One of the most common errors accountants make is to include additional depreciation on the book basis as well. Section 179 or bonus depreciation deferred tax liabilities cannot be reported on the books, only on tax returns. This common mistake is generally made in real estate business.

Section 179 and bonus depreciation are tax-specific deductions that cannot be included in the book basis of accounting. The purpose of these deductions is to expedite depreciation for tax purposes, which reduces taxable income in the year the asset is put into service. Straight-line or declining balance depreciation are commonly used in book accounting to record depreciation according to GAAP principles.

Deferred tax liabilities are a result of Section 179 and bonus depreciation creating temporary differences between book income and taxable income. The future tax impact when book depreciation eventually catches up with tax depreciation over time is reflected in these liabilities.Discrepancies in financial reporting can arise when accountants apply additional depreciation to the book basis incorrectly. Tracking these deductions separately for tax purposes is recommended while maintaining GAAP-compliant depreciation in financial statements.

The M-1 reconciliation enables the reconciliation of book income and taxable income on business tax returns. The variance between GAAP financials and IRS tax calculations needs to be explained in the M-1 reconciliation due to temporary differences caused by Section 179 and bonus depreciation.

The main goal of this is to ensure that financial statements follow book-based rules, while tax returns accurately reflect accelerated deductions that lower taxable income. As book depreciation advances, these differences gradually reverse over time.