. Partnerships with assets that equal or exceed $10 million, adjusted total
assets that equal or exceed $10 million, or have gross revenues equal or greater to $35 million are required to
file Schedule M-3. All other corporations and partnerships must still use Schedule M-1. Schedule M-3 requires
the reporting of much more detail about book-tax differences than Schedule M-1.
The current Schedule M-1 has remained virtually unchanged for decades. In that time, large and midsize
corporations have made dramatic changes in the ways they are structured and conduct business, and in their
corresponding financial and tax accounting. Schedule M-1 and the related instructions do not provide a uniform
reporting requirement for net income per books on line 1 of Schedule M-1. As a result, taxpayers may provide
information for (i) the worldwide group, (ii) the U.S. consolidated tax group, or (iii) something in between.
Similarly, Schedule M-1 and the related instructions do not provide uniform disclosure requirements for
reporting differences between financial accounting net income and taxable income. The lack of requirements
prevents efficient comparisons being made among taxpayers and prevents comparisons from year-to-year for
the same taxpayer, thus making it more difficult to assess the risk of noncompliance associated with an issue
or a taxpayer.
Objecti ves of Schedule M-3
According to the IRS, Schedule M-3:
Increases transparency while minimizing overall taxpayer burden;
Reduces the time required to examine tax returns and ensure IRS is in a position to examine the most
recent tax returns filed;
Provides consistent reporting among taxpayers and, from year-to-year, for each taxpayer;
Provides a method of presentation to obtain more useful, descriptive information at the time the federal
income tax return is filed to assist the IRS in the identification of tax returns that should or should not
be selected for audit, identification of issues that should or should not be audited, and identification of
trends and areas of greater compliance risk;
Will be modified periodically to highlight emerging issues, identify trends, and adapt to future changes
encountered by large and midsize corporations;
Facilitates tax return selection and issue identification through electronic filing;
Facilitates the use of Limited Issue Focused Examination (LIFE) audits through greater transparency.
Schedule M Guidance
2
Illustration: Excerpt from 2010 Corporate Form Schedule M-3

Schedule M Guidance
3
What Is a Schedule M-1 Adjustment?
Schedule M-1 is located on page 4 of Form 1120 Corporate and Form 1065 Partnership Federal Tax Return.
M-1 adjustments arise when the GAAP (a.k.a., the book/financial statement) rules for certain income or
expense items differ from the tax treatment as promulgated by the Internal Revenue Code.
Illustration: Page 4 of the 1120 and 1120S Schedule M-1

LD100A Master Trial Balance
Potentially Applicable TCC Sections
1.05 Trial Balance Review
2.01 Accounting Methods
2.02 Accounting Method Changes
2.03 Book Accounting Changes
2.05 Adopting an Accounting Method
2.06 Initial Tax Year
2.07 Change of Tax Year
2.93 Determination of Accounting Method Following a Transaction
2.96 Accounting for Investments
4.26 Financial Accounting
14.00 Controlled Groups and Consolidated Returns
25.06 Debt Considered a Second Class of Stock
LD100C Amount Subject to Book Reclass Summary
1.03 Recordkeeping
2.03 Book Accounting Changes
LD400 Book to Tax Reconciliation
1.02 Impact of Prior Year Events
1.03 Recordkeeping
Book Income
per Financial
Statements
(GAAP)
Taxable
Income per
IRC
Schedule M Guidance
4
1.05 Trial Balance Review
1.07 Schedule M-3/M-1 and M-2 Reconciliation
1.08 Provision to Return Reconciliation
1.09 Schedules M-3/M-1 and M-2 Analysis
2.00 Accounting Periods and Methods
2.04 Effecting a Method Change by Amending an NOL
2.05 Adopting an Accounting Method
2.06 Initial Tax Year
2.07 Change of Tax Year
2.93 Determination of Accounting Method Following a Transaction
2.94 Net Operating Loss Carryback
LD450 Schedule K Workpaper
26.01 Items that Pass Through to Shareholders
26.02 Separately Stated Income and Gains(Losses)
26.03 Separately Stated Deductions
26.04 Other Separately Stated Items
26.05 Separately Stated AMT Items
27.02 Income and Credits of Partner
27.03 Partnership Computations (IRC 703)
LD500 Equity Rollforward
1.02 Impact of Prior Year Events
1.03 Recordkeeping
1.08 Provision to Return Reconciliation
1.09 Schedules M-3/M-1 and M-2 Analysis
LD600 Sec. 444 Election of Taxable Year other than Required
Taxable Year
26.52 Calendar Year-End
26.53 Year-End Other Than Calendar Year
Sch E Officers Compensation
6.18 Compensation Paid to Top Executives
Schedule M Guidance
5
Schedule Ms
MP100A Federal Income Tax*
GAAP (Financial Statement) Treatment
Book net income or loss is presented net of income tax expense or benefit. ASC 740, Income Taxes,
addresses financial accounting and reporting for the effects of all income taxes that result from an enterprises
activities during the current year and preceding years.
Tax Treatment
As provided in IRC 275, federal income tax expense is not an allowable deduction for tax purposes. These
costs must be added back in order to arrive at taxable income.
Note: The deduction of these expenses is never allowed for tax purposes and therefore produces permanent
differences.
Where Do I Get the Information?
Source documents: Tax provision workpapers, post-provision adjusted trial balance, financial statement
footnote, and income statement.
In taxable entities, federal income tax will be clearly identifiable in both the income statement and the expense
portion of the trial balance. The account that contains federal income tax expense should be properly coded in
the tax trial balance as Federal Income Taxes. Note, a company may have an accounting policy to include
interest and/or penalties in the Income Taxes line in the income statement. It is important to confirm that only
the amount related to federal income taxes (and not related interest and penalties) is included in this schedule
M adjustment.
How Do I Calculate the Schedule M Adjustment?
The entire amount of the expense is disallowed in calculating taxable income. This amount is added back to
book income as an unfavorable addback on the schedule.
2.72 Disallowed Deductions
2.73 Federal Income Tax

Schedule M Guidance
6
MP100B State and City Income Taxes*
Book net income or loss is presented net of income tax expense or benefit, including state income taxes.
Through the process of calculating the tax provision, an estimate of the current years state income tax
expense is included in the financial statements and deducted from book income.
Tax Treatment
IRC 164(a) provides that the following taxes shall be allowed as deductions for the taxable year within which
they were paid or accrued subject to IRC 461(h) economic performance rules:
State and local, foreign, and real property taxes
State and local personal property taxes
State and local, foreign, income, war profits, and excess profits taxes
Note: See IRC 461(d). For example, California accrual of state taxes not deductible until subsequent year to
which franchise tax relates.
Source documents: Post-provision adjusted trial balance, tax provision, financial statement footnote.
The estimated amount for state income/franchise taxes can be found in both the trial balance and the income
statement section of the financial statements. Note, a company may have an accounting policy to include
interest and/or penalties in the Income Taxes line in the income statement. It is important to confirm that only
the amount related to state income taxes (and not related interest and penalties) is included in this schedule M
adjustment.
The Schedule M adjustment amount is the difference between the book expense and the tax expense. If the
book amount is larger than the tax amount, the difference will be treated as an unfavorable adjustment and will
be added back to the book income. If the tax amount is larger than the book amount, the difference will be
treated as a favorable adjustment and will be subtracted from the book income in arriving at taxable income.
Accrued state tax expense per books $20,000
Accrued state tax expense per tax 25,000
Schedule M favorable reduction ($5,000)
2.74 Deductibility of State and Local Tax Accruals
8.02 Filing Obligations
8.03 Nexus Issues
8.04 State Filing Methods
8.06 Law Changes
8.07 Alternate Measures of Tax
8.08 Federal-To-State Adjustments
8.09 Loss Carryovers and Carrybacks
8.11 Federal Consolidated Return Regulations
Schedule M Guidance
7
MP100C Foreign Income Taxes
Tax Law
Companies can elect to either deduct foreign income taxes, under IRC 164, or apply them as a credit against
US-income tax. A book/tax difference arises with respect to foreign taxes when such taxes are deducted for
book purposes but not for tax purposes. Often, companies will claim credit for foreign taxes on Form 1118
rather than claim a tax deduction.
10.21 AMT Foreign Tax Credit
12.22 Information Reporting and Withholding
12.42 Foreign Bank Account Reporting (FBAR)
16.07 Foreign Tax Credits
26.60 Foreign Subsidiaries Classified as Corporations for U.S. Tax

Schedule M Guidance
8
MP100D Foreign Withholding Tax
Tax Law
Companies can elect to either deduct foreign income taxes or apply them as a credit against US-income tax. A
book/tax difference arises with respect to foreign taxes when such taxes are deducted for book purposes but
not for tax purposes. Often, companies will claim credit for foreign taxes on Form 1118 rather than claim a tax
deduction.
16.14 U.S. Effectively Connected Income ("ECI")
16.17 Withholding on Outbound Payments

Schedule M Guidance
9
MP200 Club Dues
Tax Law
Per IRC 274(a), a deduction is not allowed for membership dues in any club organized for business,
pleasure, recreation, or other social purpose.

Schedule M Guidance
10
MP210A Other Interest Expense
Tax Law
This adjustment only applies when the interest paid or received has not been reflected in the income statement.
This adjustment is usually only necessary in unusual circumstances.
1.06 IRS Interest Expense/Income
2.31 Economic Performance [including Accrual Method Liability Quick Reference Sheet]
2.40 Capitalization of Interest, Taxes
2.80 Related Party Debt Acquisition
4.02 Deferred Payment Obligations/Nontraded Debt
4.03 Variable or Stepped Interest Payments
4.04 Multiple Debt Instruments Issued in the Same Transaction
4.05 Contingent Payment Debt Obligations
4.06 Interest Not Due Currently (Including "Payment in Kind" Debt)
4.07 Debt Issued with Warrants or Other Property
4.08 Short-Term Debt Instruments
4.09 Applicable High-Yield Debt Obligations (AHYDOs)
4.10 Acquisition Indebtedness
4.11 Debt Exchanges or Modifications
4.12 Retirements or Prepayments of Debt
4.13 Issuance of Convertible Debt
4.14 Issuance of Debt Payable In (or Indexed to) Portfolio Stock
4.15 Issuance of Convertible Debt with Contingent Interest
4.18 Low Interest Loans
4.21 Hedges of Issuers Debt Obligations: Synthetic Debt Treatment
4.22 Hedges of Issuers Convertible Debt Obligations
4.23 Equity-Linked Securities
4.24 Investment Units Consisting of Debt and a Forward Contract
4.25 Interest Capitalization
4.27 Prepaid Interest
4.28 Treatment as Debt
4.29 Interest on Related Party Debt
4.30 Related-Party Debt Acquisitions
5.06 Market Discount
5.08 Short-term Investments
5.17 Hedging Ordinary Property or Liabilities
5.22 Tax Straddle Transactions
5.32 Repurchase Agreements
7.05 Interest Income on Finance Leases
7.06 Finance Lease v. Sale
15.16 Contingent Stock Payments

Schedule M Guidance
11
MP201B Other Interest Income
1.06 IRS Interest Expense/Income
4.18 Low Interest Loans
4.30 Related-Party Debt Acquisitions
5.01 Original Issue Discount (corporate obligations)
5.02 Original Issue Discount (non-corporate obligations)
5.03 Stripped Obligations
5.05 Deferred Payment Sales
5.07 Bond premium
5.08 Short-term Investments
5.32 Repurchase Agreements
7.05 Interest Income on Finance Leases
7.07 Lessee Default
10.12 Private Activity Bonds

Schedule M Guidance
12
MP220 Lobbying Expense
Tax Law
Under IRC 162(e), deductible business expenses generally do not include amounts paid or incurred in
influencing legislation. Nondeductible lobbying expenses include amounts incurred while participating in
political campaigns, influencing the general public with respect to legislation, or while communicating directly
with certain executive branch officials on official matters.
Nondeductible lobbying also includes dues paid to exempt organizations allocable to lobbying. When payments
are made to an organization that incurs lobbying expenses the entity will generally provide the payor with the
percentage of total expenses that are directly attributable to the lobbying activity on an invoice or in some
instances an annual statement. Traditionally lobbying expenses are recorded in various accounts.
Some of these accounts could include dues and subscriptions, contribution accounts, donations, lobbying
expenses, political contributions, and organization expenses.
See also Treas. Reg. 1.162-28 and 29.
2.60 Political Contributions
2.61 Lobbying Costs

Schedule M Guidance
13
MP230 Meals and Entertainment*
These expenditures are expensed as incurred for GAAP purposes.
Tax Treatment
IRC 274(n) states that for certain meal and entertainment (M&E) expenses, only 50% of the total expense is
allowed as a deduction. However, some M&E expenses are fully deductible for tax purposes. In general, M&E
expenses related to entertaining clients (nonemployees) and travel are subject to the 50% disallowance.
In particular circumstances, the following types of M&E expenses are fully deductible (not subject to the 50%
limitation):
Recreational or social employee activities. However, such activities cannot discriminate in favor of
highly compensated employees (IRC 414(q)) (e.g., a company picnic or holiday party)
Cost of ticket package to a sporting event if the benefit is organized to benefit a tax-exempt
organization all net proceeds of the event are contributed to such origination and volunteers
Overtime meal allowances. Certain limitations are placed on the deductibility of such expenses due to
frequency and value issues
An employee's meal expenses incurred while moving that are reimbursed by the employer and
includable in the employee's gross income
Food and beverages provided to employees on certain vessels and oil or gas platforms and drilling rigs
Expenses incurred by an employer and reimbursed by their client (common in the services industry).
Very specific document substantiation requirements must be met before reimbursed expenses may
qualify for a full deduction (see IRC 274(d) and Rev. Rul. 2008-23)
De minimis fringe benefits (IRC 132). Certain prohibitions and limitations are placed on the
deductibility of such expenses due to frequency, value, and accountable plan issues
Goods, services or facilities that are treated as compensation
Goods, services or facilities made available to the public or sold to customers for adequate
consideration
Reimbursed expenses for services performed by employees but only if these expenses are not treated
as wages
A portion of the per diem rates up to the federal M&E rate (see Rev. Proc. 2010-39)
Additionally, as part of your review of the clients travel, meals, and entertainment accounts, particular attention
should be paid to expenses that are either 50% or 100% nondeductible, that may have been inadvertently
treated as fully deductible. For example, to the extent that hotel meals are charged to a hotel room invoice that
was captured in a fully deductible general ledger account, such meals charges should be identified and
subjected to the 50% limitation on deductibility. Further, exposure may exist if the clients expenses include
entertainment costs associated with luxury boxes that are used for entertaining.
You should consult with your senior or manager to determine whether your clients facts meet the terms and
conditions listed above. There is potential for a substantial consulting opportunity in performing a study of your
clients M&E expense to review either opportunity items, exposure items, or both. See your senior, manager, or
partner if you feel there is potential for such a review.
Schedule M Guidance
14
The nature of the M&E expense should be established before any adjustments are calculated. If you are not
sure that the expenses are 100%, 50% deductible, or 100% nondeductible, you must find this out from the
client or another member of the engagement team before proceeding.
The adjustment is calculated by multiplying the 50% deductible expenses by 50%. The adjustment is then
added back to book income as an unfavorable permanent Schedule M adjustment.
M&E (subject to 50% disallowance) $5,000

50%
Schedule M unfavorable addback $2,500
Practice Tips and Techniques
Many companies have misclassified exempted meals and entertainment expenditures as deductions subject to
the 50% limitation on deductibility. These misclassifications result in an overpayment of federal and state
income tax. In addition, ordinary and necessary expenses (i.e., hotel charges, office supplies, advertising,
charitable contributions, etc.) are being erroneously included in the meals and entertainment accounts.
Significant tax savings and improved financial statement earnings may result from a comprehensive analysis of
the general ledger accounts to which the 50% limitation is currently being applied. Misclassifications may be
reversed to restore full deductibility. Because these misclassifications do not constitute a method of accounting,
taxpayers may amend open years to claim tax refunds. Prospectively, we may assist clients with their general
ledger classification of expenses to ensure that full deductions are obtained on expenditures that meet the
various exceptions to the 50% limitation.
2.43 Travel, Meals, & Entertainment Costs [including M&E Quick Reference Sheet]
2.72 Disallowed Deductions [including Meals & Entertainment Quick Reference Sheet]
6.21 Company Cars & Aircraft
6.24 Fringe Benefits
6.25 Eating Facilities
6.29 Travel and Entertainment Expenses
8.27 Meals for Employees

Schedule M Guidance
15
MP230A Skybox Rental Expense
Tax Law
The cost of the skybox lease must be reduced to the cost of non-luxury box seats, per IRC 274(I)(2), for the
same number of seats in the box covered by the lease, before computing the limitation. The total cost of the
non-luxury box seats must also be reduced by 50%, the general limitation for entertainment costs.

Schedule M Guidance
16
MP240 Business Gifts
Tax Law
Generally, a company is not allowed a business deduction for gifts to an employee to the extent that the total
cost of all gifts of cash, tangible personal property, and other items to the same individual during the taxable
year exceed $25. A $400 limitation applies to gifts of tangible personal property awarded to an employee for
length of service, safety achievement, or productivity.
6.20 Employee Gifts

Schedule M Guidance
17
MP250 Key Man Life Insurance
Tax Law
Per IRC 264, premiums paid by an employer for insurance on the life of any individual are deductible only if it
can be shown that payments are 1) in the nature of additional compensation, 2) total compensation including
premiums is not unreasonable, and 3) the employer is not directly or indirectly a beneficiary under the policy.
Generally, premiums paid under split-dollar life insurance arrangements are not deductible. Premiums on
group-term life insurance covering the lives of employees are deductible by the employer unless the employer
is a direct or indirect beneficiary. The payment of such premiums may result in income to the employee if
coverage exceeds $50,000 or if the plan is discriminatory in favor of key employees. In general interest on debt
incurred or continued to purchase or carry a life insurance policy is not deductible. However interest on pre-
J une 21, 1986 policies and policy loans of up to $50,000 on a limited group of key persons.
2.65 Life Insurance Loans
2.66 Life Insurance Premiums
6.17 Life Insurance

Schedule M Guidance
18
MP260 Fines and Penalties*
Generally, fines and penalties are expensed as incurred for GAAP purposes.
Tax Treatment
IRC 162(f) states that no deduction shall be allowed for a fine or similar penalty imposed by a federal, state,
or local government for the violation of any law.
Note: Fines and penalties imposed by vendors, such as those for airline ticket changes and hotel cancellations,
are fully deductible for tax purposes.
Source documents: Clients trial balance or completed client information request.
Any account that contains fines and/or penalties should be investigated to determine what kind of fines or
penalties are included in that account. Check the treatment of these accounts in prior years or ask the client
about the nature of the accounts if this is the first year that they are present. If the accounts are expenses due
to fines and/or penalties paid to governmental organizations, they cannot be deducted for federal income tax
purposes. Note, companies may have an accounting policy for financial statement purposes to report penalties
in the income tax expense line.
Nondeductible fines and penalties are added back to book income as an unfavorable permanent Schedule M
addback.
Perform a detailed analysis of the account for the following examples of fines and penalties, which are fully
deductible and do not have to be added back to book income in determining taxable income.
Hotel cancellation penalties
Airline ticket change penalties
Other similar vendor fines or penalties
Fines or penalties that are compensatory in nature
2.59 Fines and Penalties
2.68 Department of J ustice Settlements
9.09 Tax Liability and Tax Payments
12.32 Penalties

Schedule M Guidance
19
MP270 Punitive Damages
Tax Law
Punitive damages paid under IRC 104(a)(2) that are includible in gross income by the recipient are deductible
to the payer. There are cases where punitive damages paid are excluded from gross income by the recipient if
received in a civil action for wrongful death and the applicable state law, in effect on September 13, 1995,
provides that only punitive damages may be awarded (IRC 104(c)). Beginning in 2005, attorney's fees and
court costs incurred in prosecuting claims based on unlawful discrimination and certain other federal claims,
including but not limited to whistleblower actions, are deductible from gross income (IRC 62(a)(20), as added
by the American J obs Creation Act of 2004. Only punitive damages paid pursuant to a wrongful death claim are
excluded from the recipient's income per IRC 104(c) and are thus not deductible to the payer corporation.
2.24 Recoveries for Damage

Schedule M Guidance
20
MP300 - Tax Exempt Interest*
For GAAP purposes, there is no distinction made (as to inclusion in income) between the interest income
generated by different types of debt instruments (i.e., municipal bonds vs. corporate bonds). Generally, all
interest for GAAP purposes is included in income.
Tax Treatment
IRC 103(a) states that interest income derived from bonds insured by state and local governments is
generally not included in gross income for federal tax purposes.
However, interest derived from certain state and local private activity bonds (within the meaning of IRC 141),
arbitrage bonds (within the meaning of IRC 148), and bonds not in registered form (not meeting the
requirements of IRC 149), are included in taxable income.
Note: IRC 265(a)(2) provides that no deduction shall be allowed for interest on indebtedness incurred to
purchase or carry obligations, the interest of which is wholly exempt from tax. Therefore, a separate adjustment
may be required to disallow interest expense attributable to the generation of the tax-exempt interest income.
Source documents: Trial balance, audit workpapers, or completed client information request. In most cases,
tax-exempt interest will be assigned its own trial balance account. If the description is vague, or you question
the nature of the interest income, document your questions on the open items list, and follow up with the senior
or manager on the engagement.
Any interest income amounts that are deemed to be tax-exempt have been included in the book income
amount and need to be removed in arriving at taxable income. The total tax-exempt interest amount should be
subtracted from book income as a favorable permanent adjustment.
Tax-exempt interest income per books $2,000
Tax-exempt interest income per tax 0
5.24 Tax-Exempt Interest

Schedule M Guidance
21
MP300A Tax Exempt Di vidends
Tax Law
IRC 103(a) provides that gross income does not generally include dividend income derived from any state or
local bond. However, dividends derived from certain state and local private activity bonds (within the meaning
of IRC 141), arbitrage bonds (within the meaning of IRC 148), and bonds not in registered form (not meeting
the requirements of IRC 149), are included in taxable income.
15.02 Distributions

Schedule M Guidance
22
MP300B Other Tax-Exempt Interest Income

Schedule M Guidance
23
MP310 Section 965(F) DRD
5.09 Dividends
5.25 Dividends Received Deduction
8.12 Foreign Source Dividends and IRC 78 Gross-Up
16.23 IRC 965

Schedule M Guidance
24
MP400 Outstanding Stock-Issuance, Repurchase and Refinancing Redemption
Tax Law
Pursuant to IRC 162(k), no deduction is allowed for any amount paid or incurred by a corporation in
connection with reacquisition of its stock or of the stock of any related person (as defined in IRC
465(b)(3)(C)). Note that there are exceptions to the general rule.
5.04 Redemption Premiums on Preferred Stock
15.03 Redemptions
15.04 Related Party Stock Sales Treated as Redemptions
26.57 Compensation: Employee Stock Option Plans
26.58 Shareholders Receiving Little to no Compensation
26.59 Limit on Deductibility of Business Expenses by the Corporation

Schedule M Guidance
25
MP410 Stock Options
Tax Law
In general, IRC 421(a) prevents tax income recognition to the employee and consequently a tax deduction to
the employer of the value of a qualified stock option if the stock is held for two years after the date of the grant
of the option and the share of stock is not sold within one year of the option being exercised. Qualified stock
options include incentive stock options (ISO) as provided in IRC 422 and employee stock purchase plans as
provided in IRC 423. If the employee does not hold the stock for the two year holding period or the one year
grant to exercise period, then IRC 421 does not apply to the option, the employee recognizes income on the
value of the stock option when the stock is sold, and the employer is allowed a deduction for the value of the
option included in income of the employee.
2.63 Compensation to Executives
6.01 Nonqualified and Qualified Plans
6.13 Nonqualified Stock Options
6.14 Incentive Stock Options
6.15 Employee Stock Purchase Plans

Schedule M Guidance
26
MP420 Nondeductible Compensation
Tax Law
IRC 162(m)(1). Publicly held corporations are generally not able to deduct compensation paid to certain
covered employees to the extent that such compensation exceeds $1 million per tax year. Treas. Reg. 1.162-
27. The $1 million limit does not apply to certain "performance based compensation" (IRC 162(m)(4)(C)).

Schedule M Guidance
27
MP430 Parachute Payments
Tax Law
Per IRC 280G, a corporation that enters into a contract whereby it agrees to pay an employee amounts in
excess of the employee's usual compensation in the event that control or ownership of the corporation changes
is barred from taking a deduction for an 'excess parachute payment' made to a 'disqualified individual. See IRC
280G for definitions and calculation of 'excess parachute payment.'
6.19 Golden Parachutes

Schedule M Guidance
28
MP500 Goodwill Amortization*
Goodwill is not amortized for GAAP purposes. Goodwill is tested for impairment on an annual basis and in
between annual tests in certain circumstances. After a goodwill impairment loss is recognized, the adjusted
carrying amount of goodwill is its new accounting basis.
Tax Treatment
IRC 197 states that a taxpayer shall be entitled to an amortization deduction with respect to certain
intangibles. The amount of such deduction shall be determined by amortizing the adjusted basis (for
determining gain) of such intangible ratably over the 15-year period beginning with the month in which such
intangible was acquired. To qualify as a 197 intangible, the acquisition must have been made after 8-11-93
(or 7-25-91 if an election was made). The asset must be held in connection with the conduct of a trade or
business or held for the production of income. (See IRC 212 for a more complete description).
Amortization of goodwill on acquisitions prior to IRC 197 is not deductible (permanent difference).
Source documents: Prior-year tax analysis and audit workpapers. Goodwill is separately stated in the financial
statements and, generally, is easily identifiable in the asset section of the trial balance and/or audit workpapers.
Goodwill impairment, if any, may be found in the income and expense section of the trial balance. The other
number used in the calculation is the tax amortization expense amount and will be found in fixed asset system
(FAS Encore, Fast-Tax, or other) which is used to calculate amortization and depreciation.
The taxpayer is allowed to deduct the amount of goodwill amortization expense that is calculated by the
method prescribed above in the tax treatment section. Since goodwill is not amortized for book purposes, the
difference between the book amount (generally zero unless goodwill is impaired during the year) and the tax
amount gives rise to a Schedule M adjustment.
Goodwill impairment per books $10,000
Goodwill amortization per tax 4,000
2.35 Depreciation/Amortization
3.11 Intangible Assets

Schedule M Guidance
29
MP510 Exchange Gain/Loss
Tax Law
Unrealized foreign exchange gains, resulting from functional currency translation differences, are favorable M
items, and should be deducted from book income. Similarly, unrealized foreign exchange losses are
nondeductible and should be added back to income as an unfavorable M.
15.12 IRC 351 Transactions and Incorporations
16.01 Foreign Currency Transactions

Schedule M Guidance
30
MP520 Leased Inclusion Costs*
Automobile expenditures are generally expensed as incurred for GAAP purposes.
Tax Treatment
For tax purposes, IRC 280F(c) and Treas. Reg. 1.280F-7(a) require that a corporation must include a
certain amount of income based on the fair value of the automobile for post-1986 leases of automobiles.
To determine the income inclusion under IRC 280F(a), consult the lease inclusion tables issued by the IRS
annually in a revenue procedure (e.g., in Rev. Proc. 2009-24 for vehicles first leased in 2009). You will find
tables that provide you with the IRC 280F(c)lease income inclusionby year, based on the fair market value
of the automobile. Separate lease inclusion tables are provided for trucks (including sports-utility vehicles) and
vans that are built on a truck chassis. Leased trucks and vans with loaded gross vehicle weight over 6,000
pounds are exempt from lease income inclusion.
The IRC 280F(c)lease income inclusionby year amount effectively reduces the lease payment deduction
on the automobile for tax purposes.
Example:
A car with a fair market value of $21,300 leased for 3 years beginning April 15, 2009, would have an income
inclusion amount of $11 (261/365 days $15 (from tables in Rev. Proc. 2009-24)) for 2009.
This amount would be included on page 1, line 10 of the Form 1120 (other income). It would also be included
on page 2, line 25 of Schedule M-3 (Form 1120, Other Income (Loss) Items with Differences).
Source documents: Client information (fair market value of automobile) and the lease inclusion table (e.g., Rev.
Proc. 2009-24 for 2009).
Look up the fair market value in lease inclusion table. Look across to the year in the lease. Include the amount
in miscellaneous income on the return. You will need to determine the lease date and then include in income a
pro-rata amount based on the number of days during the year the car was leased by the corporation.
Illustration: Table from Rev. Proc. 2009-24 (2009)
Fair Market Value Tax Income Inclusion Amount

1st 2nd 3rd 4th
5th and
later
$21,000 $21,500 $15 $31 $47 $55 $64

Assumptions:
Fair market value of the automobile =$21,300
Lease Date: April 15, 2009
Income inclusion under IRC Section 280F(c) =$11 ($15 261/365 Days)
Schedule M unfavorable addback.
7.02 Lessor as Tax Owner
Schedule M Guidance
31
MP600 - Credit Expense Addback
Tax Law
Pursuant to IRC 280C, a taxpayer cannot deduct expenses for which the taxpayer is also claiming a credit;
the effect of this is an unfavorable Schedule M equal to the credit amount.
9.14 Nonhighway Fuel Credit
9.15 Work Opportunity Credit
10.06 Alcohol Fuel Credit
10.22 General Business Credits
11.00 Research and Experimental Deductions and Credits
20.00 Federal Tax Credits
20.07 IRC 48C Advanced Energy Manufacturing Credit
20.08 Section 48D Credit: Qualifying Therapeutic Discovery Project Credit
20.11 IRC 45D New Markets Tax Credit
20.13 HIRE Act Credit
26.34 Fuel Tax Credit

Schedule M Guidance
32
MP610 Domestic Production Acti vi ty Deduction
16.22 IRC 199 Calculations
19.00 Domestic Production Activities Deduction (IRC 199)
18.32 IRC 199 Considerations

Schedule M Guidance
33
MP700 Environmental Remediation Costs
Tax Law
Under IRC 198(a), a taxpayer may elect to treat any qualified environmental remediation expenditure which is
paid or incurred by the taxpayer as an expense which is not chargeable to capital account. Any expenditure
which is so treated shall be allowed as a deduction for the taxable year in which it is paid. IRC 198
environmental remediation costs are separately stated on Form 1120, Schedule M-3, Part III, Line 29. Amounts
shown on this line are generally deductible and a Schedule M adjustment should not be considered automatic.
2.46 Environmental Remediation
2.95 Specified Liability Loss (IRC 172(f))
9.04 Specified Liability Loss (IRC 172(f))

Schedule M Guidance
34
MP800 or MT110 Acquisition/Reorganization Costs
Tax Law
The regulations under IRC 195 provide that a taxpayer is deemed to make an election under IRC 195(b) to
deduct start-up expenditures for the taxable year in which the active trade or business to which the
expenditures relate begins. The regulations under IRC 248 or 709 provide that a corporation or partnership,
respectively, is deemed to make an election under IRC 248(a) or 709(b) to deduct organizational
expenditures for the taxable year in which the corporation or partnership begins business. Amortization of
acquisition, reorganization, and start-up costs are separately stated items on Form 1120, Schedule M-3, Part
III, Lines 23-25 and Line 27.
2.49 Organization Costs
2.50 Start-Up Costs
4.10 Acquisition Indebtedness
8.18 Mergers and Acquisitions
15.00 Distributions, Mergers and Acquisitions, Reorganizations and Other Capital Transactions
15.18 Other Transaction Considerations

Schedule M Guidance
35
MPB25A Bank Life Insurance
2.65 Life Insurance Loans
2.66 Life Insurance Premiums
6.17 Life Insurance

Schedule M Guidance
36
MPB25B Bank-Owned Life Insurance Income
6.17 Life Insurance

Schedule M Guidance
37
MPB30A Sec 291 Interest Expense Disallowance
10.16 Mining Exploration and Development Costs

Schedule M Guidance
38
MPB30B Sec 265 Interest Expense Disallowance

Schedule M Guidance
39
MPX100 Deemed Inclusions
16.03 Subpart F Income (IRC 951 - 964)

Schedule M Guidance
40
MPX200 Distribution of PTI

Schedule M Guidance
41
MPX210 PTI Exchange Gain/Loss

Schedule M Guidance
42
MPX300 - Branch Remittance Gain/Loss
16.15 Branch Profits Tax
16.16 Branch Level Interest Tax

Schedule M Guidance
43
MPX400 Section 78 Gross-Up
8.12 Foreign Source Dividends and IRC 78 Gross-Up

Schedule M Guidance
44
MPX500 Reverse Section 901 Taxes
16.07 Foreign Tax Credits

Schedule M Guidance
45
MPX600 FSC Commission
8.10 Foreign Sales Corporation ("FSC")

Schedule M Guidance
46
MPX700 Section 965 DASTM Gain/Loss
16.24 Foreign Account Tax Compliance Act (FATCA)

Schedule M Guidance
47
MPX800 Gross Foreign Dividend Not Previousl y Taxed

Schedule M Guidance
48
MPX900 Excess Distribution 2
16.05 Passive Foreign Investment Company ("PFIC")

Schedule M Guidance
49
MTA10A Accrued Bonus*
ASC 710, Compensation - General, requires a liability to be accrued for employees compensation for future
absences if all of the following conditions are met:
1. The employers obligation is attributable to employees services already rendered,
2. The obligation relates to rights that vest or accumulate,
3. Payment is probable, and
4. The amount can be reasonable estimated.
Bonuses are accrued by a charge to income if both of the following are met:
1. The amount can be reasonably estimated, and
2. It is probable that the liability has been incurred at the financial reporting date.
Tax Treatment
A vacation, sick leave pay, or bonus (to employees with no significant ownership) deduction is generally
limited to the amount earned or awarded during the year to the extent that:
1. The amount is paid to employees during the year, or
2. The amount is vested as of the last day of the tax year (fixed and determinable) and is paid to
employees within 2 months after the end of the year. (IRC 404(a)(5); Temp. Reg. 1.404(b)-1T, Q
& A-1 and Q & A-2(b))
IRC 461 requires that the following conditions be met for an accrual to be deductible for tax purposes:
The liability must be fixed and determinable at end of the tax year (versus probable and estimable for
GAAP as discussed above)
Economic performance must have occurred (i.e., the services have been provided). In general, under
IRC 404(a)(11) and Treas. Reg. 1.461-4(d)(2)(iii)(A), deferred compensation is generally deducted
for tax purposes in the same tax year that the payment is recognized in income of the recipient. Treas.
Reg. 1.404(b)-1T allows that economic performance will be considered to have occurred if the
taxpayer made payment within 2 months of the end of the tax year (original due date of the return
without regard to extensions) in which the services were provided.
Amounts not paid within 2 months of year end are considered deferred compensation and are not deductible
until the tax year paid.
The trial balance will provide the amount of expense accrued at year-end, but client contact is required to
determine the amount paid within 2 months. Also, prior year workpapers will be required in order to find the
amount paid within 2 months and deducted on the prior-year tax return.
The adjustment amount is calculated in the following manner:
Accrued vacation, beginning of year $20,000
Amount paid within 2-1/2 months in prior year -5,000
Accrued vacation, adjusted beginning of year (not deducted in prior
year return)
$15,000
Accrued vacation, end of year 30,000
Schedule M Guidance
50
Amount paid within 2-1/2 months in current year -10,000
Accrued vacation, adjusted end of year $ 20,000
Change from beginning to end of
tax year
Adjustment to book
income Why?
Net Increase in Accrued Vacation
per Books (GAAP)
(Net of payment within 2- 1/2
months)

Addback To increase book accrual, the journal entry on
the GAAP set of books was a debit to expense
and a credit to accrual liability. This is not
allowed for tax purposes for the reasons
mentioned above. The expense must be added
back.
Net Decrease in Accrued Vacation
per Books (GAAP)
(Net of payment within 2-1/2
months)
Reduction To decrease book accrual, the entry was a
debit to accrued liability and a credit to cash.
This now becomes deductible for the tax set of
books for the reasons mentioned above.

2.32 Vacation Pay, Bonus Pay, and Deferred Compensation [including Accrual Method Liability
Resource]
6.02 Deferred Compensation
6.03 FICA Treatment of Nonqualified Deferred Compensation, Vacation Pay and Bonuses
6.04 Application of 409A

Schedule M Guidance
51
MTA10B Accrued Payroll
Tax Law
Please see MTA10A Accrued Bonus*
Resource]

Schedule M Guidance
52
MTA10C Accrued Deferred Compensation
Tax Law
Resource]

Schedule M Guidance
53
MTA10D Accrued Rabbi Trust
Tax Law
A Rabbi Trust is generally designed to provide some assurance that future benefit obligations will be satisfied.
The IRS will find a valid rabbi trust exists if all three conditions are met: the trust's assets must be available to
all the general creditors of the employer if the employer files for bankruptcy , there are no insolvency triggers
that hasten payments to employees when the employer's net worth falls below a certain point, thereby
bypassing creditors before insolvency is declared , there is a procedure to provide notice to the trustee of the
bankruptcy of the employer or financial hardship of the employer. Because a rabbi trust is subject to the claims
of the employer's general creditors, the employer is considered the owner of the trust and the executive is not
subject to tax on the deferred amounts until payments are actually received. When payments are actually
received and the executive is taxed, the employer may take a corresponding deduction.

Schedule M Guidance
54
MTA10E Accrued Benefits
Tax Law
2.53 Incurred but not Reported Employee Medical Expense (Including IBNR in Workers'
Compensation)
6.12 Plan Terminations and Significant Reductions in Future Benefit Accruals

Schedule M Guidance
55
MTA10F Accrued Vacation*
Tax Law
Resource]

Schedule M Guidance
56
MTA10G Accrued ASC 715 (formerl y FASB 106)
Tax Law
Generally, accruals for post-retirement benefits under ASC 715, Compensation Retirement Benefits,
(formerly FASB 106) are not deductible for tax purposes until paid. The costs accrued are any benefits which
are expected to be paid by the employer not otherwise covered by another pension or qualified plan. These
benefits commonly include postretirement health care and life insurance provided outside a plan.
For book purposes, these costs are accrued currently in the financial accounts, but are not deductible for tax
purposes until paid. The costs are generally treated the same as deferred compensation.
6.09 Funding
6.23 Post-Retirement Benefits

Schedule M Guidance
57
MTA10H Accrued Severance
Tax Law
GAAP as discussed above).
Economic performance must have occurred (i.e., the services have been provided).
Treas. Reg. 1.404(b)-1T imposes the additional requirement that payment must be made within 2-1/2 months
of the end of the tax year (original due date of the return without regard to extensions) that the services were
provided. Amounts not paid within 2-1/2 months are not deductible until the tax year paid (it also generally must
be includable as income by the recipient).
IRC 404(a)(11) states that no amount is treated as paid for this purpose until it is actually received by the
employee.

Schedule M Guidance
58
MTA10I Accrued Commissions
Tax Law
GAAP as discussed above).
Economic performance must have occurred (i.e., the services have been provided).
Treas. Reg. 1.404(b)-1T imposes the additional requirement that payment must be made within 2-1/2 months
of the end of the tax year (original due date of the return without regard to extensions) that the services were
provided. Amounts not paid within 2-1/2 months are not deductible until the tax year paid (it also generally must
be includable as income by the recipient).
IRC 404(a)(11) states that no amount is treated as paid for this purpose until it is actually received by the
employee.

Schedule M Guidance
59
MTA10J or MT120 - Accrued Professional Fees*
In order to fairly represent the expenses applicable to a reporting period (i.e., the matching principle), GAAP
requires an accrual for professional fees that have been incurred as of year-end but have not been paid.
Expenses are generally recognized when an entity's economic benefits are consumed (i.e., actual or expected
cash outflow) in revenue-earning activities or otherwise.
Tax Treatment
For tax purposes, expenses are allowed as deductions only after the all events test is satisfied and economic
performance has occurred. This requires that the expenses be both fixed and determinable and that the
services are performed. Since the accrual for book purposes does not require that the deduction amount be
fixed and determinable, differences arise between book and tax. IRC 461 requires that an accrual meet the
following criteria to be deductible: The liability must be fixed and determinable at the end of the tax year (versus
probable and estimable for GAAP, as discussed above) and economic performance must have occurred (i.e.,
the services have been provided) prior to year end under Treas. Reg. 1.461-4(d)(2)(i).
The all events test for accrued professional fees is generally satisfied the earlier of the date that: (1) the
required performance occurs, (2) payment is due, or (3) payment is made. The economic performance
requirement for accrued professional fees is generally satisfied as the services are provided to the taxpayer.
Note: The mere execution of an insurance or service contract (e.g., professional service contracts including
those for audit and tax services) by an accrual method taxpayer does not satisfy the all events test for incurring
the liability. For example, absent a prepayment, the amount of accrued professional fees deductible in the 2010
tax year would be limited to the amount of services actually performed in that tax year (2010). See Rev. Rul.
2007-3 and TCC Section 2.44 Executory Contracts.
The recurring item exception should be considered when the all events test is satisfied in the earlier year as a
result of payment due or made, and the services are provided within 8 months of year-end.
Under Treas. Reg. 1.461- 5, taxpayer using an accrual method may adopt the recurring item exception for
recurring items incurred by the taxpayer. Under the recurring item exception, a liability is treated as incurred for
a taxable year if:
1. as of the end of that taxable year, all events have occurred to establish the fact of the liability and the
amount of the liability can be determined with reasonable accuracy;
2. economic performance with respect to the liability occurs before the earlier of
a. date on which taxpayer timely files the return or
b. within 8 1/2 months of tax year end;
3. liability is recurring in nature and
4. either the amount of the liability is not material or the deduction of the liability in that taxable year
results in better matching of the deduction with the income to which it relates than would result from
accruing the liability for the taxable year in which economic performance occurs.
The 3 month rule should be considered. For economic performance purposes, the taxpayer can treat the
services as provided/rendered at the time of payment if the services are expected to be provided within 3
months of payment (Treas. Reg. 1.461-4(d)(6)(ii)).
See Tax Alert 07002 for a detailed discussion of accrued professional fees.
The accrual of professional fees should be relatively easy to find on both the trial balance and the financial
statements. To determine the deductible tax expense, consulting the client for additional details and facts will
be necessary. In most cases, however, the entire accrual will be disallowed and added back to book income.
Schedule M Guidance
60
If the increase in the accrual is larger than the allowable tax deduction, the difference should be added back to
book income as an unfavorable adjustment. In the following example accrued professional fees (estimated) for
services to be provided in the following year were accrued by XYZ Corp.
Beginning Balance 12/31/0X $20,000
Ending Balance 12/31/0X 30,000
2.33 Accrued Professional Fees
2.44 Executory Contracts

Schedule M Guidance
61
MTA10K Accrued Directors Fees
Tax Law
For tax purposes, expenses are usually allowed as deductions only after they meet both the all events test
and economic performance has been met. This requires that the expenses be both fixed and determinable and
that the services are performed. Since the accrual for book purposes does not require that the deduction
amount be fixed and determinable, differences arise between book and tax.
IRC 461 requires that an accrual meet the following criteria to be deductible: The liability must be fixed and
determinable at the end of the tax year and economic performance must have occurred (i.e., the services
have been provided) prior to year end under Treas. Reg. 1.461-4(d)(2)(i). Under Treas. Reg. 1.461-5,
taxpayer using an accrual method may adopt the recurring item exception for recurring items incurred by the
taxpayer. Under the recurring item exception, a liability is treated as incurred for a taxable year if:

Schedule M Guidance
62
MTA10L Accrued Related Party Compensation
Tax Law
Generally, accrued related party compensation accruals are not deductible for tax purposes until the recipient
recognizes the income.
2.78 Related Party Expenses

Schedule M Guidance
63
MTA10M Accrued Retirement
In order to fairly represent the expenses applicable to a reporting period (i.e., the matching principle), GAAP
requires an accrual for retirement costs (e.g., retirement plans, pension plans, 401(k) plans) that have been
incurred as of year-end but have not been paid. Expenses are generally recognized when an entity's economic
benefits are consumed (i.e., actual or expected cash outflow) in revenue-earning activities or otherwise.
Tax Treatment
For tax purposes, accrued retirement/pension/401(k) expenses (deferred compensation) are allowed as
deductions only after the all events test is satisfied, economic performance has occurred (i.e., the services
have been provided), and the requirements under IRC 404(a)(5) are met.
The timing of the tax deduction will vary depending on the type of plan. A stock bonus, pension, or profit-
sharing plan that meets the requirements of IRC 401(a) is a qualified plan. For qualified plans, generally the
deduction is allowed as contributions to the plan are made. For nonqualified plans, generally the deduction is
allowed as payments are made to the employee.
Under IRC 404(a), expenses are generally deductible in the year they are paid. However, IRC 404(a)(6)
provides a special rule for payments made by a pension trust, employees annuity, or stock bonus or profit-
sharing trust. If payment is made by one of these types of plan, the taxpayer is deemed to have made payment
during the taxable year for which the return is being prepared if the accrued expenses are on account of that
taxable year and payment was made no later than the time prescribed to file the return (including extensions).
If payments are not made to a qualified pension trust, employee annuity, or stock bonus or profit-sharing trust,
IRC 404(a)(5) applies. Under IRC 404(a)(5) and Treas. Reg. 1.461-4(d)(2)(iii)(A), deferred compensation
is generally deducted for tax purposes in the same tax year that the payment is recognized in income of the
recipient. Under Treas. Reg. 1.404(b)-1T A-2:(c), economic performance will be considered to have occurred
as of year-end if the taxpayer makes payment within 2-1/2 months of the end of the tax year in which the
services were provided, to the extent accrued as of the end of such year. Amounts not paid within 2-1/2 months
are not deductible until the tax year paid.

Schedule M Guidance
64
MTA10Q Accrued Related Party Bonus
Tax Law
Generally, accrued related party bonus accruals are not deductible for tax purposes until the recipient

Schedule M Guidance
65
MTA10R Accrued Related Party Vacation
Tax Law
Generally, accrued related party vacation accruals are not deductible for tax purposes until the recipient
Resource]

Schedule M Guidance
66
MTA10S Accrued Pension/Profit-Sharing
Tax Law
Please see MTA10M Accrued Retirement
6.08 Plan Contributions

Schedule M Guidance
67
MTA10T Accrued 401(k)
Tax Law
Please see MTA10M Accrued Retirement
6.08 Plan Contributions

Schedule M Guidance
68
MTA20A Accrued Workers Compensation
Tax Law
Generally, workers compensation accruals are not deductible for tax purposes until paid.
Pursuant to Treas. Reg. 1.461-5(c), the "recurring item" exception does not apply to any liability related to
Worker's Compensation.

Schedule M Guidance
69
MTA20B Accrued Charitable Contribution
Tax Law
Under IRC 170(a) and Treas. Reg. 1.170A-1, only charitable contributions paid during the tax year are
allowable as a deduction.
Under IRC 170(a)(2) and Treas. Reg. 1.170A-11(b), taxpayer may elect to recognize charitable
contributions made after year end in the prior taxable year if 1) the taxpayer's board or directors authorizes the
charitable contribution in the taxable year for which the return is being prepared and 2) payment of the
charitable contribution was made before the 15th day of the 3rd month after the end of the taxable year.
Charitable contributions are subject to limitations contained in IRC 170(b)(2) and Treas. Reg. 1.170A-8 or
1.170A-11. Note that special rules exist for charitable contribution of inventory
2.54 Post-Year-End Charitable Contributions
2.55 Property Contributions
2.56 Property Sales to Charity
2.57 Charitable Contribution Limitation

Schedule M Guidance
70
MTA20C Accrued Coupons
Tax Law
amount be fixed and determinable, differences arise between book and tax. IRC 461 requires that an accrual
meet the following criteria to be deductible: The liability must be fixed and determinable at the end of the tax
year and Economic performance must have occurred (i.e., the services have been provided) prior to year end
under Treas. Reg. 1.461- 4(d)(2)(i). In general a liability for a coupon redemption is not fixed until the coupon
has been tendered.
Under Treas. Reg. 1.461-5, taxpayer using an accrual method may adopt the recurring item exception for
recurring items incurred by the taxpayer.
Under the recurring item exception, a liability is treated as incurred for a taxable year if:

Schedule M Guidance
71
MTA20D Accrued Discounts
Tax Law
under Treas. Reg. 1.461- 4(d)(2)(i). Generally, a liability for a discount is not fixed until the discount is earned.
For example, a trade discount is earned when the requisite amount of goods have been purchased to earn the
trade discount.
2.90 Trade & Cash Discounts

Schedule M Guidance
72
MTA20E Accrued Environmental Clean-Up
Tax Law
Environmental cleanup (remediation) costs incurred by the taxpayer (as the contaminating party) may be
deductible as a current business expense under IRC 162 if certain requirements are met (Rev. Rul. 94-38);
however, costs may be required to be capitalized to inventory if requirements of IRC 263A are met (Rev. Rul.
2004-18). Environmental liabilities are capitalizable when assumed in an acquisition or are otherwise paid by a
non-contaminating party.
2.46 Environmental Remediation

Schedule M Guidance
73
MTA20F Accrued Promotions
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i). Generally, a liability for promotional expenses is fixed upon performance
of the promotion.

Schedule M Guidance
74
MTA20G Accrued Rebates
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i). Generally a liability for rebates is fixed when the rebate is earned.
5. Rebates are a payment liability and the recurring item exception applies.

Schedule M Guidance
75
MTA20H Accrued Insurance
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i).
Note: The all events test for accrued insurance is generally satisfied the earlier of the date that: (1) the required
performance occurs, (2) payment is due, or (3) payment is made. Insurance is often prepaid which would meet
the requirement of fixed and determinable. The mere execution of an insurance or service contract by an
accrual method taxpayer does not satisfy the all events test for incurring the liability. See Rev. Rul. 2007-3 and
TCC Section 2.44 Executory Contracts.
Insurance is a payment liability, thus if prepaid, all three prongs of the all events test are met upon payment.
You should also consider the capitalization rules if the contracts are over 1 year.
2.53 Incurred but not Reported Employee Medical Expense (Including IBNR in Workers'
Compensation)

Schedule M Guidance
76
MTA20I Accrued Self-Insurance
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i). Generally, self-insurance costs (i.e., for employee medical, retiree
medical, or workers compensation) are deductible in the year the medical services are provided including
incurred but not reported (IBNR) amounts. In other words, taxpayers may be able to deduct these costs in the
year that the medical services are provided to the employee rather than in the subsequent year when the
claims are submitted for reimbursement.
2.53 IBNR Employee Medical Expense (Including IBNR in Workers' Compensation)

Schedule M Guidance
77
MTA20J Accrued Advertising
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i). Generally, a liability for advertising costs is fixed when the advertising
services are rendered or upon payment, if earlier. For economic performance purposes, the taxpayer can treat
the services as provided/rendered at the time of payment if the services are expected to be provided within 3
months of payment (Treas. Reg. 1.461-4(d)(6)(ii)).
Note: In most cases, advertising is deductible as the advertising services are rendered, unless provided within
3 months of the year in which the amounts were fixed.
2.67 Prepaid Expenses [including Accelerating Deduction of Prepaid Expense Resource Page]

Schedule M Guidance
78
MTA20K Co-Op Advertising
Tax Law
that the services are performed. Since the accrual of advertising for book purposes does not require that the
deduction amount be fixed and determinable, differences arise between book and tax. These differences
require that an M adjustment be calculated. IRC 461 requires that an accrual meet the following criteria to be
deductible: The liability must be fixed and determinable at the end of the tax year (versus probable and
estimable for GAAP, as discussed above) and Economic performance must have occurred (i.e., the services
have been provided) per Treas. Reg. 1.461-4(d)(2)(i). If the all events test (fixed and determinable) is met by
year-end for the liability, Reg. 1.461-5 provides that the recurring item exception shall be deemed to apply for
co-op advertising if economic performance occurs by the earlier of: 1) the filing date of the timely-filed return
(including extensions) or 2) 8-1/2 months.. In Rev. Rul. 98-39, co-op advertising is fixed at the time advertising
services are rendered. Because this is a service liability, all three prongs of all events test are met at the time
the services are rendered.

Schedule M Guidance
79
MTA20L - Accrued Interest
Tax Law
under Treas. Reg. 1.461-4(d)(2)(i). Generally, for interest, economic performance occurs as the interest cost
economically accrues (Treas. Reg. 1.461-4(e)).

Schedule M Guidance
80
MTA20M Accrued Management Fees
Tax Law
In general, accrued management fees that are incurred by an accrual basis company may be accrued in the
current year and paid in the following year. The company enters an accrued liability in the current year and also
deducts the expense on its books in the current year.
A company may generally deduct payments made for services rendered prior to the end of year. In some
cases, if prepayment is made, services expected to be rendered within 3 months of prepayment may be
deducted in the earlier year. However, the purpose of a management fee may affect its deductibility. For
example, under Rev. Rul. 81-150, management fees that compensate for services performed to acquire a
capital asset may be considered capital expenditures that are required to be capitalized under IRC 263(a).
Additionally, management fees that compensate for services performed before a taxpayer begins a trade or
business may also be required to be capitalized under IRC 263(a) and may be amortized as start-up
expenditures under IRC 195 once the trade or business begins.
determinable at the end of the tax year and Economic performance must have occurred (i.e., the
management services have been provided) prior to year end per Reg. 1.461-4. The all events test for
accrued management fees is generally satisfied the earlier of the date that: (1) the required performance
occurs, (2) payment is due, or (3) payment is made. The economic performance requirement for accrued
management fees is generally satisfied as the services are provided to the taxpayer.
Note: The mere execution of an insurance or service contract by an accrual method taxpayer does not satisfy
the all events test for incurring the liability. See Rev. Rul. 2007-3 and TCC Section 2.44 Executory Contracts.
Note: If prepaid, taxpayer may be able to deduct 3 1/2 months of fees, if expects to have those services
rendered within 3 months of year end.
recurring items incurred by the taxpayer. Under the recurring item exception, a liability is treated as incurred for
a taxable year if:
2. economic performance with respect to the liability occurs before the earlier of a) date on which
taxpayer timely files the return or b) within 8 1/2 months of tax year end;

Schedule M Guidance
81
MTA20N Accrued Personal Property Taxes
Tax Law
Generally, accrued state and local personal property taxes are deductible in the tax year in which all the events
have occurred which determine the fact of liability, the amount thereof can be determined with reasonable
accuracy, and economic performance has occurred. Under Treas. Reg. 1.461-4(g)(6), taxes are considered
payment liabilities for which economic performance occurs in the tax year in which the taxes are paid.

Schedule M Guidance
82
MTA20O Accrued Payroll Taxes
Tax Law
under Treas. Reg. 1.461- 4(d)(2)(i).
Rev. Proc. 2008-25 provides under a special safe harbor method of accounting that solely for purposes of the
recurring item exception in Treas. Reg. 1.461-5, a taxpayer will be treated as satisfying the requirement for
the recurring item exception in Treas. Reg. 1.461-5(b)(1)(i) for its payroll tax liability in the same tax year in
which all events have occurred that establish the fact of the related compensation liability and the amount of
the related compensation liability can be determined with reasonable accuracy. Rev. Proc. 2008-25 doesn't
apply to an employee's portion of FICA tax imposed under IRC 3101 and deducted by the employer from
wages paid to the employee.
Resource]

Schedule M Guidance
83
MTA20P Accrued Royalties
Tax Law
amount be fixed and determinable, differences arise between book and tax. Royalties are fixed and
determinable depending upon when owed under the contract. Typically economic performance occurs as
property is used. Caution: There are proposed regulations that provide rules for sales-based royalties.
determinable at the end of the tax year and Economic performance must have occurred (i.e., the services
have been provided) prior to year end under Treas. Reg. 1.461-4(d)(2)(i).
2.20 Upfront Fees, Milestone Payments, and Royalties
2.25 Receipts for Royalties
2.26 Receipts for Intellectual Property

Schedule M Guidance
84
MTA20Q Related Party Accrued Interest
Tax Law
Generally, accrued related party interest accruals are not deductible for tax purposes until the recipient
2.80 Related Party Debt Acquisition
4.29 Interest on Related Party Debt

Schedule M Guidance
85
MTA20R Accrued Development Costs
Tax Law
Accrued development costs can include a number of different items which can invoke a number of different tax
account rules. Some accrued development costs may include research and development, software
development (see MTF100 Amortization*), and other tangible and intangible development.
amount be fixed and determinable, differences arise between book and tax.
determinable at the end of the tax year and Economic performance must have occurred (i.e., the services
have been provided) prior to year end under Treas. Reg. 1.461-4(d)(2)(i).
2.36 Software Development Costs [including Software Development Costs Resource Page]
11.03 Method of Identifying Research Costs
2.37 Research & Development Expenses

Schedule M Guidance
86
MTA20S Accrued Sales Tax
Tax Law
Generally, accrued sales taxes are deductible in the tax year in which all the events have occurred which
determine the fact of liability, the amount thereof can be determined with reasonable accuracy, and economic
performance has occurred. Under Treas. Reg. 1.461-4(g)(6), taxes are considered payment liabilities for
which economic performance occurs in the tax year in which the taxes are paid.
8.03 Nexus Issues
8.19 Sales and Use Taxes and Other Transfer Taxes
8.20 Obligation to Collect
8.21 Exemption Certificates
8.23 Sales Between Affiliated Groups
8.24 Hosted Software/Digital Goods
8.28 Sales/Use Tax on Purchases

Schedule M Guidance
87
MTA300 Accrued Real Property
Tax Law
Generally, accrued taxes are deductible in the tax year in which all the events have occurred which determine
the fact of liability, the amount thereof can be determined with reasonable accuracy, and economic
performance has occurred. For real property taxes, the lien date fixes the liability. Under Treas. Reg. 1.461-
4(g)(6), taxes are considered payment liabilities for which economic performance occurs in the tax year in
which the taxes are paid (modified lien date method). However, under the alternative ratable accrual method,
and a taxpayer has made a valid election under IRC 461(c), any real property tax shall accrue ratably for tax
purposes in accordance with IRC 461(c).
For a taxpayer using the modified lien date method, property taxes are deductible in the current tax year if
property tax payments are made within 8.5 months of the end of the tax year that includes the lien date.
2.41 Real Property Tax

Schedule M Guidance
88
MTB10A FHLB Stock Dividend
15.02 Distributions
14.10 Intercompany Transactions

Schedule M Guidance
89
MTB10B FHLB Stock Redemption Gain Of Sale
15.03 Redemption
15.04 Related Party Stock Sales Treated as Redemptions

Schedule M Guidance
90
MTB200 Non-Accrual Interest
2.34 Bad Debt & Disputed Sales
5.13 Bad Debts
10.11 Bad Debts of Financial Institutions

Schedule M Guidance
91
MTB30A Bad Debt Provision
5.13 Bad Debts

Schedule M Guidance
92
MTB30B Tax Loan Loss Reserve Method
2.47 Reserves
5.13 Bad Debts

Schedule M Guidance
93
MTB30C Tax Loan Loss Spec Charge Off
5.13 Bad Debts

Schedule M Guidance
94
MTB30D - Tax Reserve Recap 481(A)

Schedule M Guidance
95
MTB400 - Accrued SIP Adjustment

Schedule M Guidance
96
MTB450 SERP Expense

Schedule M Guidance
97
MTB500 Loan Costs
2.71 Loan Origination Costs/Debt Issuance Costs
4.19 Stock and Debt Issuance Costs

Schedule M Guidance
98
MTB510 Tax Loan Fees

Schedule M Guidance
99
MTD10A Deferred Rent Expense
Tax Law
Generally, deferred rent expenditures are deductible for tax purposes over the period to which they relate
(ratable accrual).
2.29 Deferred Rental Income
2.51 Deferred Rental Expense

Schedule M Guidance
100
MTD20A Deferred Revenue
Tax Law
Under Rev. Proc. 2004-34 (2004-22 I.R.B. 991), there are two permissible methods of accounting for the
advance payment:
The "full inclusion method" is simply the method under which a taxpayer includes the full amount of
advance payments in gross income in the taxable year of receipt.
Under the "deferral method," on the other hand, a qualifying taxpayer only includes an advance
payment in gross income for the taxable year of receipt to the extent that the taxpayer recognizes the
payment in revenues in its "applicable financial statement" for the taxable year of receipt. The taxpayer
includes the remaining amount of the advance payment in gross income for the next succeeding
taxable year.
An election to use the "deferral method" must be made in the first year such payments are received; otherwise,
taxpayers must apply for a change in accounting method. Note that the methods provided for in Rev. Proc.
2004-34 may not apply to all types of advanced payments. Advanced payments not covered by Rev. Proc.
2004-34 should instead be accounted for under Treas. Reg. 1.451-5 which required advanced payments to
be recognized in the taxable year of receipt. Also see Treas. Reg. 1.451-1 for special rules for deferring
advanced payments received for inventoriable goods.
2.10 Prepaid Subscription Income
2.15 Prepaid Income and Advance Payments
2.17 Gift Card Income
2.18 Government Contract Accounting
2.21 Deposits

Schedule M Guidance
101
MTD20B Unearned Rent Income*
GAAP rules dictate that unearned rental revenue should not be recognized until the income has been earned.
This means that any rents received before the period to which they apply will not be taken into income until the
applicable period begins. They are recorded by crediting a liability account called unearned rent and debiting
the cash account.
Tax Treatment
Except as provided in IRC 467 and the regulations there under, Treas. Reg. 1.61-8(b) state that gross
income includes advance rentals, which must be included in income the year of receipt regardless of the period
covered or the method of accounting employed by the taxpayer.
IRC 467(d) and Treas. Reg. 1.467-1(c)(1) define a IRC 467 rental agreement to include any rental
agreement for the use of tangible property under which there is prepaid or deferred rent under the agreement.
IRC 467(d)(2) provides that IRC 467 only applies to agreements involving rental payments of more than
$250,000.
IRC 467(a) requires the lessor and lessee of a IRC 467 rental agreement to take into account for any
taxable year the sum of (1) the amount of rent that accrues during the taxable year determined under IRC
467(b) and (2) interest for the year on the amounts that were taken into account for prior taxable years and that
are unpaid.
Source documents: Properly classified trial balance, audit workpapers, or completed client information request.
An understanding of the current tax method for recognizing advance rentals and a review of the rental
agreements may be required.
Unearned rent revenue, beginning of year $6,000
Unearned rent revenue, end of year 8,000
Rev. Proc. 2004-34 may provide some deferral if the advance rental is for:
The use of intellectual property (as defined in the Rev. Proc.)
The occupancy of use of property, if the occupancy or use is ancillary to the provision of services
The sale, lease, or license of computer software.
2.29 Deferred Rental Income
7.08 Advance Rents/Bonuses to Lessor

Schedule M Guidance
102
MTD20C Unearned License Fee
Tax Law
advance payment:
The "full inclusion method" is simply the method under which a taxpayer includes the full amount of advance
payments in gross income in the taxable year of receipt.
Under the "deferral method," on the other hand, a qualifying taxpayer only includes an advance payment in
gross income for the taxable year of receipt to the extent that the taxpayer recognizes the payment in revenues
in its "applicable financial statement" for the taxable year of receipt. The taxpayer includes the remaining
amount of the advance payment in gross income for the next succeeding taxable year.
taxpayers must apply for a change in accounting method.

Schedule M Guidance
103
MTD20D Unearned Income
Tax Law
advance payment:
The "full inclusion method" is simply the method under which a taxpayer includes the full amount of
advance payments in gross income in the taxable year of receipt.
Under the "deferral method," on the other hand, a qualifying taxpayer only includes an advance
payment in gross income for the taxable year of receipt to the extent that the taxpayer recognizes the
payment in revenues in its "applicable financial statement" for the taxable year of receipt. The taxpayer
includes the remaining amount of the advance payment in gross income for the next succeeding
taxable year.
taxpayers must apply for a change in accounting method.
2.10 Prepaid Subscription Income
2.17 Gift Card Income
2.18 Government Contract Accounting
2.21 Deposits

Schedule M Guidance
104
MTD20E Unearned Interest
Tax Law
General Rule: Treas. Reg. 1.61-8(b) states that gross income includes payments received in advance, and
must be included as income in the year of receipt regardless of the period covered or the method of accounting
employed by the taxpayer. There are exceptions to the general rule, please consult the applicable regulation
sections.

Schedule M Guidance
105
MTD300 Deferred Intercompany Profit
Tax Law
General Rule: Treas. Reg. 1.61-8(b) state that gross income includes payments received in advance, and
must be included as income in the year of receipt regardless of the period covered or the method of accounting
employed by the taxpayer. There are exceptions to the general rule, please consult the applicable regulation
sections.
10.27 Deferred Intercompany Transactions
14.10 Intercompany Transactions

Schedule M Guidance
106
MTD400 or MT280 Unrealized Book Gain(Loss)
Tax Law
In general, unrecognized gain/loss represents income recorded on the books that is not included on the tax
return. However, if the taxpayer has elected mark-to-market for tax purposes, the gain/loss will be recognized
for tax purposes.
3.05 Abandonment of Business Property
10.29 Gain on Disposition

Schedule M Guidance
107
MTF100 Amortization*
An intangible asset with a finite life is amortized over its estimated useful life. An indefinite-lived intangible asset
is accounted for in the same manner as goodwill.
Tax Treatment
The Internal Revenue Code has established its own amortizable lives for intangible assets. Some intangible
assets that are amortizable for book purposes cannot be amortized for tax purposes. For more information
regarding amortization expense, see the following sections of the IRC:
Goodwill and other intangibles 197
Start up costs** 195
Bond discount or premium 171
Lease acquisition costs 178
Organizational expenditures** 248
Partnership organization fees** 709(b)
Research expenditure 174(b)
**See standard common election templates in AS/2 Tax Pack.
Note: Under IRC 197, a taxpayer may amortize the cost of goodwill and most other intangible assets acquired
after August 10, 1993 over a period of 15 years. No tax deduction is allowed for acquisitions prior to this date.
Depreciable computer software generally acquired after August 10, 1993, that is not an amortizable IRC 197
intangible may be depreciated using the straight-line method over a three-year period (IRC 167(f)(1), (as
added by the Revenue Reconciliation Act of 1993 (P.L. 103-66))). Software amortization should be on Form
4562 as depreciation -- not amortization. This workpaper includes amortization adjustments related to other
intangible assets which do not fall under IRC 197 (IRC 248, 195, etc.). See MTF30B_4562 Tax
Depreciation* for information regarding software development costs.
The financial statements should provide the necessary detail for intangible assets. The trial balance will also
contain accounts detailing book amortization expense for the current year. Tax amortization will be taken from
either FAS Encore or GoSystem, depending on which software is used to determine tax depreciation and
amortization.
If the tax amortization expense is greater than the book amortization amount, then the difference should be
subtracted from book income as a favorable adjustment. If book amortization exceeds tax amortization, the
difference is added back as an unfavorable adjustment to book income.
Amortization expense per books $100,000
Amortization expense per tax 160,000
Schedule M Guidance
108
2.50 Start-Up Costs
2.69 Settlement Fees
3.06 Amortization of Pollution Control Facilities
5.07 Bond Premium
15.06 Asset Acquisitions or Sales
15.07 Stock Acquisitions Treated as Asset Acquisitions
15.09 Reorganizations - Acquisitive Asset Reorganizations
27.16 Treatment of Organization and Syndication Fees

Schedule M Guidance
109
MTF110 Intangible Assets Roll-Forward

Schedule M Guidance
110
MTF200 Intangible Basis Difference
15.06 Asset Acquisitions or Sales
15.07 Stock Acquisitions Treated as Asset Acquisitions
15.09 Reorganizations - Acquisitive Asset Reorganizations

Schedule M Guidance
111
MTF30A Book Depreciation*
Please see MTF30B_4562 Tax Depreciation*

Schedule M Guidance
112
MTF30B_4562 Tax Depreciation*
Please see below for Software Development Costs*
For GAAP purposes depreciation is the method of allocating the cost of a tangible capital asset over the
estimated useful life of the asset in a systematic and rational manner (generally straight-line).
Tax Treatment
For regular tax purposes, depreciation expense is calculated by using the Modified Accelerated Cost Recovery
System (MACRS). (For more information on calculating tax depreciation expense, see the CCH U.S. Master
Depreciation Guide.) Usually the tax depreciation expense for a specific asset will be greater than the book
depreciation expense in the early years of its depreciable life, and the difference will reverse in later years.
The book depreciation amount should be easily accessible in both the financial statements and the trial
balance. The tax depreciation amount will be provided by either FAS Encore, GoSystem or other system,
depending on which software is used to calculate tax depreciation expense.
If the book amount is greater than tax amount, add the difference back to book income as an unfavorable
adjustment. If tax depreciation exceeds book depreciation, subtract the amount from book income as a
favorable adjustment. Both of these adjustments are temporary in nature and at some point will reverse.
G&A
expense
Inventory
Schedule A
Depreciation expense per books $100,000 $150,000
Depreciation expense per tax 160,000 200,000
Schedule M favorable reduction ($60,000) ($50,000)

Software Development Costs*
For GAAP purposes, costs incurred during implementation of an internal-use software application (e.g., an
Enterprise Resource Planning ERP package) costs are often capitalized.
Tax Treatment
Significant portions of internal-use software development are currently deductible for tax purposes as akin to
IRC 174 expenditures under Rev. Proc. 2000-50 (see also PLR 200236028). In certain circumstances (e.g.,
taxpayer has established a method of accounting to capitalize these costs for tax purposes), in order to deduct
these costs for tax purposes, a taxpayer may be required to file a request to change a method of accounting
(Form 3115).
Capitalizable Implementation Costs:
Costs paid to a third party to purchase or license/lease the standard software system (purchased
software)
Amortization over 36 months beginning when the software system is placed in service
Schedule M Guidance
113
Direct costs incurred in-house or amounts paid to a third party to configure the purchased software
system without writing new software code, for example by activating embedded templates or switches
(installation)
Does not include indirect in-house expenses, such as overhead
Amounts paid to a third party to design and write additional software code (add on) but as to which
the taxpayer does not bear the risk (purchased software)
Third-party has the right to receive and/or retain payment only if its work product meet
performance criteria guaranteeing that the underlying development work was successfully
completed
Deductible Implementation Costs:
Amounts incurred in-house or paid to a third party to design and write additional software code (add
on) where the taxpayer bears the risk (development)
Activity is conducted in-house or payment to the third party is not contingent on the success or
failure of the underlying R&D work
Indirect costs (e.g., overhead) incurred in-house which otherwise are allocable to merely configuring a
purchased software system
Such costs fall outside the scope of IRC 263A
Other amounts incurred in-house or paid to a third party in connection with a broader implementation
project which may be characterized as business process re-engineering costs under Example 5 of
Treas. Reg. 1.263(a)-4(l)
Do not create a separate and distinct intangible asset
Training costs incurred in-house or paid to a third party to teach employees how to operate a new
software system
Deductible under IRC 162
Costs incurred in-house or paid to a third party to input new data or transfer data from the old
software system to the new system
Deductible under IRC 162
The financial statements may include the information you need to establish capitalized book amounts. The trial
balance will also contain accounts detailing book amortization expense for the current year. Additional client
inquires may be required to gather the necessary information. Tax amortization will be taken from either FAS
Encore or GoSystem, depending on which software is used to determine tax amortization.
Book expenses and tax deductions are calculated independently. The difference between the two calculations
represents the Schedule M adjustment amount.
If the deductible implementation costs (for tax purposes) and/or tax amortization is larger than the book
amortization for the year, then the difference is subtracted from book income as a favorable reduction.
Conversely, if the book amortization is greater than the deductible implementation costs (for tax purposes)
and/or tax amortization for the year, the adjustment is an unfavorable addback.
Amortization expense per books $30,000
Deductible software implementation costs
(deductible for tax purposes)

100,000
Schedule M Guidance
114

2.39 Construction Period Interest, Taxes
2.45 Like-Kind Exchanges (IRC 1031)
2.50 Start-Up Costs
2.64 Purchase of Franchise, Trademark, or Trade Name
2.69 Settlement Fees
2.75 Sales of Property or Patents
2.76 Repair Costs (Capitalization to Expense)
2.91 Package Design Costs
2.92 Contributions to the Capital of a Corporation (IRC 118)
3.00 Fixed Assets and Intangibles
3.01 Modified Accelerated Cost Recovery System (MACRS)
3.02 Accelerated Cost Recovery System (ACRS)
3.03 Pre-1981 Property: Switch to Straight-Line
3.04 Bonus Depreciation
3.06 Amortization of Pollution Control Facilities
3.08 Incorrect MACRS Recovery Period
3.12 Rehabilitations
3.14 Depreciation and Amortization Related Method Change Considerations
3.16 Election to Expense Eligible Property (IRC 179 DEDUCTION)
7.02 Lessor as Tax Owner
7.03 Leases to Tax-Exempt Entities
7.04 Lessor of Foreign-Used Property
7.10 Cancellations/Terminations of Leases
11.02 Deduction or Capitalization of Research Expenses
11.03 Method of Identifying Research Costs
11.04 Research Conducted on Taxpayer's Behalf
11.14 Election to Monetize Research and AMT Credits in Lieu of Bonus Depreciation
18.13 Oil & Gas Tangible Property

Schedule M Guidance
115
MTF30B_4626 Al ternative Minimum Tax and ACE Data Entry
9.03 Five-Year Net Operating Loss Carryback
9.10 Accumulated Earnings Tax
10.01 Alternative Minimum Tax (AMT) Depreciation Adjustment
10.02 AMT Depreciation Preference
10.03 Property Dispositions
10.04 Expensing Under IRC 179
10.05 Pollution Control Facility
10.06 Alcohol Fuel Credit
10.07 Long-Term Contracts
10.08 Non-Dealer Installment Sales
10.09 Dealer Installment Sales
10.10 Passive Activities
10.12 Private Activity Bonds
10.13 Depletion
10.14 Intangible Drilling Costs
10.16 Mining Exploration and Development Costs
10.17 Contributions of Property
10.18 Adjusted Current Earnings (ACE)
10.19 Adjusted Current Earnings (ACE) - More Considerations
10.20 NOL Carryovers
10.21 AMT Foreign Tax Credit
10.26 SRLY Limitations
10.27 Deferred Intercompany Transactions
10.28 Member Leaving Group

Schedule M Guidance
116
MTF310 Fixed Assets Roll-Forward

Schedule M Guidance
117
MTF35A Book Depletion
10.13 Depletion
18.15 Depletion in General
18.23 Percentage Depletion Preference for AMT

Schedule M Guidance
118
MTF35B Tax Depletion
10.13 Depletion
18.15 Depletion in General
18.23 Percentage Depletion Preference for AMT

Schedule M Guidance
119
MTF400 - Fixed Asset Basis Difference

Schedule M Guidance
120
MTF410 Imp of Long Lived Assets ASC 360 (formerly FAS 144)

Schedule M Guidance
121
MTF420 - Other Impairment of Assets

Schedule M Guidance
122
MTF50A Book Gain/(Loss) on Sale of Fixed Assets*
Please see MTF50B_4797 Tax Gain/(Loss) on Sale of Fixed Assets*
3.13 Dispositions

Schedule M Guidance
123
MTF50B_4684 Casualties and Thefts
2.52 Federal Disaster Losses
2.70 Casualty Losses (IRC 165) [including Casualty Loss Practice Aid and Guide]
3.10 Involuntary Conversions

Schedule M Guidance
124
MTF50B_4797 Tax Gain/(Loss) on Sale of Fixed Assets*
Gain or loss on the sale of fixed assets for GAAP purposes is calculated by using book basis amounts, which
are based on book accumulated depreciation figures.
Tax Treatment
For tax gain or loss on the sale of fixed assets, tax accumulated depreciation amounts are used in calculating
basis.
The financial statements and trial balance may include the information you need to establish book amounts for
basis in the assets and proceeds from the sale. Additional client inquires may be required to gather the
necessary information such as proceeds by asset. Tax amounts for accumulated depreciation and basis will be
taken from fixed asset software (BNA, FAS Encore, or another system) used in calculating the clients tax
depreciation.
Book gain/loss and tax gain/loss are calculated independently. The difference between the two calculations
represents the Schedule M adjustment amount.
If the book gain is larger than the tax gain, or the tax loss is greater than the book loss, then the
difference is subtracted from book income as a favorable reduction.
Conversely, if the tax gain is greater than the book gain, or the book loss is greater than the tax loss,
the adjustment is an unfavorable addback.
2.13 Foreign Expropriations
2.16 Mark to Market Method
2.48 Abandonment Losses
2.70 Casualty Losses (IRC 165) [including Casualty Loss Practice Aid and Guide]
2.79 Related Party Losses
2.97 Rescinded Transactions
3.09 Like Kind Exchange (IRC 1031)
3.10 Involuntary Conversions
3.13 Dispositions
3.16 Election to Expense Eligible Property (IRC 179 Deduction)
8.25 Sales of Business Operating Assets
18.18 Abandonment Losses
18.21 Sale or Exchange
18.22 Recapture of IDC, Mining Costs, and Depletion

Schedule M Guidance
125
MTF60A Book Gain/(Loss) on Sale of Capital Assets
3.13 Dispositions
4.20 Hedges of Issuer's Debt Obligations
5.12 Worthless Securities
5.16 Small Business Investment Company Stock
5.18 Swaps and Derivatives
5.20 Security Sales
5.21 IRC 1256 Contracts
5.23 Conversion Transactions
5.26 Financial Instrument Dispositions
5.27 Short Sales
5.28 Constructive Sales
5.29 Constructive Ownership Positions
5.31 Securities Lending Transaction14.08 Disposition of a Subsidiary - Recapture and
Recognition of Gain or Loss
15.13 Corporate Liquidations

Schedule M Guidance
126
MTF60B_Sch D Tax Gain/(Loss) on Sale of Capital Assets
3.13 Dispositions
5.12 Worthless Securities
5.16 Small Business Investment Company Stock
5.18 Swaps and Derivatives
5.20 Security Sales
5.21 IRC 1256 Contracts
5.23 Conversion Transactions
5.26 Financial Instrument Dispositions
5.27 Short Sales
5.28 Constructive Sales
5.29 Constructive Ownership Positions
5.31 Securities Lending Transaction
14.08 Disposition of a Subsidiary - Recapture and Recognition of Gain or Loss
15.13 Corporate Liquidations

Schedule M Guidance
127
MTI100 LIFO
Tax Law
Under IRC 472(c), taxpayers may not use the LIFO method for tax purposes unless they are also using the
LIFO method for financial reporting purposes. Under Treas. Reg. 1.472-2, however, taxpayers are permitted
to use different methods of computing the LIFO value of inventory for book and tax purposes. This may create
differences between the amount of the book LIFO reserve and the tax LIFO reserve, which should be captured
via a Schedule M adjustment on the return each year. Please also note the following special rules that apply in
the last taxable year of a C corporation immediately prior to its first taxable year electing S corporation status.
LIFO recapture - IRC 1363(d) generally provides that if a C corporation uses the LIFO method for its last
taxable year prior to electing S corporation status, taxpayer must include in gross income (line 10 - other
income) the "LIFO recapture amount" in its last C corporation taxable year. The LIFO recapture amount is the
amount by which the C corporation's inventory value under first-in, first-out (FIFO) lower of cost or market
method (determined under the rules of IRC 471 and Treas. Reg. 1.471-2) exceeds the inventory value
under the LIFO method. This provision generally applies in the case of S elections made after 12/17/1987.
The LIFO recapture tax is equal to the difference between (1) calculating the tax due with the LIFO recapture
amount included as income and (2) the tax due calculated without including the LIFO recapture amount in
income. The additional tax resulting from the LIFO recapture must be paid in four equal installments. The first
installment must be paid on or before the original due date (excluding extensions) of the return for the electing
corporation's last tax year as a C corporation. The remaining three deferral installments must be paid by the
due dates of the S corporations returns of the three succeeding taxable years (excluding extensions). The
deferred portion of the tax (3 installments) is shown on Schedule J as follows: "Sec. 10227 deferred -
$(amount).
Note that the recapture of the LIFO reserve does not terminate the taxpayer's LIFO election and they must still
value inventory using LIFO as an S corporation unless an accounting method change is requested.
2.82 Inventory Identification and Valuation Methods
2.84 Consistency of Inventory Method
2.87 Last-In, First-Out (LIFO) Method
2.89 Supplies Inventories and Rotable Spare Parts
25.11 Inventory Value at Date of Election
25.37 Use of Last-in, First-Out (LIFO) Method
25.38 Recapture of Last-in, First-Out (LIFO) Benefits

Schedule M Guidance
128
MTI200 263A UNICAP Adjustment*
A company will generally include in inventory on the balance sheet the price paid or consideration given to
acquire the asset, as well as any applicable expenditure (direct and indirect) incurred to bring an article to its
existing condition (raw material, work-in-process, finished good) and location (often referred to as full
absorption costing). The determination of the costs to include in inventory on the balance sheet for GAAP
purposes often involves many considerations.
Tax Treatment
IRC 263A (Uniform Capitalization, a.k.a. UNICAP) requires additional indirect and mixed service costs to be
capitalized into inventory and not deducted in the year that the costs were incurred. These costs are often over
and above the expenditures capitalized to inventory on the balance sheet (UNICAP is sometimes referred to as
super full absorption costing). The logic behind this cost capitalization is that certain expenses incurred in the
current year are actually associated with inventory goods produced or purchased that may still be in inventory,
assuming that all of the inventory was not sold in the current year. These costs should not be deducted until the
inventory is sold. If the goods are still in inventory, a portion of the expenses related to the production,
purchase, storing, etc., of the goods should be capitalized to inventory and not currently deducted.
Note: UNICAP does not apply to retailers with less than $10 million in average gross receipts (IRC
263A(b)(2)(B)) for the three years prior to the current tax year. The UNICAP rules and regulations are quite
complex and differ according to whether the taxpayer is a producer/manufacturer or a wholesaler/retailer and
differentiate further into simplified and non-simplified methods. See Treas. Reg. 1.263A-1, -2, and -3 for
further guidance.
The calculation of the uniform capitalization or IRC 263A adjustment is an extremely involved process that
requires quite a bit of company input and information. You will need to gather several estimates from the
company concerning allocation percentages and other relevant information.
A good place to start gathering the necessary information is the prior years workpaper file. Chances are that if
the client requires an IRC 263A calculation in the current year, they probably were required to perform a
similar calculation last year. Beyond looking at a prior years tax workpapers, consulting the tax senior or
manager on the engagement team may be a good idea.
Note: Please be aware that there are several methods for computing the UNICAP balance at the end of the
year.
The Schedule M results from the difference between costs required to be capitalized under IRC 263A for
inventory and the costs required to be capitalized for book purposes for inventory. Differences between the
costs capitalized to capital accounts or basis are captured as part of the Schedule Ms related to differences in
book and tax cost recovery methods. The calculation for the uniform capitalization balance at year-end will vary
depending on the method of calculating the IRC 263A adjustment your client has elected to use. Once you
arrive at the UNICAP balance at year-end, the Schedule M analysis is very similar to most Schedule M
discussed in other segments of this guide. See the following illustration:
UNICAP, beginning of year $4,000
UNICAP, end of year 6,000
2.88 Uniform Capitalization (UNICAP)
Schedule M Guidance
129
18.31 IRC 263A Uniform Cost Capitalization
25.11 Inventory Value at Date of Election
25.37 Use of Last-in, First-Out (LIFO) Method
25.38 Recapture of Last-in, First-Out (LIFO) Benefits

Schedule M Guidance
130
MTI300 Capitalized Interest
Tax Law
Pursuant to IRC 263A(f), interest incurred for production of real or tangible property must be capitalized and
depreciated over the life of the related asset. The UNICAP rules and regulations for the capitalization of interest
are quite complex. The return preparer should consult with the engagement manager to insure that the
Schedule M has been calculated properly.
2.39 Construction Period Interest and Taxes
4.25 Interest Capitalization

Schedule M Guidance
131
MTI400 Lower of Cost/Market Write-Downs
Tax Law
Under Treas. Reg. 1.471-2(c), the bases of valuation most commonly used by taxpayers that meet the
requirements of IRC 471 are cost and lower of cost or market. Typically, inventory reserves recorded to value
inventory at LCM for book purposes will in general not meet the tax requirements contained in Treas. Reg.
1.471-2 and a tax specific analysis should be performed to quantify the amount of the LCM reserve that should
be recognized on the tax return. LCM taxpayers should also recognize a Schedule M adjustment each year for
the full change in the book inventory reserve as the tax amount of the LCM reserve will be separately
calculated and recorded here. Note that for any taxpayers using LIFO to value inventory, lower of cost or
market is not a permitted method (IRC 472(b) and Rev. Proc. 79-23).
2.82 Inventory Identification and Valuation Methods
2.83 Non-Saleable Items
2.85 Lower of Cost or Market (LCM) Reserves
2.84 Consistency of Inventory Method

Schedule M Guidance
132
MTM100 IRC Section 481(a) Adjustment*
Overview
IRC 481(a) adjustments can be negative or positive and are the result of an approved change in the
accounting method that was properly filed on Form 3115.
Since this concept does not exist for GAAP purposes, there will never be account balances for IRC 481(a) in
the trial balance or on the income statement.
Tax Treatment
After filing Form 3115, Application for Change in Accounting Method, there may be an IRC 481 adjustment
amount that will be taken into income over a certain number of years (under Rev. Proc. 2011-14Automatic
Changes and Rev. Proc. 97- 27Non-Automatic Changes
1
). This adjustment will produce a difference
between book and tax income. It is likely that positive adjustments will be included in income over four years
and negative adjustments will be included in income in one year.
1
If the IRC 481 adjustment is $25,000 or less, the de minimis rule under Rev. Proc. 2011-14 allows the
adjustment to be taken all in the year of change.
Some record that a Form 3115 has been filed should be present in the tax workpapers for either the current
year or prior years. In the section of workpapers detailing the computation of the adjustment, you will find the
total adjustment amount and the number of years that the adjustment will be taken into income.
Source documents: Approved Form 3115 and related workpapers.
When the Form 3115 is prepared, all of the necessary computations are made. There will be a total IRC
481(a) adjustment amount listed, as well as the applicable number of years that the adjustment is to be taken
into income. Therefore, all of the calculations have been done for you. The IRC 481(a) amount applicable to
your return year should be added to or subtracted from book income, depending on the nature of the
adjustment.

Schedule M Guidance
133
MTM20D Income/Loss from Domestic Schedules K-1
Tax Law
Corporate taxpayers are generally not concerned with some of the tax attributes that are provided in
partnership Schedule K-1. For instance, qualified dividends' lower tax rates do not apply to corporate tax
payers. When preparing a corporate tax return, the preparer will want to sum the dividend amounts show on
lines, 6a and 6b in order to input the total dividend income for the corporation being passed through from the
partnership K-1. The preparer will also want to note such items as foreign tax information which is reported on
Line 16, foreign transactions. These amounts will need to be imported into corporate return by some means
other than the MTM20D, F or Z workpapers. The purpose of this workpaper is to input the income(loss) items
coming from the K-1 into the corporate return. However, due to the complexity of partnership tax law, the
preparer will need to exercise diligence in order to make sure that the income (loss) effect has been accurately
reported.
2.22 Passthrough Entity Income

Schedule M Guidance
134
MTM20F Income/Loss from Foreign Schedule K-1
Tax Law
partnership Schedules K-1. For instance, qualified dividends' lower tax rates do not apply to corporate tax
payers. When preparing a corporate tax return, the preparer will want to sum the dividend amounts show on
lines, 6a and 6b in order to input the total dividend income for the corporation being passed through from the
partnership K-1. The preparer will also want to note such items as foreign tax information which is reported on
Line 16, foreign transactions. These amounts will need to be imported into corporate return by some means
other than the MTM20D, F or Z workpapers. The purpose of this workpaper is to input the income(loss) items
coming from the K-1 into the corporate return. However, due to the complexity of partnership tax law, the
preparer will need to exercise diligence in order to make sure that the income (loss) effect has been accurately
reported.

Schedule M Guidance
135
MTM20Z Income/Loss from Other Schedules K-1
Tax Law
partnership K-1's. For instance, qualified dividends' lower tax rates do not apply to corporate tax payers. When
preparing a corporate tax return, the preparer will want to sum the dividend amounts show on lines, 6a and 6b
in order to input the total dividend income for the corporation being passed through from the partnership K-1.
The preparer will also want to note such items as foreign tax information which is reported on Line 16, foreign
transactions. These amounts will need to be imported into corporate return by some means other than the
MTM20D, F or Z workpapers. The purpose of this workpaper is to input the income(loss) items coming from the
K-1 into the corporate return. However, due to the complexity of partnership tax law, the preparer will need to
exercise diligence in order to make sure that the income (loss) effect has been accurately reported.

Schedule M Guidance
136
MTM300 Installment Sales*
Revenues and costs of sales are recognized at the time of sale; however, the related gross profit is deferred
and recognized in the periods in which the cash is actually collected. To the extent there is an excess of total
proceeds over cost, each installment is deemed to bear the same proportion of profit.
Tax Treatment
IRC 453(b) states that the term installment sale means a disposition of property where at least one payment
is to be received after the close of the taxable year in which the disposition occurs. Subsection (c) states that
the term installment method means a method under which the income recognized for any taxable year from a
disposition is that proportion of the payments received in that year which the gross profit (realized when
payment is completed) bears to the total contract price (i.e., the income recognized in a year under the
installment method is equal to the payments received during the year multiplied by the gross profit percentage
from the sale).
IRC 453(e)(1) dictates that if property is disposed of to a related party and is subsequently redisposed of
before the person making the first disposition receives all payments with respect to such disposition, then the
amount realized with respect to the second disposition shall be treated as received at the time of the second
disposition by the person making the first disposition.
Generally, interest must be paid on the deferred tax related to any obligation that arises during a tax year from
the disposition of property under the installment method if: a) the property had a sales price over $150,000 and
b) the aggregate balance of all nondealer installment obligations arising during, and outstanding at the close of,
the tax year is more than $5 million. See IRC 453A to figure the interest.
The book gain/loss amount will be shown in both the financial statements and the trial balance, and you must
complete Form 6252. Information that is required for this form includes the sales price, the basis of the asset
sold, and the amount of proceeds received in the current year.
If the sale occurred in a prior year, then the book gain for the current year, if any, will be reflected in the trial
balance. Conveniently, most of the required tax information will be found on Form 6252. The only additional
information you will need is the amount of proceeds received in the current year. However, Form 6252 must still
be completed.
Generally, there will be both a book gain/loss and a tax gain/loss. The difference between these two amounts
will be the Schedule M adjustment. If the amount the tax gain is greater than the book gain, the difference is an
unfavorable adjustment. If the tax gain is less than the book gain, the difference is a favorable adjustment.
These adjustments will reverse themselves in time, and the net effect, after all proceeds have been received,
will be zero.
2.08 Installment Sales
10.08 Non-Dealer Installment Sales
10.09 Dealer Installment Sales
23.09 Gains or Losses from Sales of Stocks, Securities and Other Capital Assets

Schedule M Guidance
137
MTM400 Equity Earnings of Subsidiary

Schedule M Guidance
138
MTM500 Minority Interest
Tax Law
The minority interest is the income (loss) included in the income statement (loss) on Schedule M-3, Part I, Line
11, for any member of the U.S. consolidated tax group that is less than 100% owned is included on Schedule
M-3, Part II, Line 8. This entry is usually made on the eliminations entity.

Schedule M Guidance
139
MTM600 Hedging Transactions
4.21 Hedges of Issuer's Debt Obligations: Synthetic Debt Treatment
4.22 Hedges of Issuer's Convertible Debt Obligations

Schedule M Guidance
140
MTM610 - OID & Other Imputed Interest
5.01 Original Issue Discount (Corporate Obligations)
5.02 Original Issue Discount (Non-Corporate Obligations)

Schedule M Guidance
141
MTM620 - Mark to Marked Income/(Loss)
5.30 Dealers/Traders

Schedule M Guidance
142
MTM700 Inc Recognition from LT Contracts

Schedule M Guidance
143
MTM71A Sale versus Lease

Schedule M Guidance
144
MTM71B Purchase versus Lease

Schedule M Guidance
145
MTM800 Accrual to Cash Adjustment
2.02 Accounting Method Changes [including Accounting Method Change Guidance]

Schedule M Guidance
146
MTP10A Prepaid Advertising*
A prepaid expense is an asset that is recognized into expense in the period, or over the period, in which the
benefit is realized.
Tax Treatment
Treas. Reg. 1.461-1(a)(1) and (2) require that both cash and accrual method taxpayers capitalize
expenditures under IRC 263(a) or 263A, as appropriate, if the expenditure results in the creation of an asset
having a useful life extending substantially beyond the close of the tax year.
In general, taxpayers are required to capitalize prepaid expenses. See Treas. Reg. 1.263(a)-4(d)(3). An
exception to the general rule is the 12-month rule set forth in Treas. Reg. 1.263(a)-4(f). Taxpayers that meet
the 12-month rule may deduct amounts paid to create any right or benefit for the taxpayer that does not (i)
extend beyond the earlier of 12 months after the first date on which the taxpayer realizes the right or benefit; or
(ii) the end of the taxable year following the taxable year in which the payment is made. Although the 12-month
rule provides an exception to the capitalization requirement, it does not determine the timing of the deduction,
which is governed by IRC 461 and the regulations there under. Under IRC 461, an item may not be
deducted for tax purposes until all events have occurred that establish the fact of the liability, the amount of the
liability can be determined with reasonable accuracy, and economic performance has occurred with respect to
the liability.
Economic performance generally occurs when the subject matter that gives rise to the liability (such as
services, property or use of property) is provided to the taxpayer. For payment liabilities (such as insurance,
warranty, service contracts, and taxes) economic performance occurs as payment is made to the person to
which the liability is owed.
A special rule allows a taxpayer to treat services or property as provided to the taxpayer as the taxpayer makes
payment to the person providing the services or property if the taxpayer can reasonably expect the person to
provide the services or property within 3 months after the date of payment. This rule is commonly referred to
as the 3 month rule. See Treas. Reg. 1.461-4(d)(6)(ii).
Certain liabilities may qualify for treatment under the recurring item exception. Under the recurring item
exception, a liability is treated as incurred for a taxable year if: (i) as of the end of the taxable year all of the
events have occurred which establish the fact of the liability and the amount of the liability can be determined
with reasonable accuracy; (ii) economic performance with respect to the liability occurs on or before the earlier
of the date the taxpayer files a timely return; or the 15th day of the ninth month after the close of the taxable
year; and (iii) either the liability is immaterial or the deduction of the liability for the taxable year results in better
matching.
If the prepaid expense meets the 12-month rule, the all-events test, and the economic performance
requirements, then the increase in the prepaid is currently deductible for tax purposes.
The following prepaid items that are capitalized for financial statement purposes may be deductible for tax
purposes, provided they meet the tests discussed above.
Prepaid service contracts
Prepaid advertising
Prepaid insurance
Prepaid postage
Prepaid travel costs
Prepaid subscription costs
Other recurring prepaid expenses (see Treas. Reg. 1-461-5)
Prepaid professional fees
The list above is by no means all-encompassing, but rather provides an example of common prepaid expense
items. Review the clients detailed trial balance for other prepaid items.
Schedule M Guidance
147
Source documents: Adjusted trial balance, audit workpapers, or tax leadsheet.
Prepaid insurance per books, beginning of year $100,000
Prepaid insurance per books, end of year 160,000
Change from the
beginning to end of
tax year
Adjustment to book
income

Why?
Increase in prepaid
balance per books
(GAAP)
Reduction To increase prepaid expenses per
the GAAP books, the entry debits
prepaid expense (asset account)
and credits cash. This may be
allowed as a tax deduction for tax
purposes.
Decrease in prepaid
balance per books
(GAAP)
Addback To decrease prepaid expense on
the books, the entry was a debit to
the appropriate expense account
and a credit to prepaid expense
(asset account).


Schedule M Guidance
148
MTP10B - Prepaid Insurance*
Tax Law
Please see MTP10A Prepaid Advertisi ng*

Schedule M Guidance
149
MTP10C Prepaid Supplies
Tax Law
If supplies are used in the manufacture of inventory or held for sale in the ordinary course of business, they
should be accounted for under IRC 471 and 263A. Otherwise, supplies should be deducted in accordance
with Treas. Reg. 1.162-3. Under Treas. Reg. 1.162-3, taxpayers may deduct supplies but only the amount
that was actually consumed and used in operation during the taxable year. If the taxpayer carries incidental
materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the
beginning and end of the year are not taken, the taxpayer may take a deduction for the total cost of such
supplies and materials as were purchased during the year.
2.89 Supplies Inventories and Rotable Spare Parts

Schedule M Guidance
150
MTP10D Prepaid Rent Expense
Tax Law
For Tax in general, an item (either normally deductible or capitalizable on the books) may not be deducted for
tax purposes until both the "all events test and economic performance requirements are met. The all events
test is satisfied when the liability is: fixed (payment is unconditionally due or required performance occurs), and
determinable with reasonable accuracy. As a general rule, economic performance occurs when the subject
matter that gives rise to the expense (such as services, property or use of property) is provided to the taxpayer.
However, for prepayment of goods or services provided to the taxpayer, if service and/or property related to the
expenditure is received within 3-1/2 months after payment is made, this amount may be deducted in the year
paid (the 3-1/2 month rule). For prepayments for use of property, the prepaid expense is recognized ratably
over the period of time the taxpayer is entitled to use the property (Treas. Reg. 1.461-4(d)(3)(i)). Treas. Reg.
1.461- 1(a)(1) and (2) require that both cash and accrual method taxpayers capitalize expenditures under
IRC 263(a) or 263A, as appropriate, if the expenditure results in the creation of an asset having a useful life
extending substantially beyond the close of the tax year.
If your case meets the all events test and economic performance requirements (or the 3-1/2 month rule) and
these expenditures do not result in the creation of an asset having a useful life extending beyond one year,
then the increase in the prepaid is currently deductible for tax purposes.
2.30 Construction Allowances
2.51 Deferred Rental Expense
7.08 Advance Rents/Bonuses to Lessor
7.09 Related Party Leasing Transactions

Schedule M Guidance
151
MTP10E Prepaid Legal Fees*
Tax Law
Please see MTP10A Prepaid Advertisi ng*

Schedule M Guidance
152
MTP10F Prepaid VEBA
Tax Law
For Tax in general, an item (either normally deductible or capitalizable on the books) may not be deducted for
tax purposes until both the "all events test and economic performance requirements are met. The all events
test is satisfied when the liability is: fixed (payment is unconditionally due or required performance occurs), and
determinable with reasonable accuracy. As a general rule, economic performance occurs when the subject
matter that gives rise to the expense (such as services, property or use of property) is provided to the taxpayer.
However, for prepayment of goods or services provided to the taxpayer, if service and/or property related to the
expenditure is received within 3-1/2 months after payment is made, this amount may be deducted in the year
paid (the 3-1/2 month rule). For prepayments for use of property, the prepaid expense is Recognized ratably
over the period of time the taxpayer is entitled to use the property (Treas. Reg. 1.461-4(d)(3)(i)). Treas. Reg.
1.461-1(a)(1) and (2) require that both cash and accrual method taxpayers capitalize expenditures under IRC
263(a) or 263A, as appropriate, if the expenditure results in the creation of an asset having a useful life
extending substantially beyond the close of the tax year. If your case meets the all events test and economic
performance requirements (or the 3-1/2 month rule) and these expenditures do not result in the creation of an
asset having a useful life extending beyond one year, then the increase in the prepaid is currently deductible for
tax purposes.

Schedule M Guidance
153
MTR10A Bad Debt Reserve*
Losses for uncollectible receivables are accrued when it is probable that a loss as been incurred and the
amount can be reasonably estimated.
Tax Treatment
For tax purposes, IRC 166 states that there shall be allowed as a deduction any debt which becomes
worthless within the taxable year. Also, when satisfied that a debt is recoverable only in part, the Secretary may
allow such debt, in an amount not in excess of the part specifically charged off within the taxable year, as a
deduction. This is referred to as the specific charge-off method.
In regards to IRC 166, the basis for determining the amount of the deduction for any bad debt shall be the
adjusted basis provided in IRC 1011 for determining the loss from the sale or other disposition of property.
The change in the allowance account should be easily accessible in the trial balance and financial statements.
Getting the amount of actual write-offs will usually require speaking to the client. Once you have both of these
amounts, you are ready to calculate the adjustment.
Any increase in the allowance account must be disallowed by adding the amount back into book income. If the
allowance account decreased in the current year from the prior year amount, then the difference is subtracted
from book income in arriving at taxable income. These adjustments reflect temporary or timing differences and
will reverse at a later point in time. Therefore, an increase in the allowance that is disallowed in the current year
may be deductible next year if the receivable is actually written off.
Change from beginning to
end of tax year
Adjustment to
book income

Why?
Increase in Allowance for
Doubtful Accounts per
books (GAAP)
Addback To increase book accrual, the journal
entry on the GAAP books was a debit
to expense and a credit to allowance
of doubtful accounts. This is not
allowed for tax purposes for the
reasons mentioned above.
Decrease in Allowance for
Doubtful Accounts per
books (GAAP)
Reduction To decrease book accrual, the entry
was a debit to allowance for doubtful
accounts and a credit to account
receivable. This now becomes
deductible for the tax set of books for
the reasons mentioned above.

Note: For certain types of companies (such as some smaller financial institutions), the calculation of bad debt
expense is very different than the one described above. You should always be sure which method is being
used when determining bad debt for a particular company.
2.47 Reserves
Schedule M Guidance
154
5.13 Bad Debts

Schedule M Guidance
155
MTR10B Inventory Reserve
Tax Law
requirements of section 471 are cost and lower of cost or market. Any taxpayers following a method of using
cost for tax purposes should not be recognizing for tax purposes any book inventory reserves that make
adjustments to the cost of inventory in ending inventory. Taxpayer valuing inventory at cost should recognize a
Schedule M adjustment each year for the full change in the book inventory reserves. Treas. Reg. 1.471-2
provides specific rules and guidance that must be followed for tax purposes for taxpayers using lower of cost or
market. Typically, inventory reserves recorded to value inventory at LCM for book purposes will in general not
meet the tax requirements contained in Treas. Reg. 1.471-2 and a tax specific analysis should be performed
to quantify the amount of the LCM reserve that should be recognized on the tax return. See workpaper MTI400
for computation of the LCM deduction for these taxpayers. LCM taxpayers should also recognize a Schedule M
adjustment each year for the full change in the book inventory reserve as the tax amount of the LCM reserve
will be separately calculated and recorded at MTI400. Note that for any taxpayers using LIFO to value
inventory, lower of cost or market is not a permitted method (IRC 472(b) and Rev. Proc. 79-23). LIFO
taxpayers should also recognize a Schedule M adjustment each year for the full change in the book inventory
reserve in order to avoid creating a LIFO termination event.
2.47 Reserves
2.86 Inventory Shrinkage

Schedule M Guidance
156
MTR10C Obsolescence Reserve
Tax Law
requirements of section 471 are cost and lower of cost or market. Any taxpayers following a method of using
cost for tax purposes should not be recognizing for tax purposes any book inventory reserves that make
adjustments to the cost of inventory in ending inventory. Taxpayer valuing inventory at cost should recognize a
Schedule M adjustment each year for the full change in the book inventory reserves. Treas. Reg. 1.471-2
provides specific rules and guidance that must be followed for tax purposes for taxpayers using lower of cost or
market. Typically, inventory reserves recorded to value inventory at LCM for book purposes will in general not
meet the tax requirements contained in Treas. Reg. 1.471-2 and a tax specific analysis should be performed
to quantify the amount of the LCM reserve that should be recognized on the tax return. See workpaper MTI400
for computation of the LCM deduction for these taxpayers. LCM taxpayers should also recognize a Schedule M
adjustment each year for the full change in the book inventory reserve as the tax amount of the LCM reserve
will be separately calculated and recorded at MTI400. Note that for any taxpayers using LIFO to value
inventory, lower of cost or market is not a permitted method (IRC 472(b) and Rev. Proc. 79-23). LIFO
taxpayers should also recognize a Schedule M adjustment each year for the full change in the book inventory
reserve in order to avoid creating a LIFO termination event.
2.47 Reserves

Schedule M Guidance
157
MTR10D Sales Returns & Allowance Reserve
Tax Law
IRC 461 requires that expenses meet the "all events test" before they are allowable as deductions for taxable
income purposes. The all events test requires that the costs be both fixed and determinable. Additionally,
economic performance must have taken place. This may lead to a difference in the expenses deducted for
books and tax with regard to these items. Many taxpayers reserve for estimated future customer returns that
might relate to the current year sales. However, this liability may not be accrued for tax purposes until the all
events test has been met and economic performance has occurred. For liabilities for goods and services
provided by the taxpayer actually receives returns goods from a customer and issues a refund in the form of
cash or replacement good to the taxpayer, economic performance occurs as the taxpayer incurs costs in
connections with the satisfaction of the liability (in this case, when the customer). See Treas. Reg. 1.461-
4(d)(4)(i)
2.47 Reserves

Schedule M Guidance
158
MTR10E Warranty Reserve*
ASC 450, Contingencies, requires that a reserve be accrued (and expensed) if information available prior to the
issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and
The following are examples of common reserves you will probably see on many of your client engagements:
the amount of the loss can be reasonably
estimated.
Litigation reserves
Warranty reserves
Real estate-owned (REO) reserves (financial institutions)
Contingency reserves
Self-Insurance Medical Reserves (a.k.a., IBNR)
Other reserves
Note: ASC 450, Contingencies, defines a contingency as an existing condition, situation, or set of
circumstances involving uncertainty that will ultimately be resolved when future events occur or fail to occur.
Not all uncertainties that evolve in the accounting process represent contingencies as defined in ASC 450.
Often estimates are required in the financial statements to measure the financial effects of past transactions in
addition to being used to measure future events, as is the case for contingencies.
Tax Treatment
IRC 461 requires that expenses meet the all events test before they are allowable as deductions for taxable
income purposes. The all events test requires that the costs be both fixed and determinable. Additionally,
economic performance must have taken place. This may lead to a difference in the expenses deducted for
books and tax with regard to these items.
Many taxpayers deduct the reserve on a cash basis when the payment occurs. However, not all reserves are
contingent upon payment for economic performance. The Code has identified only certain specific reserve
(liabilities) that are deemed payment liabilities and therefore the deduction is allowed generally when payment
occurs. The following are examples of GAAP accruals called payment liabilities (as defined by Treas. Reg.
1.461-4(g)). In general, these liabilities must be paid in order for the economic performance test to be met:
Liabilities arising out of the Workers Compensation Act, tort liabilities, breach of contract, or violation of
law
Rebates or refunds
Awards, prizes, or jackpots
Taxes
Insurance
Warranties
Licensing fees
For all reserves not classified as payment liabilities, economic performance is deemed to have
occurred when the services, property, or use of property has been provided.
Summary of the issues
IRC 461 requires that the taxpayer meet the all events test, which is:
The liability is fixed and determinable (versus. estimable for GAAP as discussed above)
Economic performance has occurred by year-end
Generally, economic performance occurs when the subject matter that comprises the expense (such as
services, property, or use of property) is provided to the taxpayer.
Schedule M Guidance
159
Source documents: Clients trial balance, audit workpapers, or completed information request.
XYZ Corp. has a pending lawsuit that the law firm of F. Lee Fasby estimates will settle for $400,000. This
settlement is probable to occur.
What is the Schedule M for the current years tax return? (Note: The pending litigation balance was $300,000 at
the beginning of the year.)
Pending litigation reserve, beginning of year $300,000
Pending litigation reserve, end of year 400,000
Change from the
beginning to end of
tax year
Adjustments
effect on book
income

Why?
Increase in reserve
per books (GAAP)
Unfavorable
addback
To increase the reserve accrual, the
journal entry on the GAAP books was a
debit to the expense and a credit to the
reserve account. This is not allowed for
tax purposes for the reasons mentioned
above.
Decrease in reserve
per books (GAAP)
Favorable
reduction
To decrease reserve accrual, the entry is
generally a debit to reserve and a credit
to cash. This now becomes deductible
for the tax books for the reasons
mentioned above. Note: Changes in
reserve accounts do not always require
Schedule M-1 adjustments due to items
such as reclasses and other book
adjustments. You may need to evaluate
the detail general ledger for a
transactional history.

2.47 Reserves

Schedule M Guidance
160
MTR10F Contingency Reserve*
Tax Law
Please see MTR10E Warranty Reserve*
2.47 Reserves

Schedule M Guidance
161
MTR10G - Restructuring Reserve*
Tax Law
2.47 Reserves

Schedule M Guidance
162
MTR10H Litigation Reserve*
Tax Law
2.42 Contested Liabilities
2.47 Reserves

Schedule M Guidance
163
MTS100 Stock Options
Tax Law
In general, Treas. Reg. 1.83-7(a) allows an employer to deduct the value of a nonqualified stock option
(NSO), without a readily ascertainable value, in the tax year that the employee includes the amount into
income, which is the tax year the NSO is exercised. If the NSO has a readily ascertainable value, then the
employee includes the NSO into income when the NSO is granted and the employer is allowed a deduction in
the same year.
6.13 Nonqualified Stock Options
6.14 Incentive Stock Options

Schedule M Guidance
164
MTT100 State Taxes*
Tax Law
Please see MP100B State & City Income Taxes*
8.02 Filing Obligations
8.03 Nexus Issues
8.04 State Filing Methods
8.06 Law Changes
8.07 Alternate Measures of Tax
8.09 Loss Carryovers and Carrybacks
8.11 Federal Consolidated Return Regulations
26.73 State Entity-Level Taxes
26.76 Other State Tax Issues

Schedule M Guidance
165
MTT200 Capitalized Real Estate Taxes
2.39 Construction Period Interest and Taxes
2.41 Real Property Tax
8.29 Sales, Use, and Transfer Tax Considerations in the Merger and Acquisition Context
8.30 Transfer Taxes Imposed on Real Property Deed Transfers

Schedule M Guidance
166
OT100 Federal Tax Payments
Tax Law
Per IRC 6655, four installment payments are generally required for corporations to avoid underpayment
penalties. Enter the Federal Tax payments made by quarter. The amounts entered here will assist in the
calculation of Form 2220, Underpayment of Estimated Tax by Corporations.
2.98 Estimated Tax Payments
9.06 Estimated Taxes
9.08 Underpayment of Estimated Taxes
9.09 Tax Liability and Tax Payments

Schedule M Guidance
167
Additional Hedge Fund Partnership Schedule Ms
MP100 Federal Tax Exempt Interest and Income
Tax Law
Tax Exempt Income includes interest from State & Local government obligations. Includes District of Columbia
and US possessions, and tax exempt "dividend" income from Mutual Funds
Exclusions:
Any private activity bond which is not a qualified bond. See IRC 141
Any arbitrage bonds within the meaning of IRC 148
Bonds not in registered form. See IRC 149
Expenses incurred to produce tax exempt income are non-deductible.
Interest Expense paid to borrow funds to purchase tax exempt securities is non-deductible.
No deduction is permitted for amortized premium on a tax-exempt bond.
The amortized premium for the tax year is instead an adjustment to the basis of the bond.
IRC 103(a), IRC 265, related regulations, Rev-Proc 72-18, Rev-Proc 74-8
Schedule M Guidance
168

MP110 Syndication Fees
Tax Law
Syndication expenses are defined to include all expenses of issuing and marketing partnership interests,
including brokerage fees, registration fees, legal fees of the underwriter and the issuer (the general partner or
the partnership) for securities advice and advice relating to the adequacy of tax disclosures in the offering
documents, accounting fees relating to representations included in the offering materials, and printing costs of
all offering materials.
IRC 709 and related regulations
Note - Syndication Fees are NOT line 18C Non-Deductible Expenses

Schedule M Guidance
169
Additional Partnership Schedule Ms
Sch B Other Partnership Information
2.28 Cancellation of Debt Income
3.09 Like Kind Exchange (IRC 1031)
4.12 Retirements or Prepayments of Debt
12.31 TEFRA Audits
18.08 Partnership Profits Interest
18.25 Passive Activity Limitations
27.11 Transactions Between Partner and a Partnership
27.22 Basis Adjustments
27.33 International Considerations

Schedule M Guidance
170
KP100 Partner Information
23.13 Passthroughs
27.04 Partner's Distributive Share
27.05 Substantial Economic Effect
27.09 Acquisition of a Partnership Interest (IRC 722 and 742)
27.10 Taxable Years of Partner and Partnership

Schedule M Guidance
171
KP200 Partner Contributions
27.06 Nonrecourse Deductions and Minimum Gain
27.07 Contributed Property (IRC 704(c))
27.08 Adjustments to Basis (IRC 705 and 733)
27.14 Disguised Sales
27.17 Nonrecognition of Gain or Loss on Contribution27.18 Basis of Property Contributed to
Partnership
27.19 Character of Gain or Loss on Contributed Unrealized Receivables, Inventory, and Capital
Loss Property

Schedule M Guidance
172
KP300 Partner Distributions
27.14 Disguised Sales
27.20 Extent of Recognition of Gain or Loss on Distribution
27.21 Basis of Distributed Property Other than Money
27.23 Character of Gain or Loss on Disposition of Distributed Property
27.24 Payments to a Retiring Partner or Deceased Partner's Successor in Interest
27.25 Recognition of Precontribution Gain in Case of Certain Distributions to a Contributing Partner
27.27 Unrealized Receivables and Inventory Items

Schedule M Guidance
173
KP400 Transfer of Interest
27.15 Continuation of Partnership
27.26 Recognition and Character of Gain or Loss on Sale or Exchange
27.27 Unrealized Receivables and Inventory Items
27.28 Treatment of Certain Liabilities

Schedule M Guidance
174
KP500 Partnership Liabilities
27.04 Partner's Distributive Share
27.06 Nonrecourse Deductions and Minimum Gain
27.28 Treatment of Certain Liabilities

Schedule M Guidance
175
KP600 Guaranteed Payments Detail
27.12 Payments Not in Capacity as a Partner
27.13 Guaranteed Payments

Schedule M Guidance
176
KP700 Foreign Partner Withholding
27.33 International Considerations

Schedule M Guidance
177
MP440 or MP120 Guaranteed Payments
Tax Law
IRC 707(c) provides that a partnership that makes a guaranteed payment to a partner is entitled to deduct the
payment at the time and to the extent that a payment under the same circumstances to an unrelated party
would be deductible. IRC 707(c) also provides that the partner receiving the guaranteed payment must
include the payment as ordinary income within or with which ends the partnership taxable year in which the
partnership paid or accrued the payment under its method of accounting. The partnership must report this
income to the partners on Schedule K1. As such, the total amount of guaranteed payments deducted by the
partnership is added back as ordinary income and then reported out to the partners on Schedule K1.
27.12 Payments Not in Capacity as a Partner
27.13 Guaranteed Payments

Schedule M Guidance
178
MP450 Syndication Costs
Tax Law
IRC 709(a) provides that amounts paid to sell, or promote the sale of, an interest in a partnership are not
deductible except as provided in IRC 709(b). However, unlike organization costs, syndication costs are not
eligible for the IRC 709(b) amortization election, and thus not deductible by the partnership in any event. In
addition, unlike the deduction available under IRC 165 for the unamortized amount of the capitalized
organization expense, when a partnership is liquidated, there is no partnership-level deduction for the
capitalized syndication costs that the partnership caries on its books as an intangible asset.

Schedule M Guidance
179
Additional S Corporation Schedule Ms
LD550 AAA Reconciliation (S Corporation)
26.28 Accumulated Adjustments Account (AAA)
26.29 Other Adjustments Account (OAA)

Schedule M Guidance
180
Sch B Other S Corporation Information
5.01 Original Issue Discount (corporate obligations)
12.39 Reportable Transactions Analysis
25.01 Eligibility to Elect New S Corporation Status
25.02 Eligibility of a Currently Electing S Corporation
25.03 General Requirements
25.04 Entity Requirements
25.12 Corporations with C Corporation E&P at Date of Election
25.13 Corporations with Wholly Owned Subsidiaries
25.14 Qualified Subchapter S Subsidiary (Qsub) Election
25.15 Insolvent Wholly Owned Subsidiaries
25.16 Wholly Owned Subsidiaries with Appreciated Property
25.17 Wholly Owned Subsidiaries with C Corporation E&P
25.18 Wholly Owned Subsidiaries with Inventory
25.34 Termination of QSub Election
25.35 Former C Corporation
26.31 Earnings and Profits
26.39 Applicability of the Built-In Gains Tax
26.40 Recognized Built-In Gains
26.41 Unexpired NOL or Capital Loss Carryovers
26.42 Recognized Built-In Gains in Excess of NOL Carryovers
26.43 Excess General Business Tax Credit Carryovers
26.44 Transferred Basis Property

Schedule M Guidance
181
KS100 Shareholder Information
23.13 Passthroughs
25.01 Eligibility to Elect New S Corporation Status
25.02 Eligibility of a Currently Electing S Corporation
25.03 General Requirements
25.05 Trusts as Shareholders
25.09 Shareholder Consent
25.19 Shareholder that is a QSST
25.20 Shareholder that is a ESBT

Schedule M Guidance
182
KS200 Shareholder Contributions
26.08 Shareholder Basis
26.09 Adjustments to basis
26.10 Basis in Stock
26.11 Loans from the S Corporation
26.13 Restoration of Basis

Schedule M Guidance
183
KS300 Shareholder Distributions
25.26 Distributions of Appreciated Property
26.20 Cash or Noncash Distributions
26.21 Corporations with E&P
26.22 Multiple Distributions During the Year
26.23 Election to Treat Distributions as Dividends
26.24 Filing Requirements for Distributions Taxed as Dividends
26.25 Debt-Financed Distributions
26.27 Post Termination Distributions
26.32 Distributions in a Post-Termination Transition Period

Schedule M Guidance
184
KS350 Taxability of Distributions to Shareholders
26.20 Cash or Noncash Distributions
26.21 Corporations with E&P
26.22 Multiple Distributions During the Year
26.23 Election to Treat Distributions as Dividends
26.24 Filing Requirements for Distributions Taxed as Dividends
26.25 Debt-Financed Distributions
26.27 Post Termination Distributions
26.32 Distributions in a Post-Termination Transition Period

Schedule M Guidance
185
KS400 Ownership and Transfers
26.48 Transfers of Stock
26.49 Election
26.50 20 Percent or More Change in Stock Ownership
26.51 Sale of 80 Percent or More of S Corporation Stock

Schedule M Guidance
186
KS500 Schedule K Al locations
23.13 Passthroughs
26.01 Items that Pass Through to Shareholders
26.02 Separately Stated Income and Gains(Losses)
26.03 Separately Stated Deductions
26.04 Other Separately Stated Items
26.05 Separately Stated AMT Items
26.06 Offsets to Shareholders' Share of Income
26.07 Payment to Shareholders' Family Members
26.14 Losses in Excess of Basis
26.15 Limitation on Deductibility of Losses
26.16 Loss Carryovers
26.18 Material Participation
26.19 Passive Activities
26.30 Carryovers
26.33 Investment Credit Recapture
26.34 Fuel Tax Credit
26.37 Non-U.S. Sourced Income
26.38 Recapture of Overall Foreign Loss
26.67 Individual Shareholders
26.78 State Credits and Incentives
26.79 State Treatment of Certain Items
Schedule M Guidance
187

KS600 Shareholder Foreign Withholding
26.62 Intercompany Transactions Between S Corporation and its Foreign Affiliates
26.63 Payments Received From 3rd Parties in Foreign J urisdictions
26.67 Individual Shareholders

Schedule M Guidance
188
MP450 Shareholder Fringe Benefits
26.35 Benefits Provided to More-Than-2 Percent Shareholders
26.36 Self-Insured Medical Plans

Schedule M Guidance
189
OT200 Composite Tax Payments
8.16 Special Entities
23.13 Passthroughs
26.73 State Entity-Level Taxes
26.75 State Composite Returns
26.77 State Withholding

*Previously included in The Hows and Whys of Calculating Some Common Schedule M Adjustments

Schedule M Guidance

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Schedule M Guidance

Uploaded by

Copyright:

Available Formats

Schedule M Guidance

You might also like