Write a brief essay (suggested length of a total of 1–2 pages) in which you do the following: 1. Describe how you would reconcile the book income to tax income differences for ABC as a corporation and an s-corporation. 2. Make a recommendation for the board of directors about whether or not ABC should become an s-corporation, based on your calculations. (You may present this portion of your essay in memo format if you wish.)

For corporations, there is a three step process to reconcile book income to tax income. Usually, corporations keep their accounting records on an accrual basis, which recognizes income when it’s earned, not necessarily when a customer pays for it. Tax returns on the other hand must be completed based on when the income has been received. This may create differences between the general ledger and the tax filing, and must be accounted for.
The first step is to total all income items in the current year but not entered into the general ledger. Then add the result to the net income after taxes from the general ledger. Add the current year’s federal tax expense and any capital losses that exceed the corporation’s capital gains. Step two requires the preparer to add any general ledger expenses that are not deductible in the current tax year. Some examples include charitable contribution carryovers from a previous year, nondeductible entertainment and travel expenses, or even timing differences caused by using different depreciation methods on the general ledger and tax return. Finally, subtract tax exempt interest and any other listed income on the general ledger not on the company’s tax return. What results is the corporation’s adjusted book income before any net operating loss or special deductions. For S corporations with a revenue of $250,000 or more, a Schedule M-1 must be completed. The purpose of the M-1 is to provide a