Updated October 18, 2026. Quick answer: Schedule M-1 starts with the S corporation’s net income per books and adjusts it, with itemized additions and subtractions, until it reaches the income (loss) on Schedule K, line 18. Line 8 of Schedule M-1 must match line 18 of Schedule K. Some corporations file Schedule M-3 instead.
What Schedule M-1 does
Schedule M-1 is at the top of page 5 of the Form 1120-S return. The heading is “Reconciliation of Income (Loss) per Books With Income (Loss) per Return”. The form adds this note: “The corporation may be required to file Schedule M-3. See instructions.”
When Schedule M-1 is not used
The instructions open with “In completing Schedule M-1, the following apply.” The rules are:
- “Schedule M-1 isn’t required to be completed if the corporation” answered Yes to question 11 on Schedule B (see the Schedule B questions 6 to 11 page).
- “Corporations with total assets of $10 million or more on the last day of the tax year must file Schedule M-3 (Form 1120-S) instead of Schedule M-1.”
- “A corporation filing Form 1120-S that isn’t required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.”
A further rule covers corporations that complete Schedule M-3 through Part I and Schedule M-1 for 2025: “If the corporation chooses to complete Schedule M-1 instead of completing Schedule M-3, Parts II and III, Schedule M-1, line 1, must equal Schedule M-3, Part I, line 11.” The Instructions for Schedule M-3 (Form 1120-S) carry the details.
Lines 1 to 4: book income and additions
Line 1 is “Net income (loss) per books”. Line 4 is “Add lines 1 through 3”. Lines 2 and 3 are the additions.
| Line | Form caption | What the form and instructions say |
|---|---|---|
| Line 2 | “Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize):” | “Report on this line income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10 not recorded on the books this year.” “Describe each such item of income.” “Attach a statement if necessary.” |
| Line 3 | “Expenses recorded on books this year not included on Schedule K, lines 1 through 12e, and 16f (itemize):” | The form splits this line into 3a depreciation and 3b travel and entertainment. The instructions comment on 3b only. |
| Line 3b | “Travel and entertainment” | “Entertainment expenses not deductible under section 274(a).” “Nondeductible club dues.” |
The instructions list more items for line 3b than are shown here, and some carry dollar limits printed in that list, so read the full list on the instruction page. They also say “take that amount into account for purposes of figuring expenses and deductions to enter on lines 3 and 6.” That sentence applies if the corporation has an amount on Schedule K, line 16f.
Lines 5 to 8: subtractions and the result
Line 5 is income recorded on the books but not on Schedule K, with a row for “Tax-exempt interest”. Line 6 is deductions on Schedule K not charged against book income, with a row for “Depreciation”. Line 7 is “Add lines 5 and 6”. Line 8 reads “Income (loss) (Schedule K, line 18).” “Subtract line 7 from line 4”.
The instructions do not give a separate paragraph for lines 1, 3a and 4 to 8, so those lines follow the form’s captions. The form’s captions for lines 3 and 6 both refer to “Schedule K, lines 1 through 12e, and 16f” in their wording.
The tie to Schedule K line 18
The instructions for Schedule K line 18 say “The amount reported on line 18 must be the same as the amount reported on Schedule M-1, line 8”. That is the check this schedule exists to support. The Schedule K side is on the Schedule K lines 17 and 18 page, and the lines that feed line 18 are on the Schedule K lines 1 to 4, Schedule K lines 5 to 10 and Schedule K lines 11 to 13 pages.
Where the number comes from
Line 1 comes from the corporation’s financial records. Lines 2, 3, 5 and 6 are itemized differences between those records and the Schedule K lines named in the captions. Line 4 and line 7 are sums, and line 8 is the subtraction. The itemized lines call for a description of each item in the instructions for line 2 and in the form’s own “(itemize)” captions. For the page 1 ordinary income that is part of the Schedule K result, see the page 1 lines 13 to 22 page.
Where it goes next
Line 8 is checked against Schedule K, line 18, as quoted above. Separately, the shareholders’ accumulated adjustments account is figured on Schedule M-2, and the balance sheet on the same schedule group is on the Schedule L page.
Edition and line numbers
This page reads the 2025 Form 1120-S and its 2025 instructions, the current files irs.gov served on 2026-10-18. They are the files for the tax year 2025 return, filed in 2026. Form 1120-S prints the title line “U.S. Income Tax Return for an S Corporation”, with the header “For calendar year 2025 or tax year beginning”. Check the tax year printed on the form you are filling in and use the line numbers on that year’s form, because a different year’s form can number or word its lines differently.
Common mistakes
- Ending Schedule M-1 at a different figure from Schedule K. The instructions say “The amount reported on line 18 must be the same as the amount reported on Schedule M-1, line 8”
- Listing an unrecorded income item without describing it. The instructions say “Describe each such item of income.”
- Using Schedule M-1 when Schedule M-3 is required. The instructions say “Corporations with total assets of $10 million or more on the last day of the tax year must file Schedule M-3 (Form 1120-S) instead of Schedule M-1.”
Related: Form 1120-S, Form 1120, Form 4562, and Schedule K-1 (Form 1120-S) boxes.
Sources
- Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation (2025): https://www.irs.gov/pub/irs-pdf/i1120s.pdf
- Form 1120-S, U.S. Income Tax Return for an S Corporation (2025): https://www.irs.gov/pub/irs-pdf/f1120s.pdf
Read from the IRS documents linked above on October 18, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.