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Book and tax differences

REG Chapter 18 · Area V · Blueprint V.A

A corporation keeps two sets of numbers that are both correct: net income under GAAP for its owners and lenders, and taxable income under the Code for the IRS. The gap between them has to be explained, line by line, on Schedule M-1 or, for larger corporations, Schedule M-3. This chapter sorts the differences into permanent and temporary ones, walks through the common items (tax-exempt interest, fines, meals, depreciation, bad debts, reserves, charitable and capital loss limits), builds Schedules M-1 and M-2, and ends with the Blueprint's analysis task: reviewing an adjusted trial balance to find every difference. Reggie and Sam work through Coastal Pottery Inc.'s books with Dana, its controller. Figures are for tax year 2026.

In this chapter

1. Two sets of books, both correct
2. Permanent differences
3. Temporary differences
4. Limits that create differences
5. Schedule M-1, line by line
6. Schedules M-2 and M-3
7. Reviewing an adjusted trial balance

This chapter has 7 lessons, 50 practice MCQs with explanations and 20 simulations, plus flashcards and a recall sheet.

What this chapter covers

• Permanent and temporary differences
• Schedules M-1 and M-3
• reviewing a trial balance for differences

Chapter 17: Computation of tax and credits · Chapter 19: C corporations