What type of item is considered a subtraction on Schedule M-1?

The subtraction on Schedule M-1 relates specifically to adjustments that need to be made between financial accounting records and tax records. In this context, the correct answer identifies the proceeds on key employee life insurance as a subtraction.

When it comes to key employee life insurance, the premiums paid are often not deductible for tax purposes, whereas the proceeds from such a policy are typically received tax-free. Since these proceeds represent income that the organization does not record in its financial books, they are effectively a reconciliation adjustment on Schedule M-1. This means that while the insurance payouts reflect an inflow of resources for tax purposes, they don't correspond with the income recognized in the financial statements, thus creating a need to subtract this amount on Schedule M-1 to accurately represent the taxable income.

Other potential adjustments, like capital losses exceeding capital gains or differing treatments of depreciation for book versus tax purposes, do not result in subtractions in this instance. The essence of Schedule M-1 is to ensure that the taxable income aligns accurately with the net income reported in financial statements, and key employee life insurance proceeds serve as a clear example of income that affects tax calculations differently than standard accounting practices.