I think you're talking about how to get to taxable income from book income? If so, then it would be like below —
BOOK INCOME
– municipal bond interest
– proceeds from life insurance (on officer of co.)
+ premium on life insurance (on office of co.)
+ rent received in advance
– tax depreciation in excess of book depreciation
+ book depreciation in excess of tax depreciation
+ 50% of business meals expense
= TAXABLE INCOME
Explanations:
~ subtract muni bond interest income because it's NONTAXABLE. it would be included in book income, but it's not included in taxable income, so you take it out (to get to taxable income)
~ subtract proceeds from life insurance (on keyman/officer of company) because they are also NONTAXABLE. (same as muni bond interest)
~ add premiums paid for that life insurance (on keyman/officer of company) ARE TAXABLE. it's kind of like an expense — you pay these premiums to get the life insurance on that person. so they will be deducted from book income, BUT they're taxable, so you ADD it back to get to taxable income
~ add rent received in advance b/c under tax rules it is taxed immediately (book income wouldn't recognize this income yet until it's earned b/c book follows accrual rules)
~ subtract tax depreciation in excess of book depreciation because depreciation is an expense — so you if you have more expense under tax, you'll deduct it that extra expense (that wasn't recognized under book) to get to the tax income
~ for the business meals deduction… on the books you'll just expense business meals (the whole thing). but under the tax rule (called business meal deduction) you can only deduct 50% of the meals — the other 50% is taxed. So because half of it is taxed, you have to add that half back in to get to taxable income.
I hope this helps…. once you take REG this will all make sense too b/c a lot of REG is tax
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