Tax books. Records kept by a firm's management that follow IRS rules. The books follow Financial Accounting Standards Board rules.

M-1 adjustments: reconciliation of book and taxable income (income and deductions.) Differences exist because of the difference in GAAP and tax law.

Remember that all income, no matter the amount, is taxable unless the law says otherwise – even if you don't get a Form 1099-K. If you get money from someone as a gift, reimbursement or repayment of other personal expenses, that money is not taxable.

Reconciliation Formula. In general, to reconcile book income to taxable income, we will add back expenses that are not tax deductible, add revenue that was not included in book income, subtract deductions not included in the calculation of book income, and subtract tax-exempt earnings.