Identify book and tax differences in computing taxable income and how these differences are reported in the tax return.

Taxpayers maintain their books and records on various methods of accounting and have different objectives when preparing financial statements and when completing tax returns. Taxpayers are generally required to provide a reconciliation of book and taxable income in their business tax returns as well as a reconciliation of their equity. This presents many issues for tax return preparers and their clients. This topic will help you identify book and tax differences in computing taxable income and how these differences are reported in the tax return. We will identify the starting point, book income, and common differences in computing book and taxable income. As Schedule M-1 presents a bridge between book and taxable income for which the IRS uses in ascertaining whether taxable income is properly stated and Schedule M-2 is a reconciliation of equity, it is important for tax return preparers and their clients to understand how to complete these schedules. Failure to properly complete these schedules can result in increased IRS scrutiny and questioning.