On December 31, 2019, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer) who owns 75% of the corporation's outstanding stock. The $50,000 bonus is paid to the president on February 4, 2020. For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

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The $50,000 bonus accrued to the president will be a deduction for Flamingo, Inc. on its 2019 Form 1120, not a subtraction item on Schedule M-1, because it is an expense that reduces the corporation's taxable income for 2019, assuming it meets the "all events test" and economic performance has occurred by the end of the year. Schedule M-1 is used to reconcile financial statement income with tax return income, and this expense would be part of the corporation's deductible expenses, not a reconciliation item.