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1065 دستورالعمل برای برنامه M-3

دستورالعمل های برنامه M-3 (شکل 1065)، درآمد خالص (Los) برای مشارکت های خاص

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Department of the Treasury  
Internal Revenue Service  
Instructions for  
Schedule M-3 (Form 1065)  
(Rev. November 2023)  
(For use with December 2021 revision of Sch. M-3 (Form 1065))  
Net Income (Loss) Reconciliation for Certain Partnerships  
Section references are to the Internal Revenue Code unless  
otherwise noted.  
1. The amount of total assets at the end of the tax year  
reported on Schedule L, line 14, column (d), is equal to $10  
million or more.  
2. The amount of adjusted total assets for the tax year is  
equal to $10 million or more. See Total Assets and Adjusted  
Total Assets, later.  
3. The amount of total receipts for the tax year is equal to  
$35 million or more. Total receipts is defined in the instructions  
for Codes for Principal Business Activity and Principal Product or  
Service in the Instructions for Form 1065.  
4. An entity that is a reportable entity partner with respect to  
the partnership (as defined under these instructions) owns or is  
deemed to own, directly or indirectly, an interest of 50% or more  
in the partnership's capital, profit, or loss on any day during the  
tax year of the partnership.  
Future Developments  
For the latest information about developments related to  
Schedule M-3 (Form 1065) and its instructions, such as  
legislation enacted after they were published, go to IRS.gov/  
What’s New  
Amortization of research and development costs. Specified  
research and development costs paid or incurred in connection  
with a trade or business in tax years beginning after December  
31, 2021, must be capitalized and amortized. See the  
A common trust fund or foreign partnership must file  
Schedule M-3 if it meets any of the tests discussed above.  
General Instructions  
Applicable schedule and instructions. Use the December  
2021 Schedule M-3 (Form 1065) with these instructions for tax  
years ending December 31, 2021, and until a new revision of the  
form and instructions are available. For previous tax years, see  
the applicable Schedule M-3 (Form 1065) and instructions. (For  
example, use the 2020 Schedule M-3 (Form 1065) with the 2020  
instructions for tax years ending December 31, 2020, through  
December 31, 2021.)  
Note. All references to a U.S. partnership in these instructions  
refer to any entity required to file Schedule M-3 (Form 1065),  
where appropriate.  
Partnerships not required to file Schedule M-3 may voluntarily  
file Schedule M-3.  
Completing Schedule M-3 (Form 1065)  
Form 1065 filers that are required to file Schedule M-3 (Form  
1065) and have at least $50 million total assets at the end of the  
tax year must complete Schedule M-3 (Form 1065) entirely.  
Purpose of Schedule  
Schedule M-3, Part I, asks certain questions about the  
partnership's financial statements and reconciles financial  
statement net income (loss) for the consolidated financial  
statement group to income (loss) per the income statement for  
the partnership.  
Form 1065 filers that (a) are required to file Schedule M-3  
(Form 1065) and have less than $50 million total assets at the  
end of the tax year, or (b) aren't required to file Schedule M-3  
(Form 1065) and voluntarily file Schedule M-3 (Form 1065) must  
either (i) complete Schedule M-3 (Form 1065) entirely, or (ii)  
complete Schedule M-3 (Form 1065) through Part I and  
complete Schedule M-1 instead of completing Parts II and III of  
Schedule M-3 (Form 1065). If the filer chooses to complete  
Schedule M-1 instead of completing Parts II and III of  
Schedule M-3, Parts II and III, reconcile financial statement  
net income (loss) for the partnership (per Schedule M-3, Part I,  
line 11) to line 1 of the Analysis of Net Income (Loss) per Return  
found on Form 1065.  
Schedule M-3 (Form 1065), line 1 of Schedule M-1 must equal  
line 11 of Part I of Schedule M-3 (Form 1065).  
Where To File  
If the partnership is required to file (or voluntarily files)  
Schedule M-3 (Form 1065), the partnership must file Form 1065  
and all attachments and schedules, including Schedule M-3  
(Form 1065), at the following address.  
For any part of Schedule M-3 (Form 1065) that is completed,  
all columns must be completed, all applicable questions must be  
answered, all numerical data requested must be provided, and  
any statement required to support a line item must be attached  
and provide the information required for that line item. Any  
partnership required to file Schedule M-3 must check all boxes  
above Part I that apply for the reason(s) for which the  
Schedule M-3 is required to be filed. A partnership not required  
to file Schedule M-3, but that is doing so voluntarily, should  
check box E above Part I.  
Department of the Treasury  
Internal Revenue Service Center  
Ogden, UT 84201-0011  
Who Must File  
Any entity that files Form 1065 must file Schedule M-3 (Form  
1065) if any of the following is true.  
Total Assets and Adjusted Total Assets  
The partnership should figure its adjusted total assets using the  
Aug 29, 2023  
Cat. No. 38800Y  
 
For purposes of determining for Schedule M-3 whether the  
partnership's adjusted total assets (under these instructions)  
equal $10 million or more, the partnership's total assets at the  
end of the tax year must be determined on an overall accrual  
method of accounting unless both of the following apply: (a) the  
tax return of the partnership is prepared using an overall cash  
method of accounting, and (b) the partnership doesn't prepare  
financial statements using, and isn't included in financial  
statements prepared on, an accrual basis.  
Reconciliation regarding non-tax-basis income statements and  
related non-tax-basis balance sheets to be used in the  
preparation of Schedule M-3 and the related non-tax-basis  
balance sheets to be used in the preparation of Schedule L.  
In the case of a partnership year ending because of a section  
708 termination, the total assets of the partnership at the end of  
the year for determining the requirement to file Schedule M-3 are  
determined immediately before the section 708 termination and  
any actual or deemed contribution or distribution of the  
partnership assets under the provisions of section 708 are taken  
into account.  
file Schedule M-3 for 2023 and either (i) complete Schedule M-3  
entirely, or (ii) complete Schedule M-3 through Part I and  
complete Schedule M-1 instead of completing Parts II and III of  
Schedule M-3.  
4. The facts are the same as in Example 1.3 except that the  
amount of total liabilities at the end of 2023 reported to Cypress'  
partners on Schedules K-1 is $11 million. Cypress made  
distributions of $1.5 million during 2023 as reflected on  
Schedule M-2, line 6. Cypress has adjusted total assets for 2023  
equal to $11 million, the greater of the tentative amount of $9  
million, the sum of $7.5 million plus $1.5 million (the amount of  
distributions that must be added back to determine adjusted  
total assets for 2023), or $11 million (the amount of the total  
liabilities at the end of 2023 reported to Cypress’ partners on  
Schedules K-1). Because Cypress has adjusted total assets of  
$10 million or more for its tax year ending December 31, 2023,  
Cypress must file Schedule M-3 for 2023 and either (i) complete  
Schedule M-3 entirely, or (ii) complete Schedule M-3 through  
Part I and complete Schedule M-1 instead of completing Parts II  
and III of Schedule M-3.  
5. Dogwood, a U.S. partnership, files Form 1065 for the tax  
year ending December 31, 2023. Dogwood has total assets at  
the end of 2023 reported on Schedule L, line 14, column (d), of  
$7.5 million. The amount of total liabilities at the end of 2023  
reported to Dogwood's partners on Schedules K-1 is $5 million.  
Dogwood made no distributions during 2023 reflected on  
Schedule M-2, line 6. Dogwood reported a loss of ($3 million) for  
2023 on Schedule M-2, line 3. Dogwood didn't report  
Example 1.  
1. U.S. partnership Ash, a limited liability company (LLC),  
owns 60% of the income and capital of U.S. partnership Birch,  
also an LLC. For its tax year ending December 31, 2023, Ash  
prepares non-tax-basis GAAP (generally accepted accounting  
principles) consolidated financial statements with Birch that  
report total assets at the end of the year of $12 million. Ash files  
Form 1065 and reports on its non-tax-basis unconsolidated  
GAAP Schedule L total assets at the end of the year of $7  
million. The $7 million total includes $3 million for its investment  
in Birch under the equity method of accounting. The amount of  
total liabilities at the end of the year reported to Ash's partners  
on Schedules K-1 is $5 million. Ash made distributions of $1  
million during the year reflected on Schedule M-2, line 6. The  
amount of Ash's adjusted total assets is $8 million for the tax  
year. Ash has total receipts for the tax year of $15 million. Ash  
has no reportable entity partners (as defined under Reportable  
required to file Schedule M-3 under any of the four tests  
discussed earlier. Ash may voluntarily file Schedule M-3 for the  
tax year. If Ash doesn't file Schedule M-3, it must complete  
Schedule M-1. If Ash files Schedule M-3, it must either (i)  
complete Schedule M-3 entirely, or (ii) complete Schedule M-3  
through Part I and complete Schedule M-1 instead of completing  
Parts II and III of Schedule M-3.  
adjustments to capital on Schedule M-2, line 4 or 7. Dogwood  
has adjusted total assets for 2023 in the tentative amount of  
$10.5 million, the sum of $7.5 million plus $3 million (the amount  
of the loss stated as a positive amount that must be added back  
to determine adjusted total assets for 2023). This tentative  
amount is compared to the total liabilities at the end of 2023 as  
reported to Dogwood's partners on Schedules K-1, and the  
greater of the two amounts is considered the adjusted total  
assets. Because Dogwood has adjusted total assets of $10  
million or more for its tax year ending December 31, 2023,  
Dogwood must file Schedule M-3 for 2023 and either (i)  
complete Schedule M-3 entirely, or (ii) complete Schedule M-3  
through Part I and complete Schedule M-1 instead of completing  
Parts II and III of Schedule M-3.  
6. Evergreen, a U.S. partnership, files Form 1065 for the tax  
year ending December 31, 2023. Evergreen has total assets at  
the end of the tax year reported on Schedule L, line 14, column  
(d), of $7.5 million. The amount of total liabilities at the end of  
2023 reported to Evergreen's partners on Schedules K-1 is $5  
million. Evergreen made no distributions during 2023 reflected  
on Schedule M-2, line 6. Evergreen didn't report a loss for 2023  
on Schedule M-2, line 3. Evergreen didn't report adjustments to  
capital on Schedule M-2, line 7, but did report a negative  
adjustment of ($3 million) on Schedule M-2, line 4. Evergreen  
has adjusted total assets for 2023 in the tentative amount of  
$10.5 million, the sum of $7.5 million plus $3 million (the amount  
of the negative adjustment stated as a positive amount that must  
be added back to determine adjusted total assets for 2023), an  
amount that isn't less than the total liabilities at the end of 2023  
reported to Evergreen's partners on Schedules K-1. Because  
Evergreen has adjusted total assets of $10 million or more for its  
tax year ending December 31, 2023, Evergreen must file  
Schedule M-3 for 2023 and either (i) complete Schedule M-3  
entirely, or (ii) complete Schedule M-3 through Part I and  
complete Schedule M-1 instead of completing Parts II and III of  
Schedule M-3.  
2. The facts are the same as in Example 1.1 except that Ash  
has total receipts for 2023 of $40 million. Ash must file  
Schedule M-3 for 2023 and either (i) complete Schedule M-3  
entirely, or (ii) complete Schedule M-3 through Part I and  
complete Schedule M-1 instead of completing Parts II and III of  
Schedule M-3.  
3. Cypress, a U.S. partnership, files Form 1065 for the tax  
year ending December 31, 2023. Cypress has total assets at the  
end of the tax year reported on Schedule L, line 14, column (d),  
of $7.5 million. The aggregate amount of total liabilities at the  
end of 2023 reported to Cypress' partners on Schedules K-1 is  
$5 million. Cypress made distributions of $3 million during 2023  
reflected on Schedule M-2, line 6. Cypress didn't report a loss for  
2023 on Schedule M-2, line 3. Cypress didn't report adjustments  
to capital on Schedule M-2, line 4 or 7. Cypress has adjusted  
total assets for 2023 in the tentative amount of $10.5 million, the  
sum of $7.5 million plus $3 million (the amount of distributions  
that must be added back to determine adjusted total assets for  
2023), an amount that isn't less than the total liabilities at the end  
of 2023 reported to Cypress' partners on Schedules K-1.  
7. Fern has $50 million in total assets at the end of its 2023  
tax year ending December 31, 2023, and files Form 1065. Fern  
must file Schedule M-3 and complete it entirely.  
Because Cypress has adjusted total assets of $10 million or  
more for its tax year ending December 31, 2023, Cypress must  
-2-  
Keep for Your Records  
Adjusted Total Assets Worksheet  
1. Enter total assets at the end of the tax year on Schedule L, line 14, column (d) . . . . . . . . . . . . . . . .  
2. Enter capital distributions on Schedule M-2, lines 6a and 6b (shown as a positive amount) . . . . . . . .  
3. Enter any loss reported on Schedule M-2, line 3 (shown as a positive amount) . . . . . . . . . . . . . . . .  
4. Enter the amount of any positive adjustment on Schedule M-2, line 7 . . . . . . . . . . . . . . . . . . . . . .  
5. Enter the amount of any negative adjustment on Schedule M-2, line 4 (shown as a positive  
1.  
2.  
3.  
4.  
amount) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.  
6. Add lines 1 through 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  
6.  
7. Enter combined total liabilities (recourse and non recourse) on all Schedules K-1 (Form 1065), Part II,  
Item K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.  
8. Adjusted Total Assets. Enter the greater of line 6 or line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  
8.  
Note. For line 2 above, if the partnership reflects partner capital account changes resulting from the sale of a partnership interest on Schedule M-2 as matching contributions and  
distributions (on lines 2a and 2b and on lines 6a and 6b, respectively), reduce the amounts shown on lines 6a and 6b by such matching amounts.  
5. State or country in which it is organized.  
6. Date on which it first became a reportable entity partner.  
Reportable Entity Partner Reporting  
Responsibilities  
7. Date with respect to which it is reporting a change in its  
For the purposes of these instructions, a reportable entity partner  
with respect to a partnership filing Form 1065 is an entity that:  
ownership interest in the partnership, if applicable.  
Owns or is deemed to own, directly or indirectly, under these  
8. The interest in the partnership it owns or is deemed to  
own in the partnership, directly or indirectly (as defined under  
these instructions), as of the date with respect to which it is  
reporting.  
instructions, a 50% or greater interest in the income, loss, or  
capital of the partnership on any day of the tax year; and  
Was required to file Schedule M-3 on its most recently filed  
U.S. federal income tax return or return of income filed prior to  
that day.  
9. Any change in that interest as of the date with respect to  
which it is reporting.  
For the purposes of these instructions, the following rules  
apply.  
1. The parent corporation of a consolidated tax group is  
deemed to own all corporate and partnership interests owned or  
deemed to be owned under these instructions by any member of  
the tax consolidated group.  
2. The owner of a disregarded entity is deemed to own all  
corporate and partnership interests owned or deemed to be  
owned under these instructions by the disregarded entity.  
The reportable entity partner must retain copies of required  
reports it makes to partnerships under these instructions. Each  
partnership must retain copies of the required reports it receives  
under these instructions from reportable entity partners.  
For more information, see Item D. Reportable Entity Partner,  
later.  
Example 2.  
1. Ginkgo, a U.S. corporation, is the parent of a financial  
consolidation group with 50 domestic subsidiaries, DS1 through  
DS50, and 50 foreign subsidiaries, FS1 through FS50, all 100%  
owned on September 16, 2023. On September 15, 2023, Ginkgo  
filed a consolidated tax return on Form 1120 and was required to  
file Schedule M-3 for the tax year ending December 31, 2022.  
On September 16, 2023, DS1, DS2, DS3, FS1, and FS2 each  
acquire a 10% partnership interest in partnership Hawthorn,  
which files Form 1065 for the tax year ending December 31,  
2023. Ginkgo is deemed to own, directly or indirectly, under  
these instructions all corporate and partnership interests of DS1,  
DS2, and DS3, as the parent of the tax consolidation group, and  
therefore is deemed to own 30% of Hawthorn on September 16,  
2023. Ginkgo is deemed to own, directly or indirectly, under  
these instructions all corporate and partnership interests of FS1  
and FS2 as the owner of 50% or more of each corporation by  
vote and therefore is deemed to own 20% of Hawthorn on  
September 16, 2023. Ginkgo is therefore deemed to own 50% of  
Hawthorn on September 16, 2023. Ginkgo owns or is deemed to  
own, directly or indirectly, under these instructions 50% or more  
of Hawthorn on September 16, 2023, and was required to file  
Schedule M-3 on its most recently filed U.S. income tax return  
filed before that date. Therefore, Ginkgo is a reportable entity  
partner of Hawthorn as of September 16, 2023. On October 5,  
2023, Ginkgo reports to Hawthorn, as it is required to do, that  
Ginkgo is a reportable entity partner as of September 16, 2023,  
deemed to own, under these instructions, a 50% interest in  
Hawthorn. Hawthorn is therefore required to file Schedule M-3  
when it files its Form 1065 for its tax year ending December 31,  
2023.  
3. The owner of 50% or more of a corporation by vote on any  
day of the corporation tax year is deemed to own all corporate  
and partnership interests owned or deemed to be owned under  
these instructions by the corporation during the corporation tax  
year.  
4. The owner of 50% or more of partnership income, loss, or  
capital on any day of the partnership tax year is deemed to own  
all corporate and partnership interests owned or deemed to be  
owned under these instructions by the partnership during the  
partnership tax year.  
5. The beneficial owner of 50% or more of the beneficial  
interest of a trust or nominee arrangement on any day of the trust  
or nominee arrangement tax year is deemed to own all corporate  
and partnership interests owned or deemed to be owned under  
these instructions by the trust or nominee arrangement.  
A reportable entity partner with respect to a partnership (as  
defined above) must report the following to the partnership within  
30 days of first becoming a reportable entity partner and, after  
first reporting to the partnership under these instructions,  
thereafter within 30 days of the date of any change in the interest  
it owns or is deemed to own, directly or indirectly, under these  
instructions, in the partnership.  
1. Name.  
2. Mailing address.  
3. Employer identification number (EIN), if applicable.  
4. Entity or organization type.  
-3-  
   
2. Throughout 2019, A, an LLC filing Form 1065 for calendar  
year 2019, owns, as its only asset, 50% of each of B, C, D, and  
E, each also an LLC filing Form 1065 for calendar year 2019. A  
is owned by individuals and S corporations not required to file  
Schedule M-3 for 2018, 2019, or 2020. B, C, D, and E are owned  
by A and by individuals and S corporations not required to file  
Schedule M-3 for 2018, 2019, or 2020. For the partnership tax  
years ending December 31, 2019, each of B, C, D, and E has no  
year-end liabilities, $3 million in total assets and $6 million in  
adjusted total assets (the difference equal to the distributions by  
each in 2019), and 2019 total receipts of $20 million. As of  
December 31, 2019, no owner, direct or indirect, of B, C, D, or E  
was required to file Schedule M-3 on its most recently filed U.S.  
income tax return or return of income. None of B, C, D, or E is  
required to file Schedule M-3 for 2019. For the partnership tax  
year ending December 31, 2019, A has no year-end liabilities, $6  
million in total assets and $12 million in adjusted total assets (the  
difference equal to the distributions in 2019), and 2019 total  
receipts of $6 million. As of December 31, 2019, no owner, direct  
or indirect, of A was required to file Schedule M-3 on its most  
recently filed U.S. income tax return. A must file Schedule M-3  
when it files its Form 1065 for 2019 because A has adjusted total  
assets of $10 million or more.  
3. The ownership facts are the same as in Example 2.2  
continued to calendar year 2020. On March 3, 2020, A files its  
Form 1065 with Schedule M-3 for the partnership tax year  
ending December 31, 2019. As of March 4, 2020, A becomes a  
reportable entity partner with respect to any partnership in which  
it owns or is deemed to own, directly or indirectly, under these  
instructions a 50% or greater interest in the income, loss, or  
capital of the partnership. A owns 50% of each of B, C, D, and E  
and is therefore a reportable entity partner with respect to each  
as of March 4, 2020, the day after it filed its 2019 Form 1065 with  
a required Schedule M-3. On March 20, 2020, A reports to B, C,  
D, and E, as it is required to do within 30 days of March 4, that it  
is a reportable entity partner owning a 50% interest. Each of B,  
C, D, and E is required to file Schedule M-3 for 2020 because  
each has a reportable entity partner. A will determine if it must  
file Schedule M-3 for 2020 based on its separate facts for 2020.  
Schedule M-3 and the related non-tax-basis balance sheet  
amounts that must be used for Schedule L.  
Total assets at the end of the tax year shown on Schedule L,  
line 14, column (d), must equal the total assets of the partnership  
as of the last day of the tax year, and must be the same total  
assets reported by the partnership in the non-tax-basis financial  
statements, if any, used for Schedule M-3. If the partnership  
prepares non-tax-basis financial statements, Schedule L must  
report the non-tax-basis financial statement total assets. If the  
partnership doesn't prepare non-tax-basis financial statements,  
Schedule L must be based on the partnership's books and  
records. The Schedule L balance sheet can show tax-basis  
balance sheet amounts if the partnership is allowed to use books  
and records for Schedule M-3 and the partnership's books and  
records reflect only tax-basis amounts.  
Generally, total assets at the beginning of the year  
(Schedule L, line 14, column (b)) must equal total assets at the  
close of the prior year (Schedule L, line 14, column (d)). For  
each Schedule L balance sheet item reported for which there is  
a difference between the current opening balance sheet amount  
and the prior closing balance sheet amount, attach a statement  
that reports the balance sheet item, the prior closing amount, the  
current opening amount, and a short explanation of the change.  
Such reasons for these differences include technical  
terminations and mergers.  
For purposes of measuring total assets at the end of the year,  
the partnership's assets may not be netted or reduced by  
partnership liabilities. In addition, total assets may not be  
reported as a negative amount. If Schedule L is prepared on a  
non-tax-basis method, an investment in another partnership may  
be shown as appropriate under the partnership's non-tax-basis  
method of accounting, including, if required by the partnership's  
reporting methodology, the equity method of accounting for  
investments. If Schedule L is prepared on a tax-basis method, an  
investment by the partnership in another partnership must be  
shown as an asset and measured by the partnership's adjusted  
basis in its partnership interest. Any liabilities contributing to  
such adjusted basis must be shown on Schedule L as  
partnership liabilities.  
Example 3. Aspen, an LLC, files Form 1065 for calendar  
year 2023. Bamboo, a general partnership, also files Form 1065  
for calendar year 2023. Aspen is a general partner in Bamboo.  
Aspen's capital account in Bamboo at the close of 2023 is  
negative $4 million. This reflects Aspen's 2023 contribution to  
Bamboo's capital of $2 million reduced by Aspen's share of 2023  
losses passing through to it from Bamboo, $6 million. Aspen's  
adjusted basis in Bamboo on December 31, 2023, is $16 million,  
its $4 million negative tax capital account in Bamboo plus its $20  
million share of Bamboo's liabilities under section 752. Aspen  
prepares only tax-basis income statements and balance sheets.  
On its Schedule L, Aspen reports as an asset the adjusted basis  
of its investment in Bamboo, $16 million. Aspen also reports its  
$20 million share of Bamboo's liabilities in the liabilities section  
of Schedule L. Aspen doesn't report its $4 million negative  
capital account in Bamboo on Schedule L.  
4. The ownership facts are the same as in Example 2.2 for  
calendar year 2019, except that A is owned 50% by corporation  
Z that was first required to file Schedule M-3 for its corporate tax  
year ending December 31, 2018, and that filed its Form 1120  
with Schedule M-3 for 2018 on September 15, 2019. As of  
September 16, 2019, Z was a reportable entity partner with  
respect to A and, through A, with respect to B, C, D, and E. On  
October 5, 2019, Z reports to A, B, C, D, and E, as it is required  
to do within 30 days of September 16, that Z is a reportable  
entity partner directly owning (with respect to A) or deemed to  
own indirectly (with respect to B, C, D, and E) a 50% interest.  
Therefore, because Z was a reportable entity partner for 2019,  
each of A, B, C, D, and E is required to file Schedule M-3 for  
2019, regardless of whether it would otherwise be required to file  
Schedule M-3 for that year.  
Other Form 1065 Schedules Affected by  
Schedule M-3 Requirements  
Schedule L  
Example 4. The facts are the same as in Example 3, except  
that Bamboo is an LLC and Aspen is a member of Bamboo.  
None of Bamboo's liabilities are recourse with respect to Aspen.  
Aspen isn't obligated to restore any deficit capital account in  
Bamboo. Aspen prepares non-tax-basis income statements and  
balance sheets under an accounting method that requires the  
use of the equity method of accounting to account for its  
If a non-tax-basis income statement and related non-tax-basis  
balance sheet are prepared for any purpose for a period ending  
with or within the tax year, Schedule L must be prepared  
showing non-tax-basis amounts. See the discussion in Part I.  
regarding non-tax-basis income statements and related  
non-tax-basis balance sheets prepared for any purpose and the  
impact on the selection of the income statement used for  
investment in Bamboo. On its non-tax-basis books and records,  
Aspen initially reports $2 million as its investment in Bamboo, the  
amount of Aspen's capital contribution. Aspen then reduces its  
$2 million investment in Bamboo by its share of Bamboo's  
-4-  
allocable losses. Because Aspen's allocable share of Bamboo's  
losses is $6 million, Aspen's investment in Bamboo under the  
equity method is reduced to $0. Because Aspen isn't liable to  
repay any of Bamboo's liabilities and isn't obligated to restore  
any deficit with respect to its capital account in Bamboo, Aspen  
doesn't report any of Bamboo's liabilities on Aspen's Schedule L  
balance sheet.  
Non-Tax-Basis Financial Statements and Tax-Basis  
Financial Statements  
A tax-basis income statement is allowed for Schedule M-3 and a  
tax-basis balance sheet for Schedule L only if neither a  
non-tax-basis income statement nor a non-tax-basis balance  
sheet were prepared for any purpose and the books and records  
of the partnership reflect only tax-basis amounts. The  
partnership is deemed to have non-tax-basis income statements  
and the related non-tax-basis balance sheets for the current tax  
year for purposes of Schedule M-3 and Schedule L if such  
non-tax-basis financial statements were prepared for and  
presented to management, creditors, members or partners,  
government regulators, or any other third parties for a period  
ending with or within the tax year.  
Entity Considerations for Schedule M-3  
For purposes of Schedule M-3, references to the classification of  
an entity (for example, as a corporation, a partnership, or a trust)  
are references to the treatment of the entity for U.S. income tax  
purposes. An entity that is generally disregarded as separate  
from its owner for U.S. income tax purposes (disregarded entity)  
must not be separately reported on Schedule M-3 except, if  
required, on Part I, line 7a or 7b. On Schedule M-3, Parts II and  
III, any item of income, gain, loss, deduction, or credit of a  
disregarded entity must be reported as an item of its owner. In  
particular, the income or loss of a disregarded entity must not be  
reported on Part II, line 7, 8, or 9, as from a separate partnership  
or other pass-through entity. The financial statement income or  
loss of a disregarded entity is included on Part I, line 7a or 7b,  
only if its financial statement income or loss is included on Part I,  
line 11, but not on Part I, line 4a.  
If a Form 10-K is filed with the Securities and Exchange  
Commission (SEC) for the period ending with or within the tax  
year, the partnership must check “Yes” for line 1a and use that  
income statement for Schedule M-3. If Form 10-K isn't filed and  
a non-tax-basis income statement is prepared that is a certified  
non-tax-basis income statement for the period ending with or  
within the tax year, the partnership must check “Yes” for line 1b  
and use that income statement for Schedule M-3. If Form 10-K  
isn't filed and no certified non-tax-basis income statement is  
prepared but an unaudited non-tax-basis income statement is  
prepared for the period ending with or within the tax year, the  
partnership must check “Yes” for line 1c and use that income  
statement for Schedule M-3.  
Specific Instructions  
Item D. Reportable Entity Partner  
Order of priority in accounting standards. If no Form 10-K  
is filed and two or more non-tax-basis income statements are  
both certified non-tax-basis income statements for the period,  
the income statement prepared according to the following order  
of priority in accounting standards must be used.  
On Schedule M-3, page 1, if the partnership has any reportable  
entity partners for the year, check item D. A partnership must  
report the name, EIN (if applicable), and maximum percentage  
of actual or deemed ownership of each reportable entity partner  
if there are one or two reportable entity partners for the tax year  
of the partnership, or, if there are more than two reportable entity  
partners for the tax year of the partnership, of the two reportable  
entity partners with the largest maximum percentage of actual or  
deemed ownership for the tax year of the partnership. The  
maximum percentage of actual or deemed ownership for a  
reportable entity partner for a tax year of the partnership is the  
maximum percentage interest owned or deemed owned under  
these instructions by the reportable entity partner in the  
partnership's capital, profit, or loss on any day during the tax  
year of the partnership.  
1. U.S. Generally Accepted Accounting Principles (GAAP).  
2. International Financial Reporting Standards (IFRS).  
3. Any other International Accounting Standards (IAS).  
4. Any regulatory accrual accounting.  
5. Any other accrual accounting standard.  
6. Section 704(b) book accounting.  
7. Any other fair market value reporting standard.  
8. Any cash basis standard.  
The reportable entity partner must retain copies of required  
reports it makes to partnerships under these instructions. Each  
partnership must retain copies of the required reports it received  
under these instructions from reportable entity partners. See  
If no non-tax-basis income statement is certified and two or  
more non-tax-basis income statements are prepared, the  
income statement prepared according to the first listed of the  
accounting standards above must be used.  
If no non-tax-basis financial statements are prepared for the  
U.S. partnership filing Schedule M-3, the U.S. partnership must  
check “No” on questions 1a, 1b, and 1c, skip lines 2 through 3b,  
and enter the net income (loss) per the books and records of the  
U.S. partnership on line 4a.  
Part I. Financial Information and Net  
Income (Loss) Reconciliation  
Line 1. Questions Regarding the Type of Income  
Statement Prepared  
Consolidated Financial Statements  
For lines 1 through 11, use only the financial statements of the  
U.S. partnership filing Form 1065. If the U.S. partnership filing  
Form 1065 is controlled by another entity, the U.S. partnership  
must use for its Schedule M-3, Part I, its own financial  
statements and not the financial statements of the controlling  
entity.  
If a partnership filing a Schedule M-3  
(a) is included in the non-tax-basis consolidated financial  
statements of a group (consolidated financial statement group)  
with an entity parent filing a U.S tax return and Schedule M-3,  
(b) has its income (loss) included and removed by the entity  
parent on that entity parent's Schedule M-3, Part I, and (c)  
doesn't have a separate non-tax-basis financial statement  
(certified or otherwise) of its own, the partnership must answer  
questions 1a, 1b, and 1c, as appropriate, for its own tax return  
and must report on its own Schedule M-3, as appropriate, the  
amount for the partnership's net income (loss) that is equal to the  
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amount included and removed in the entity parent's  
Schedule M-3, Part I. However, if in the circumstances described  
immediately above, the partnership does have separate  
non-tax-basis financial statements (certified or otherwise) of its  
own, independent of the amount of the partnership's net income  
included in the consolidated financial statements with the entity  
parent, the partnership must answer questions 1a, 1b, and 1c, as  
appropriate, for its own tax return, based on its own separate  
non-tax-basis income statement, and must report on line 4a the  
net income (loss) amounts shown on its separate income  
statement.  
must be reported on line 11. Report on line 12a the worldwide  
consolidated total assets and total liabilities amounts for the  
partnership using the same financial statements (or books and  
records) used for the worldwide consolidated income (loss)  
amount reported on line 4a.  
Line 5. Net Income (Loss) of Nonincludible  
Foreign Entities  
Remove the financial statement net income (line 5a) or loss  
(line 5b) of each foreign entity that is included on line 4a and isn't  
the partnership (nonincludible foreign entity). In addition, on  
line 8, adjust for consolidation eliminations and correct for  
minority interest and intercompany dividends between any  
nonincludible foreign entity and the partnership filing Form 1065.  
Don't remove in Part I the financial statement net income (loss)  
of any nonincludible foreign entity accounted for on line 4a using  
the equity method.  
Lines 2 and 3. Questions Regarding Income  
Statement Period and Restatements  
Enter the beginning and ending dates on line 2 for the  
partnership's annual income statement period ending with or  
within the current tax year.  
The questions on lines 3a and 3b, regarding income  
statement restatements, refer to the worldwide consolidated  
income statement issued by the partnership filing Form 1065  
and used to prepare Schedule M-3. Answer “Yes” on lines 3a  
and/or 3b if the partnership's annual income statement has been  
restated for any reason. Attach a short statement of the reasons  
for the restatement in net income for each annual income  
statement period that is restated, including the original amount  
and restated amount of each annual statement period's net  
income. The attached statement isn't required to report  
restatements on an entity-by-entity basis.  
Attach a supporting statement that provides the name, EIN (if  
applicable), and net income (loss) included on line 4a that is  
removed on this line 5 for each separate nonincludible foreign  
entity. Also state the total assets and total liabilities for each such  
separate nonincludible foreign entity and include those assets  
and liabilities amounts in the total assets and total liabilities  
reported on Part I, line 12b. The amounts of income (loss)  
detailed on the supporting statement should be reported for  
each separate nonincludible foreign entity without regard to the  
effect of consolidation or elimination entries. If there are  
consolidation or elimination entries relating to nonincludible  
foreign entities whose income (loss) is reported on the attached  
statement that aren't reportable on line 8, the net amounts of all  
such consolidation and elimination entries must be reported on a  
separate line on the attached statement, so that the separate  
financial accounting income (loss) of each nonincludible foreign  
entity remains separately stated.  
Line 4. Worldwide Consolidated Net Income  
(Loss) per Income Statement  
Report on line 4a the worldwide consolidated net income (loss)  
per the income statement (or books and records, if applicable) of  
the partnership.  
For example, if the net income (after consolidation and  
elimination entries) of a nonincludible foreign sub-consolidated  
group is being reported on line 5a, the attached supporting  
statement should report the income (loss) of each separate  
nonincludible foreign legal entity from each such entity's own  
financial accounting net income statement or books and records,  
and any consolidation or elimination entries (for intercompany  
dividends, minority interests, etc.) not reportable on line 8 should  
be reported on the attached supporting statement as a net  
amount on a line separate and apart from lines that report each  
nonincludible foreign entity's separate net income (loss).  
In completing Schedule M-3, the partnership must use  
financial statement amounts from the financial statement type  
checked “Yes” on line 1, or from its books and records if line 1c is  
checked “No.If line 1a is checked “Yes,” report on line 4a the net  
income amount reported in the income statement presented to  
the SEC on the partnership's Form 10-K.  
If a partnership prepares non-tax-basis financial statements,  
the amount on line 4a must equal the financial statement net  
income (loss) for the income statement period ending with or  
within the tax year as indicated on line 2.  
If the partnership prepares non-tax-basis financial statements  
and the income statement period differs from the partnership's  
tax year, the income statement period indicated on line 2 applies  
for purposes of lines 4a through 8.  
Line 6. Net Income (Loss) of Nonincludible U.S.  
Entities  
Remove the financial statement net income (line 6a) or loss  
(line 6b) of each U.S. entity that is included on line 4a and isn't  
an includible entity in the partnership return (nonincludible U.S.  
entity). In addition, on line 8, adjust for consolidation eliminations  
and correct for minority interest and intercompany dividends  
between any nonincludible U.S. entity and any includible entity.  
Don't remove in Part I the financial statement net income (loss)  
of any nonincludible U.S. entity accounted for on line 4a using  
the equity method.  
If the partnership doesn't prepare non-tax-basis financial  
statements and has checked “No” on line 1c, enter the net  
income (loss) per the books and records of the partnership on  
line 4a.  
Check the appropriate box on line 4b to indicate which of the  
following accounting standards was used for line 4a.  
1. U.S. Generally Accepted Accounting Principles (GAAP).  
2. International Financial Reporting Standards (IFRS).  
3. Section 704(b).  
4. Tax-basis.  
5. Other (specify).  
Attach a supporting statement that provides the name, EIN (if  
applicable), and net income (loss) included on line 4a that is  
removed on line 6a or 6b for each separate nonincludible U.S.  
entity. Also state the total assets and total liabilities for each such  
separate nonincludible U.S. entity and include those assets and  
liabilities amounts in the total assets and total liabilities reported  
on Part I, line 12c. The amounts of income (loss) detailed on the  
supporting statement should be reported for each separate  
nonincludible U.S. entity without regard to the effect of  
Report on lines 5a through 10, as instructed below, all  
adjustment amounts required to adjust worldwide net income  
(loss) reported on line 4a (whether from financial statements or  
books and records) to net income (loss) of the partnership that  
consolidation or elimination entries. If there are consolidation or  
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elimination entries relating to nonincludible U.S. entities whose  
income (loss) is reported on the attached statement that aren't  
reportable on line 8, the net amounts of all such consolidation  
and elimination entries must be reported on a separate line on  
the attached statement, so that the separate financial accounting  
income (loss) of each nonincludible U.S. entity remains  
separately stated.  
Line 8. Adjustment to Eliminations of  
Transactions Between Includible Entities and  
Nonincludible Entities  
Adjustments on line 8 to reverse certain financial accounting  
consolidation or elimination entries are necessary to ensure that  
transactions between includible entities and nonincludible U.S.  
or foreign entities aren't eliminated, in order to report the correct  
total amount on line 11. Also, additional consolidation entries  
and elimination entries may be necessary on line 8 related to  
transactions between includible entities that are in the  
consolidated financial statement group and other includible  
entities that aren't in the consolidated financial statement group  
but that are reported on line 7a or 7b in order to report the  
correct total amount on line 11.  
For example, if the net income (after consolidation and  
elimination entries) of a nonincludible U.S. sub-consolidated  
group is being reported on line 6a, the attached supporting  
statement should report the income (loss) of each separate  
nonincludible U.S. legal entity from each such entity's own  
financial accounting net income statement or books and records,  
and any consolidation or elimination entries (for intercompany  
dividends, minority interests, etc.) not reportable on line 8 should  
be reported on the attached supporting statement as a net  
amount on a line separate and apart from lines that report each  
nonincludible U.S. entity's separate net income (loss).  
Include on line 8 the total of the following: (a) amounts of any  
adjustments to consolidation entries and elimination entries that  
are contained in the amount reported on line 4a, required as a  
result of removing amounts on line 5 or 6; and (b) amounts of  
any additional consolidation entries and elimination entries that  
are required as a result of including amounts on line 7a or 7b.  
This is necessary in order that the consolidation entries and  
intercompany elimination entries included in the amount  
reported on line 11 are only those applicable to the financial net  
income (loss) of includible entities for the financial statement  
period. For example, adjustments must be reported on line 8 to  
remove minority interest and to reverse the elimination of  
intercompany dividends included on line 4a that relate to the net  
income of entities removed on line 5 or 6 because the income to  
which the consolidation or elimination entries relate has been  
removed. Also, for example, consolidation or elimination entries  
must be reported on line 8 to eliminate any intercompany  
dividends between entities whose income is included on line 7a  
or 7b and other entities included in the U.S. income tax return.  
If an entity owner of an interest in another entity (a) accounts  
for the interest in the other entity in the owner's separate general  
ledger on the equity method; and (b) fully consolidates the other  
entity in the owner's consolidated financial statements, but that  
entity isn't includible in the owner's Form 1065, then, as part of  
reversing all consolidation and elimination entries for the  
nonincludible entity, the owner must reverse on line 8 the  
elimination of the equity income inclusion from the other entity. If  
the owner doesn't account for the other entity on the equity  
method on its own general ledger, it won't have eliminated the  
equity income for consolidated financial statement purposes,  
and therefore will have no elimination of equity income to  
reverse.  
Lines 7a and 7b. Net Income (Loss) of Other  
Foreign Disregarded Entities and Net Income  
(Loss) of Other U.S. Disregarded Entities  
Include on line 7a or 7b the financial net income or (loss) of each  
disregarded entity in the U.S. tax return that isn't included in the  
consolidated financial group, and therefore not included in the  
income reported on line 4a, but that is included on line 11.  
Include on line 7a the financial income or (loss) of any foreign  
disregarded entity that isn't included in the income reported on  
line 4a but that is included on line 11 (other foreign disregarded  
entities). Include on line 7b the financial income or (loss) of any  
U.S. disregarded entity that isn't included in the income reported  
on line 4a but that is included on line 11 (other U.S. disregarded  
entities). In addition, on line 8, adjust for consolidation  
eliminations and correct for minority interest and intercompany  
dividends for any other disregarded entity.  
Attach a supporting statement that provides the name, EIN,  
and net income (loss) per the financial statement or books and  
records included on line 7a or 7b for each separate foreign or  
U.S. disregarded entity. Also state the total assets and total  
liabilities for each such separate included entity and include  
those assets and liabilities amounts in the total assets and total  
liabilities reported on Part I, line 12d. The amounts of income  
(loss) detailed on the supporting statement should be reported  
for each separate other disregarded entity without regard to the  
effect of consolidation or elimination entries solely between or  
among the entities listed. If there are consolidation or elimination  
entries relating to such separate other disregarded entities  
whose income (loss) is reported on the attached statement that  
aren't reportable on line 8, the net amounts of all such  
The attached supporting statement for line 8 must identify the  
type (for example, minority interest, intercompany dividends,  
etc.) and amount of consolidation or elimination entries reported,  
as well as the names of the entities to which they pertain. It isn't  
necessary, but it is permitted, to report on line 8 intercompany  
eliminations that net to zero, such as intercompany interest  
income and expense.  
consolidation and elimination entries must be reported on a  
separate line on the attached statement, so that the separate  
financial accounting income (loss) of each separate other  
disregarded entity remains separately stated.  
For example, if the net income (after consolidation and  
elimination entries) of a sub-consolidated group of other foreign  
disregarded entities is being reported on line 7a, the attached  
supporting statement should report the income (loss) of each  
separate other foreign disregarded entity from each disregarded  
entity's own financial accounting net income statement or books  
and records, and any consolidation or elimination entries (for  
intercompany dividends, minority interests, etc.) not reportable  
on line 8 should be reported on the attached supporting  
statement as a net amount on a line separate and apart from  
lines that report each other foreign disregarded entity's separate  
net income (loss).  
Line 9. Adjustment to Reconcile Income  
Statement Period to Tax Year  
Include on line 9 any adjustments necessary to the income (loss)  
of the partnership to reconcile differences between the  
partnership's income statement period reported on line 2 and the  
partnership's tax year. Attach a statement describing the  
adjustment.  
Line 10. Other Adjustments to Reconcile to  
Amount on Line 11  
Include on line 10 any other adjustments to reconcile net income  
(loss) on line 4a through line 9, with net income (loss) of the  
partnership reported on line 11.  
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For any adjustment reported on line 10, attach a supporting  
statement with an explanation of each net adjustment included  
on line 10.  
includes no income for Nutmeg either on line 11 or on Part II,  
line 7, column (a). Cedar's taxable income from Nutmeg must be  
reported by Cedar on Part II, line 7, column (d).  
3. U.S. partnership Palm owns 60% of corporation DS1,  
which is fully consolidated in Palm's financial statements. Palm  
accounts for DS1 in Palm's separate general ledger on the equity  
method. DS1 has net income of $100 (before minority interests)  
and pays dividends of $50, of which Palm receives $30. The  
dividend reduces Palm's investment in DS1 for equity method  
reporting on Palm's separate general ledger where Palm  
includes its 60% equity share of DS1 income, which is $60. In its  
financial statements, Palm eliminates the DS1 equity method  
income of $60 and consolidates DS1, including $60 of net  
income ($100 less the minority interest of $40) on line 4a.  
Palm must remove the $100 net income of DS1 on line 6a.  
Palm must reverse on line 8 the elimination of the $40 minority  
interest net income of DS1 and the elimination of the $60 of DS1  
equity income. The net result is that Palm includes the $60 of  
equity method income from DS1 on line 11 and on Part II, line 5,  
column (a). Palm's dividend income on the tax return from its  
investment in DS1 must be reported on Part II, line 6, column (d).  
4. U.S. partnership Cedar owns 60% of the capital and  
profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg  
in Cedar's separate general ledger on the equity method.  
Nutmeg has net income of $100 (before minority interests) and  
makes no distributions during the tax year. Cedar treats Nutmeg  
as a corporation for financial statement purposes and as a  
partnership for U.S. income tax purposes. For equity method  
reporting on Cedar's separate general ledger, Cedar includes its  
60% equity share of Nutmeg income, which is $60. In its financial  
statements, Cedar eliminates the $60 of Nutmeg equity method  
income and consolidates Nutmeg, including $60 of net income  
($100 less the minority interest of $40) on line 4a.  
Cedar must remove the $100 net income of Nutmeg on  
line 6a. Cedar must reverse on line 8 the elimination of the $40  
minority interest net income of Nutmeg and the elimination of the  
$60 of Nutmeg equity method income. The result is that Cedar  
includes the $60 of equity method income for Nutmeg on line 11  
and on Part II, line 7, column (a). Cedars's taxable income from  
Nutmeg must be reported by Cedar on Part II, line 7, column (d).  
5. U.S. partnership Cedar owns 60% of the capital and  
profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg  
in Cedar's separate general ledger on the equity method.  
Nutmeg has net income of $100 (before minority interests) and  
pays a $50 cash distribution, of which Cedar receives $30. The  
distribution reduces Cedar's investment in Nutmeg for equity  
method reporting on Cedar's separate general ledger. Cedar  
treats Nutmeg as a corporation for financial statement purposes  
and as a partnership for U.S. income tax purposes. For equity  
method reporting on Cedar's separate general ledger, Cedar  
includes its 60% equity share of Nutmeg income, which is $60.  
In its financial statements, Cedar eliminates the $60 of Nutmeg  
equity method income, consolidates Nutmeg, and includes $60  
of net income ($100 less the minority interest of $40) on line 4a.  
Cedar must remove the $100 net income of Nutmeg on  
line 6a. Cedar must reverse on line 8 the elimination of the $40  
minority interest net income of Nutmeg and the elimination of the  
$60 of Nutmeg equity method income. The result is that Cedar  
includes the $60 of equity method income for Nutmeg on line 11  
and on Part II, line 7, column (a). Cedar's taxable income from  
Nutmeg must be reported by Cedar on Part II, line 7, column (d).  
Line 11. Net Income (Loss) per Income  
Statement of the Partnership  
Report on line 11 the net income (loss) per the income statement  
(or books and records, if applicable) of the partnership. Amounts  
reported in column (a) of Parts II and III must be reported on the  
same accounting method as is used to report the amount of net  
income (loss) per income statement of the partnership on  
line 11.  
Don't, in any event, report on line 11 the net income of entities  
other than the partnership filing Form 1065 for the tax year. For  
example, it isn't permissible to remove the income of  
nonincludible entities on lines 5 and/or 6, above, then to add  
back such income on lines 7 through 10, such that the amount  
reported on line 11 includes the net income of entities not  
includible in the U.S. income tax return. A principal purpose of  
Schedule M-3 is to report on line 11 only the financial accounting  
net income of only the partnership (including any other includible  
entities) filing Form 1065.  
Whether or not the partnership prepares financial statements,  
line 11 must include all items that impact the net income (loss) of  
the partnership even if they aren't recorded in the profit and loss  
accounts in the partnership's general ledger, including, for  
example, all post-closing adjusting entries (including work paper  
adjustments) and dividend income or other income received  
from nonincludible entities. If the partnership prepares  
unconsolidated financial statements using the same accounting  
method used to determine worldwide consolidated net income  
(loss) for Part I, line 4, and if it uses the equity method for  
investments, the amount reported on Part I, line 11, will equal the  
amount of the unconsolidated net income (loss) reported on the  
unconsolidated financial statements. See Examples 5.3, 5.4,  
and 5.5 below.  
Example 5.  
1. U.S. partnership Palm owns 60% of corporation DS1  
which is fully consolidated in Palm's financial statements. Palm  
doesn't account for DS1 in Palm's separate general ledger on  
the equity method. DS1 has net income of $100 (before minority  
interests) and pays dividends of $50, of which Palm receives  
$30. The dividend is eliminated in the consolidated financial  
statements. In its financial statements, Palm consolidates DS1  
and includes $60 of net income ($100 less the minority interest  
of $40) on line 4a.  
Palm must remove the $100 net income of DS1 on line 6a.  
Palm must reverse on line 8 the elimination of the $40 minority  
interest net income of DS1. In addition, Palm reverses its  
elimination of the $30 intercompany dividend in its financial  
statements on line 8. The net result is that Palm includes the $30  
dividend from DS1 on line 11 and on Part II, line 6, column (a).  
Palm's dividend income included on the tax return from DS1  
must be reported on Part II, line 6, column (d).  
2. U.S. partnership Cedar owns 60% of the capital and  
profits interests in U.S. LLC Nutmeg. Cedar doesn't account for  
Nutmeg in Cedar's separate general ledger on the equity  
method. Nutmeg has net income of $100 (before minority  
interests) and makes no distributions during the tax year. Cedar  
treats Nutmeg as a corporation for financial statement purposes  
and as a partnership for U.S. income tax purposes. In its  
financial statements, Cedar consolidates Nutmeg and includes  
$60 of net income ($100 less the minority interest of $40) on  
line 4a.  
6. U.S. partnership Palm owns 100% of the stock of U.S.  
LLC Redwood, a disregarded entity. Redwood is included in  
Palm's federal income tax return, even though Redwood isn't  
included in Palm's consolidated financial statements on either a  
consolidated basis or on the equity method. Redwood has 2023  
net income of $100 after taking into account its $40 interest  
payment to Palm. Palm has net income of $1,040 after  
Cedar must remove the $100 net income of Nutmeg on  
line 6a. Cedar must reverse on line 8 the elimination of the $40  
minority interest net income of Nutmeg. The result is that Cedar  
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recognition of the interest income from Redwood. Because  
Redwood is a disregarded entity, 100% of the net income of both  
Palm and Redwood must be reported on Palm's Form 1065 and  
the intercompany interest income and expense must be removed  
by consolidation elimination entries.  
column (c). Generally, under GAAP, a temporary difference  
affects (creates, increases, or decreases) a deferred tax asset or  
liability.  
If the partnership doesn't prepare financial statements, or the  
financial statements aren't prepared under GAAP, report in  
column (b) any difference that the partnership believes will  
reverse in a future tax year (that is, have an opposite effect on  
taxable income in a future tax year (or years) due to the  
difference in timing of recognition for financial accounting and  
U.S. income tax purposes) or is the reversal of such a difference  
that arose in a prior tax year. Report in column (c) any difference  
that the partnership believes won't reverse in a future tax year  
(and isn't the reversal of such a difference that arose in a prior  
tax year).  
Palm must report its financial statement net income of $1,040  
on line 4a and reports Redwood's net income of $100 on line 7b  
as a U.S. disregarded entity not included on line 4a, but included  
on line 11. Then, in order to reflect the full consolidation of the  
financial accounting net income of Palm and Redwood on  
line 11, the following consolidation and elimination entry is  
reported on line 8: offsetting entries to remove the $40 of interest  
income received from Redwood included by Palm on line 4a,  
and to remove the $40 of interest expense of Redwood included  
in line 7b for a net change of zero. The result is that line 11  
reports $1,140: $1,040 from line 4a, and $100 from line 7. Stated  
another way, line 11 includes the entire $1,000 net income of  
Palm, measured before recognition of the intercompany interest  
income from Redwood and the consolidation of Redwood  
operations, plus the entire $140 net income of Redwood,  
measured before interest expense to Palm. Palm isn't required to  
include on the attached supporting statement for line 8 the  
offsetting adjustment to the intercompany elimination of interest  
income and interest expense (though it is permitted to do so).  
If the partnership is unable to determine whether a difference  
between column (a) and column (d) for an item will reverse in a  
future tax year or is the reversal of a difference that arose in a  
prior tax year, report the difference for that item in column (c).  
Example 6. At the end of Partnership Sycamore’s first tax  
year, December 31, 2023, it wasn't required to file Schedule M-3  
for any reason.  
Sycamore may elect to file Schedule M-3 instead of  
completing Schedule M-1.  
If Sycamore elects to file Schedule M-3, it must either (i)  
complete Schedule M-3 entirely, or (ii) complete Schedule M-3  
through Part I and complete Schedule M-1 instead of completing  
Parts II and III of Schedule M-3.  
Line 12. Total Assets and Liabilities of Entities  
Included or Removed on Part I, Lines 4, 5, 6, and  
7
Line 12 must be completed by all partnerships that file  
If Sycamore elects to complete Schedule M-3 entirely, it must  
Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total  
amounts (not just the partnership's share) of assets and liabilities  
of entities included or removed on Part I, lines 4, 5, 6, and 7. All  
assets and liabilities reported on Part I, lines 12a through 12d,  
must be reported as positive amounts. On line 12a, enter the  
worldwide consolidated total assets and total liabilities of all of  
the entities included in completing Part I, line 4. On line 12b,  
enter the total assets and total liabilities of the entities removed  
in completing Part I, line 5. On line 12c, enter the total assets and  
total liabilities of the entities removed in completing Part I, line 6.  
On line 12d, enter the total assets and total liabilities of the  
entities included in completing Part I, line 7.  
complete all columns of Parts II and III.  
If Sycamore completes Schedule M-3 through Part I and  
completes Schedule M-1 instead of completing Parts II and III of  
Schedule M-3, line 11 of Part I of Schedule M-3 must equal line 1  
of Schedule M-1.  
Reporting Requirements for Parts II and III  
General Reporting Requirements  
If an amount is attributable to a reportable transaction described  
in Regulations section 1.6011-4(b), the amount must be reported  
in columns (a), (b), (c), and (d), as applicable, of Part II, line 10,  
items relating to reportable transactions, regardless of whether  
the amount would otherwise be reported on Schedule M-3, Part  
II or Part III. Thus, if a taxpayer files Form 8886, Reportable  
Transaction Disclosure Statement, the amounts attributable to  
that reportable transaction must be reported on Part II, line 10.  
Parts II and III  
General Reporting Information  
A schedule or statement may be attached to any line even if  
none is required.  
A partnership is required to report in column (a) of Parts II and  
III the amount of any item specifically listed on Schedule M-3 that  
is in any manner included in the partnership's current year  
financial statement net income (loss) or in an income or expense  
account maintained in the partnership's books and records, even  
if there is no difference between that amount and the amount  
included in net income (loss) for tax purposes unless (a)  
otherwise instructed in these instructions, or (b) the amount is  
attributable to a reportable transaction described in Regulations  
section 1.6011-4(b) and is therefore reported on Part II, line 10.  
For example, with the exception of interest income reflected on a  
Schedule K-1 received by the partnership as a result of the  
partnership's investment in a partnership or other pass-through  
entity, all interest income included on Part I, line 11, whether from  
unconsolidated affiliated entities, third parties, banks, or other  
entities, whether from foreign or domestic sources, whether  
taxable or exempt from tax, and whether classified as some  
other type of income for U.S. income tax purposes (such as  
dividends), must be included on Part II, line 11, column (a).  
Likewise, all fines and penalties included on Part I, line 11, paid  
to a government or other authority for the violation of any law for  
For each line item in Parts II and III, report in column (a) the  
amount of net income (loss) included on Part I, line 11, and  
report in column (d) the amount included on line 1 of the  
Analysis of Net Income (Loss) found on Form 1065.  
Note. Part II, line 26, column (a), must equal Part I, line 11,  
and column (d) must equal line 1 of the Analysis of Net Income  
(Loss) found on Form 1065. Thus, column (d) on Part II and Part  
III must include certain of the separately stated items on  
Schedule K.  
For any item of income, gain, loss, expense, or deduction for  
which there is a difference between columns (a) and (d), the  
portion of the difference that is temporary must be entered in  
column (b) and the portion of the difference that is permanent  
must be entered in column (c).  
If financial statements are prepared by the partnership in  
accordance with generally accepted accounting principles  
(GAAP), differences that are treated as temporary under GAAP  
must be reported in column (b) and differences that are  
permanent (that is, not temporary) for GAAP must be reported in  
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which fines or penalties are assessed must be included on Part  
III, line 7, column (a), regardless of the government authority that  
imposed the fines or penalties, regardless of whether the fines or  
penalties are civil or criminal, and regardless of the  
classification, nomenclature, or terminology attached to the fines  
or penalties by the imposing authority in its actions or  
documents.  
and adequately disclosed. In general, a difference is adequately  
disclosed if the difference is labeled in a manner that clearly  
identifies the item or transaction from which the difference  
arises. For further guidance about adequate disclosure, see  
Regulations section 1.6662-4(f). If a specific item of income,  
gain, loss, expense, or deduction is described on Part II, lines 7  
through 21, or Part III, lines 1 through 29, and the line doesn't  
indicate to “attach schedule” or “attach details,and the specific  
instructions for the line don't call for an attachment of a schedule  
or explanation, then the item is considered separately stated and  
adequately disclosed if the item is reported on the applicable line  
and the amount(s) of the item(s) is reported in the applicable  
columns of the applicable line. See the instructions for Part II,  
lines 1 through 9, for specific additional information required to  
be provided for these particular lines.  
Except as otherwise provided, differences for the same item  
must be combined or netted together and reported as one  
amount on the applicable line of Schedule M-3. However,  
differences for separate items must not be combined or netted  
together. Each item (and corresponding amount attributable to  
that item) must be separately stated and adequately disclosed  
on the applicable line of Schedule M-3 or any statement required  
to be attached, even if the amounts are below a certain dollar  
amount.  
If a partnership would be required to report in column (a) of  
Parts II and III the amount of any item specifically listed on  
Schedule M-3 in accordance with the preceding paragraph,  
except that the partnership has capitalized the item of income or  
expense and reports the amount in its financial statement  
balance sheet or in asset and liability accounts maintained in the  
partnership's books and records, the partnership must report the  
proper tax treatment of the item in columns (b), (c), and (d), as  
applicable.  
Furthermore, in applying the two preceding paragraphs, a  
partnership is required to report in column (a) of Parts II and III  
the amount of any item specifically listed on Schedule M-3 that is  
included in the partnership's financial statements or exists in the  
partnership's books and records, regardless of the nomenclature  
associated with that item in the financial statements or books  
and records. Accurate completion of Schedule M-3 requires  
reporting amounts according to the substantive nature of the  
specific line items included in Schedule M-3 and consistent  
reporting of all transactions of like substantive nature that  
occurred during the tax year. For example, all expense amounts  
that are included in the financial statements or exist in the books  
and records that represent some form of “Bad debt expense”  
must be reported on Part III, line 26, in column (a), regardless of  
whether the amounts are recorded or stated under different  
nomenclature in the financial statements or the books and  
records such as “Provision for doubtful accounts,Expense for  
uncollectible notes receivable,or “Impairment of trade accounts  
receivable.Likewise, as stated in the preceding paragraph, all  
fines and penalties must be included on Part III, line 7, column  
(a), regardless of the terminology or nomenclature attached to  
them by the partnership in its books and records or financial  
statements.  
Required statements for Part II, line 22, and Part III, line 30.  
A separate statement must be attached to Schedule M-3 (Form  
1065) that includes a detailed description of each item and  
adjustment entered on Part II, line 22, and Part III, line 30.  
The description for each amount entered in column (a) must  
be readily identifiable to the name of the account in the financial  
statements or books and records of the taxpayer, under which  
the amount in column (a) was recorded in the accounting  
records. Also, the description for each amount entered in column  
(a) must include detailed information supporting each  
adjustment reported in columns (b) and (c), including how the  
adjustment is identified in the accounting records. The entire  
description is considered the tax description for the amount  
reported in column (d) for each item reported on Part II, line 22,  
or Part III, line 30.  
Each description should adequately describe all four columns  
of Part II, line 22, or Part III, line 30. If additional information is  
required to provide an acceptable description, provide a  
supporting statement.  
With limited exceptions, Part II includes lines for specific items  
of income, gain, or loss (income items). (See lines 1 through 21.)  
If an income item is described on lines 1 through 21, report the  
amount of the item on the applicable line, regardless of whether  
there is a difference for the item. If there is a difference for the  
income item, or only a portion of the income item has a  
Example 7. Partnership Tulip prepares GAAP financial  
statements. In prior years, Tulip acquired intellectual property  
(IP) and goodwill. The IP is amortizable for both U.S. income tax  
and financial statement purposes. In 2023, Tulip's annual  
amortization expense for IP is $9,000 for U.S. income tax  
purposes and $6,000 for financial statement purposes. The  
goodwill isn't amortizable for U.S. income tax purposes and is  
subject to impairment for financial statement purposes. In 2023,  
Tulip records an impairment charge on the goodwill of $5,000.  
Tulip must report the amortization attributable to the IP on Part III,  
line 21, and report $6,000 in column (a), a temporary difference  
of $3,000 in column (b), and $9,000 in column (d). Tulip must  
report the goodwill impairment on Part III, line 19, and report  
$5,000 in column (a), a permanent difference of ($5,000) in  
column (c), and $0 in column (d).  
difference and a portion of the item doesn't have a difference,  
and the item isn't described on lines 1 through 21, report and  
describe the entire amount of the item on line 22.  
With limited exceptions, Part III includes lines for specific  
items of expense or deduction (expense items). (See lines 1  
through 29.) If an expense item is described on lines 1 through  
29, report the amount of the item on the applicable line,  
regardless of whether there is a difference for the item. If there is  
a difference for the expense item, or only a portion of the  
expense item has a difference and a portion of the item doesn't  
have a difference and the item isn't described on lines 1 through  
29, report and describe the entire amount of the item on line 30.  
Example 8. Partnership Willow is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Willow placed in service 10 depreciable fixed  
assets in a previous tax year. Willow's total depreciation expense  
for its 2023 tax year for five of the assets is $50,000 for income  
statement purposes and $70,000 for U.S. income tax purposes.  
Willow's total annual depreciation expense for its 2023 tax year  
for the other five assets is $40,000 for income statement  
purposes and $30,000 for U.S. income tax purposes. Willow  
If there is no difference between the financial accounting  
amount and the amount reported for tax purposes of an entire  
item of income, loss, expense, or deduction and the item isn't  
described or included on Part II, lines 1 through 22, or Part III,  
lines 1 through 30, report the entire amount of the item in  
columns (a) and (d) of Part II, line 25.  
Separately stated and adequately disclosed. Each  
difference reported in Parts II and III must be separately stated  
-10-  
 
treats the differences between financial statement and U.S.  
income tax depreciation expense as giving rise to temporary  
differences that will reverse in future years. Willow must combine  
all of its depreciation adjustments. Accordingly, Willow must  
report on Part III, line 25, for its 2023 tax year income statement  
depreciation expense of $90,000 in column (a), a temporary  
difference of $10,000 in column (b), and U.S. income tax  
depreciation expense of $100,000 in column (d).  
Part II. Reconciliation of Net Income  
(Loss) per Income Statement of  
Partnership With Income (Loss) per  
Return  
Lines 1 Through 9. Additional Information for  
Each Entity  
Example 9. Partnership Derry is a calendar year partnership  
that files and entirely completes Schedule M-3 for its 2023 tax  
year. On December 31, 2023, Derry establishes three reserve  
accounts in the amount of $100,000 for each account. One  
reserve account is an allowance for accounts receivable that are  
estimated to be uncollectible. The second reserve is an estimate  
of coupons outstanding that may have to be paid. The third  
reserve is an estimate of future warranty expenses. In its  
financial statements, Derry treats the three reserve accounts as  
giving rise to temporary differences that will reverse in future  
years. The three reserves are expenses in Derry's 2023 financial  
statements but aren't deductions for U.S. income tax purposes in  
2023. Derry must not combine the Schedule M-3 differences for  
the three reserve accounts. Derry must report the amounts  
attributable to the allowance for uncollectible accounts  
receivable on Part III, line 26, Bad debt expense, and must  
separately state and adequately disclose the amounts  
For any item reported on lines 1 or 3 through 5, attach a  
supporting statement that provides the name of the entity for  
which the item is reported, the entity's EIN (if applicable), the  
type of entity (corporation, partnership, etc.), and the item  
amounts for columns (a) through (d). See the instructions for  
lines 2 and 6 through 9 for the specific information required for  
those particular lines.  
Line 1. Income (Loss) From Equity Method  
Foreign Corporations  
Report on line 1, column (a), the financial income (loss) included  
on Part I, line 11, for any foreign corporation accounted for on the  
equity method and remove such amount in column (b) or (c), as  
applicable. Report the amount of dividends received and other  
taxable amounts received or includible from foreign corporations  
on lines 2 through 4, as applicable.  
attributable to each of the other two reserves, coupons  
outstanding, and warranty costs, on a required, attached  
statement that supports the amounts on Part III, line 30. Derry  
must also provide a description for each reserve that meets the  
requirements for Part III, line 30, discussed earlier under  
this example, an acceptable description for warranty costs would  
be “Future Warranty Expense Reserve.”  
Line 2. Gross Foreign Dividends Not Previously  
Taxed  
Except as otherwise provided in this paragraph, report on line 2,  
column (d), the amount (before any withholding tax) of any  
foreign dividends included on line 1 of the Analysis of Net  
Income (Loss) found on Form 1065, and report on line 2, column  
(a), the amount of dividends from any foreign corporation  
included on Part I, line 11. Don't report on line 2 any amounts  
that must be reported on line 3 or dividends that were previously  
taxed and must be reported on line 4. (See the instructions  
below for lines 3 and 4.) Report withholding taxes on Part III,  
line 30, Other expense/deduction items with differences, or  
line 25, Other items with no differences, as applicable.  
Note. There is no need to add the title of the reserve account to  
the description if the account name for the amount in column (a)  
is already part of the adjustment description.  
Example 10. Partnership Elm is a calendar year partnership  
that files and entirely completes Schedule M-3 for its 2023 tax  
year. On January 2, 2023, Elm establishes an allowance for  
uncollectible accounts receivable (bad debt reserve) of  
$100,000. During 2023, Elm increases the reserve by $250,000  
for additional accounts receivable that may become  
For any dividends reported on line 2 that are received on a  
class of voting stock of which the partnership directly or indirectly  
owned 10% or more of the outstanding shares of that class at  
any time during the tax year, report on an attached supporting  
statement for line 2: (a) the name of the dividend payer, (b) the  
payer's EIN (if applicable), (c) the class of voting stock on which  
the dividend was paid, (d) the percentage of the class directly or  
indirectly owned, and (e) the amounts for columns (a) through  
(d).  
uncollectible. Additionally, during 2023, Elm decreases the  
reserve by $75,000 for accounts receivable that were discharged  
in bankruptcy during 2023. The balance in the reserve account  
on December 31, 2023, is $275,000. The $100,000 amount to  
establish the reserve account and the $250,000 to increase the  
reserve account are expenses on Elm's 2023 financial  
statements but aren't deductible for U.S. income tax purposes in  
2023. However, the $75,000 decrease to the reserve is  
deductible for U.S. income tax purposes in 2023. In its financial  
statements, Elm treats the reserve account as giving rise to a  
temporary difference that will reverse in future tax years. Elm  
must report on Part III, line 26, Bad debt expense, for its 2023 tax  
year income statement bad debt expense of $350,000 in column  
(a), a temporary difference of ($275,000) in column (b), and U.S.  
income tax bad debt expense of $75,000 in column (d).  
Example 11. During 2023, partnership Fig had $100 of  
meals expenses, $100 of entertainment expenses, and therefore  
deducted $200 on its income statement. For federal income tax  
purposes, the $100 of meals expenses is subject to section  
274(n) (50% allowance) and the $100 of entertainment  
expenses is subject to section 274(a) (0% allowance). Fig must  
report on Part III, line 6: $200 in column (a), $150 in column (c),  
and $50 in column (d). Fig must report all of its meals and  
entertainment expenses only on this line whether there is a  
difference or not because meals and entertainment expenses  
are specifically described.  
Line 3. Subpart F, QEF, and Similar Income  
Inclusions  
Report on line 3, column (d), the amount included in taxable  
income under section 951 (relating to Subpart F), gains or other  
income inclusions resulting from elections under sections  
1291(d)(2) and 1298(b)(1), and any amount included in taxable  
income pursuant to section 1293 (relating to QEFs). See Form  
5471, Information Return of U.S. Persons With Respect to  
Certain Foreign Corporations, and Form 8621, Information  
Return by a Shareholder of a Passive Foreign Investment  
Company or Qualified Electing Fund, for more information.  
Also include on line 3 passive foreign investment company  
mark-to-market gains and losses under section 1296. Don't  
report such gains and losses on line 14.  
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loss-sharing percentage (if applicable), and the amount reported  
in column (a), (b), (c), or (d) of line 7 or 8, as applicable.  
Line 4. Gross Foreign Distributions Previously  
Taxed  
Example 12. U.S. partnership Holly is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Holly has an investment in a U.S. partnership  
USP. Holly prepares financial statements in accordance with  
GAAP. For its 2023 tax year, Holly's financial statement net  
income includes $10,000 of income attributable to its share of  
USP's net income. Holly's Schedule K-1 from USP reports  
$5,000 of ordinary income, $7,000 of long-term capital gains,  
$4,000 of charitable contributions, and $200 of section 179  
expense. Holly must report on line 7 $10,000 in column (a), a  
permanent difference of ($2,200) in column (c), and $7,800 in  
column (d).  
Report on line 4, column (a), any distributions received from  
foreign corporations that were included on Part I, line 11, and  
that were previously taxed for U.S. income tax purposes. For  
example, include in column (a) amounts that are excluded from  
taxable income under sections 959 and 1293(c). Remove such  
amounts in column (b) or (c), as applicable. Report the full  
amount of the distribution before any withholding tax. Report  
withholding taxes on Part III, line 30, Other expense/deduction  
items with differences, or line 25, Other items with no  
differences, as applicable. Because previously taxed foreign  
distributions aren't currently taxable, line 4, column (d), is  
shaded. (Also, see the instructions above for line 2.)  
Line 9. Income (Loss) From Other Pass-Through  
Entities  
Line 5. Income (Loss) From Equity Method U.S.  
Corporations  
For any interest in a pass-through entity (other than an interest in  
a partnership reportable on line 7 or 8, as applicable) owned by  
the U.S. partnership (other than an interest in a disregarded  
entity), report the following on line 9.  
Report on line 5, column (a), the financial income (loss) included  
on Part I, line 11, for any U.S. corporation accounted for on the  
equity method and remove such amount in column (b) or (c), as  
applicable. Report on line 6 the amount of dividends received  
from any U.S. corporations.  
1. In column (a), the sum of the partnership's distributive  
share of income or loss from the pass-through entity that is  
included on Part I, line 11.  
Line 6. U.S. Dividends  
2. In column (b) or (c), as applicable, the sum of all  
Report on line 6, column (a), the amount of dividends included  
on Part I, line 11, that were received from any U.S. corporation.  
Report on line 6, column (d), the amount of any U.S. dividends  
included in taxable income on line 1 of the Analysis of Net  
Income (Loss) found on Form 1065.  
differences, if any, attributable to the pass-through entity.  
3. In column (d), the sum of all taxable amounts of income,  
gain, loss, or deduction reportable on the partnership's  
Schedule(s) K-1 received from the pass-through entity (if  
applicable).  
For any dividends reported on line 6 that are received on  
classes of voting stock in which the partnership directly or  
indirectly owned 10% or more of the outstanding shares of that  
class at any time during the tax year, report on an attached  
supporting statement for line 6: (1) the name of the dividend  
payer, (2) the payer's EIN (if applicable), (3) the class of voting  
stock on which the dividend was paid, (4) the percentage of the  
class directly or indirectly owned, and (5) the amounts for  
columns (a) through (d).  
For each pass-through entity reported on line 9, attach a  
supporting statement that provides that entity's name, EIN (if  
applicable), the partnership's end of year profit-sharing  
percentage (if applicable), the partnership's end of year  
loss-sharing percentage (if applicable), and the amounts  
reported by the partnership in column (a), (b), (c), or (d) of line 9,  
as applicable.  
Line 10. Items Relating to Reportable  
Transactions  
Line 7. Income (Loss) From U.S. Partnerships,  
and  
Any amounts attributable to any reportable transactions (as  
described in Regulations section 1.6011-4) must be included on  
line 10 regardless of whether the difference, or differences,  
would otherwise be reported elsewhere in Part II or Part III. Thus,  
if a taxpayer files Form 8886 for any reportable transaction  
described in Regulations section 1.6011-4, the amounts  
attributable to that reportable transaction must be reported on  
line 10. In addition, all income and expense amounts attributable  
to a reportable transaction must be reported on line 10, columns  
(a) and (d), even if there is no difference between the financial  
statement amounts and the tax return amounts.  
Line 8. Income (Loss) From Foreign  
Partnerships  
For any interest owned by the partnership that is treated as an  
investment in a partnership for U.S. income tax purposes (other  
than an interest in a disregarded entity), report amounts on line 7  
or 8, as described below.  
1. In column (a), the sum of the partnership's distributive  
share of income or loss from a U.S. or foreign partnership that is  
included on Part I, line 11.  
2. In column (b) or (c), as applicable, the sum of all  
differences, if any, attributable to the partnership's distributive  
share of income or loss from a U.S. or foreign partnership.  
3. In column (d), the sum of all amounts of income, gain,  
loss, or deduction attributable to the partnership's distributive  
share of income or loss from a U.S. or foreign partnership (that  
is, the sum of all amounts reportable on the partnership's  
Schedule(s) K-1 received from the partnership (if applicable)),  
without regard to any limitations computed at the partner level  
(for example, limitations on utilization of charitable contributions,  
capital losses, and interest expense).  
Each difference attributable to a reportable transaction must  
be separately stated and adequately disclosed. A partnership  
will be considered to have separately stated and adequately  
disclosed a reportable transaction on line 10 if the partnership  
sequentially numbers each Form 8886 and lists by statement  
number (shown on line A of Form 8886) on the supporting  
statement for line 10 each sequentially numbered reportable  
transaction and the amounts required for line 10, columns (a)  
through (d).  
Instead of satisfying the requirements of the preceding  
paragraph, a partnership will be considered to have separately  
stated and adequately disclosed a reportable transaction if the  
partnership attaches a supporting statement that provides the  
following for each reportable transaction.  
For each partnership reported on line 7 or 8, attach a  
supporting statement that provides the name, EIN (if applicable),  
end of year profit-sharing percentage (if applicable), end of year  
-12-  
1. A description of the reportable transaction disclosed on  
Form 8886 for which amounts are reported on line 10.  
line 6, columns (a) through (d), on Schedule M-3, line 11,  
columns (a) through (d), as applicable.  
2. The name and reportable transaction or tax shelter  
registration number, if applicable, as reported on lines 1a and 1c,  
respectively, of Form 8886.  
3. The type of reportable transaction (that is, listed  
transaction, confidential transaction, transaction with contractual  
protection, etc.) as reported on line 2 of Form 8886.  
An entity that (a) is required to file a Schedule M-3 and has  
less than $50 million in total assets at the end of the tax year, or  
(b) isn't required to file a Schedule M-3 and voluntarily files a  
Schedule M-3, isn't required to file Form 8916-A but may  
voluntarily do so.  
Report on line 11, column (a), the total amount of interest  
income included on Part I, line 11, and report on line 11, column  
(d), the total amount of interest income included on line 1 of the  
Analysis of Net Income (Loss) found on Form 1065 that isn't  
required to be reported elsewhere on Schedule M-3. In column  
(b) or (c), as applicable, adjust for any amounts treated for U.S.  
income tax purposes as interest income that are treated as some  
other form of income for financial accounting purposes, or vice  
versa. For example, adjustments to interest income resulting  
from adjustments made in accordance with the instructions for  
line 16, Sale versus lease, should be made in columns (b) and  
(c) of line 11.  
If a transaction is a listed transaction described in  
Regulations section 1.6011-4(b)(2), the description must also  
include the published guidance number shown on line 3 of Form  
8886. In addition, if the reportable transaction involves an  
investment in the transaction through another entity such as a  
partnership, the description must include the name and EIN (if  
applicable) of that entity as reported on line 5 of Form 8886.  
Example 13. Partnership Jasmine is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Jasmine incurred seven different abandonment  
losses during its 2023 tax year. One loss of $12 million results  
from a reportable transaction described in Regulations section  
1.6011-4(b)(5), another loss of $5 million results from a  
reportable transaction described in Regulations section  
1.6011-4(b)(4), and the remaining five abandonment losses  
aren't reportable transactions. Jasmine discloses the reportable  
transactions giving rise to the $12 million and $5 million losses  
on separate Forms 8886 and sequentially numbers them X1 and  
X2, respectively. Jasmine must separately state and adequately  
disclose the $12 million and $5 million losses on line 10. The $12  
million loss and the $5 million loss will be adequately disclosed if  
Jasmine attaches a supporting statement for line 10 that lists  
each of the sequentially numbered forms, Form 8886-X1 and  
Form 8886-X2, and with respect to each reportable transaction  
reports the appropriate amounts required for line 10, columns (a)  
through (d). Alternatively, Jasmine's disclosures will be adequate  
if the description provided for each loss on the supporting  
statement includes the names and reportable transaction or tax  
shelter registration numbers, if any, disclosed on the applicable  
Form 8886, identifies the type of reportable transaction for the  
loss, and reports the appropriate amounts required for line 10,  
columns (a) through (d). Jasmine must report the losses  
attributable to the other five abandonment losses on line 21e,  
regardless of whether a difference exists for any or all of those  
abandonment losses.  
Example 14. Partnership Kiwi is a calendar year partnership  
that files and entirely completes Schedule M-3 for its 2023 tax  
year. Kiwi enters into a transaction with contractual protection  
that is a reportable transaction described in Regulations section  
1.6011-4(b)(4). This reportable transaction is the only reportable  
transaction for Kiwi's 2023 tax year and results in a $7 million  
capital loss for both financial accounting purposes and U.S.  
income tax purposes. Although the transaction doesn't result in a  
difference, Kiwi is required to report on line 10 the following  
amounts: ($7 million) in column (a), $0 in columns (b) and (c),  
and ($7 million) in column (d). The transaction will be adequately  
disclosed if Kiwi attaches a supporting statement for line 10 that  
(a) sequentially numbers the Form 8886 and refers to the  
sequentially numbered Form 8886-X1; and (b) reports the  
applicable amounts required for line 10, columns (a) through (d).  
Alternatively, the transaction will be adequately disclosed if the  
supporting statement for line 10 includes a description of the  
transaction, the name and reportable transaction number, if any,  
and the type of reportable transaction disclosed on Form 8886.  
Don't report on line 11 amounts reported in accordance with  
the instructions for lines 7, 8, 9, 10, and 20.  
Line 12. Total Accrual to Cash Adjustment  
This line is completed by a partnership that prepares financial  
statements (or books and records, if permitted) using an overall  
accrual method of accounting and uses an overall cash method  
of accounting for U.S. income tax purposes (or vice versa). With  
the exception of amounts required to be reported on line 10, the  
partnership must report on line 12, a single amount net of all  
adjustments attributable solely to the use of the different overall  
methods of accounting (for example, adjustments related to  
accounts receivable, accounts payable, compensation, accrued  
liabilities, etc.), regardless of whether a separate line on  
Schedule M-3 corresponds to an item within the accrual to cash  
reconciliation. Differences not attributable to the use of the  
different overall methods of accounting must be reported on the  
appropriate lines of Schedule M-3 (for example, a depreciation  
difference must be reported on Part III, line 25).  
Example 15. Partnership Laurel is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Laurel prepares financial statements in  
accordance with GAAP using an overall accrual method of  
accounting. Laurel uses an overall cash method of accounting  
for U.S. income tax purposes. Laurel's financial statements for  
the year ending December 31, 2023, report accounts receivable  
of $35,000, an allowance for bad debts of $10,000, and  
accounts payable of $17,000 related to 2023 acquisition and  
reorganization legal and accounting fees. In addition, for Laurel's  
year ending December 31, 2023, Laurel reported financial  
statement depreciation expense of $15,000 and depreciation for  
U.S. income tax purposes of $25,000. For Laurel's 2023 tax year  
using an overall cash method of accounting, Laurel doesn't  
recognize the $35,000 of revenue attributable to the accounts  
receivable, can't deduct the $10,000 allowance for bad debt, and  
can't deduct the $17,000 of accounts payable. In its financial  
statements, Laurel treats both the difference in overall  
accounting methods used for financial statement and U.S.  
income tax purposes and the difference in depreciation expense  
as temporary differences. Laurel must combine all adjustments  
attributable to the differences related to the overall accounting  
methods on line 12. As a result, Laurel must report on line 12  
$8,000 in column (a) ($35,000 – $10,000 – $17,000), ($8,000) in  
column (b), and $0 in column (d). Laurel must not report the  
accrual to cash adjustment attributable to the legal and  
Line 11. Interest Income  
accounting fees on Part III, line 18, Current year acquisition/  
reorganization legal and accounting fees. Because the  
Attach Form 8916-A, Supplemental Attachment to  
Schedule M-3. Complete Part II and enter the amounts shown on  
difference in depreciation expense doesn't relate to the use of  
the cash or accrual method of accounting, Laurel must report the  
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depreciation difference on Part III, line 25, Depreciation, and  
report $15,000 in column (a), $10,000 in column (b), and  
$25,000 in column (d).  
Amounts reportable on line 10.  
Any gain or loss from inventory hedging transactions  
reportable on line 13.  
Amounts reportable on line 16.  
Line 13. Hedging Transactions  
Amounts reportable on line 19.  
Mark-to-market income or (loss) associated with the  
Report on line 13, column (a), the net gain or loss from hedging  
transactions on Part I, line 11. Report in column (d) the amount  
of taxable income from hedging transactions as defined in  
section 1221(b)(2). Use columns (b) and (c) to report all  
differences caused by treating hedging transactions differently  
for financial accounting purposes and for U.S. income tax  
purposes. For example, if a portion of a hedge is considered  
ineffective under GAAP but is still a valid hedge under section  
1221(b)(2), the difference must be reported on line 13. The  
hedge of a capital asset, which isn't a valid hedge for U.S.  
income tax purposes but may be considered a hedge for GAAP  
purposes, must also be reported here.  
inventories of dealers in securities under section 475 reportable  
on line 14.  
Section 481(a) adjustments related to cost of goods sold or  
inventory valuation reportable on line 17.  
Fines and penalties reportable on Part III, line 7.  
Judgments, damages, awards, and similar costs, reportable  
on Part III, line 8.  
Amounts included on Part III, line 28, Purchase versus lease.  
Important. Complete and attach Form 8916-A, Part I, for each  
item listed on line 15 in columns (a) through (d).  
An entity that (a) is required to file a Schedule M-3 and has  
less than $50 million in total assets at the end of the tax year, or  
(b) isn't required to file a Schedule M-3 and voluntarily files a  
Schedule M-3, isn't required to file Form 8916-A but may  
voluntarily do so.  
Report hedging gains and losses computed under the  
mark-to-market method of accounting on line 13 and not on  
line 14.  
Report any gain or loss from inventory hedging transactions  
on line 13 and not on line 15.  
Example 16. Partnership Cashew is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Cashew placed in service 10 depreciable fixed  
assets in a previous tax year. Cashew's total depreciation  
expense for its 2023 tax year for five of the assets is $50,000 for  
financial accounting purposes and $70,000 for U.S. income tax  
purposes. Cashew's total annual depreciation expense for its  
2023 tax year for the other five assets is $40,000 for financial  
accounting purposes and $30,000 for U.S. income tax purposes.  
In addition, Cashew incurs $200 of meal expenses that Cashew  
deducts in computing net income for financial accounting  
purposes. All $200 of the meal expenses is subject to the 50%  
limitation under section 274(n). In its financial statements,  
Cashew treats the $50,000 depreciation and $100 of the meals  
as other costs in computing cost of goods sold. Cashew must  
include on Form 8916-A and on line 15, in column (a), the  
$50,000 of depreciation and $100 of meals. Cashew must also  
include a temporary difference of $20,000 in column (b), a  
permanent difference of ($50) in column (c), and $70,050 in  
column (d) ($70,000 depreciation and $50 meals). In addition,  
Cashew must report on Part III, line 25, for its 2023 tax year  
income statement, depreciation expense of $40,000 in column  
(a), a temporary difference of ($10,000) in column (b), and  
$30,000 in column (d); and on Part III, line 6, meals and  
entertainment expense of $100 in column (a), a permanent  
difference of ($50) in column (c), and $50 in column (d). All other  
cost of goods sold items would be added to the amounts  
included on line 15, detailed in this example, and reported on  
Form 8916-A and on line 15 in the appropriate columns.  
Line 14. Mark-to-Market Income (Loss)  
Report on line 14 any amount representing the mark-to-market  
income or loss for any securities held by a dealer in securities, a  
dealer in commodities having made a valid election under  
section 475(e), or a trader in securities or commodities having  
made a valid election under section 475(f). “Securities” for these  
purposes are securities described in section 475(c)(2) and  
commodities described in section 475(e)(2). Securities  
described in section 475(c)(2)(E) do not include contracts to  
which section 1256(a) applies.  
Report hedging gains and losses computed under the  
mark-to-market method of accounting on line 13, Hedging  
transactions, and not on line 14.  
Traders in securities or commodities. For a trader in  
securities or commodities that made a valid election under  
section 475(f) to use the mark-to-market method to account for  
securities or commodities held in connection with a trading  
business that files Form 4797, Sales of Business Property, any  
Schedule M-3 entries required as a result of mark-to-market  
these securities or commodities are reported as follows: (a)  
mark-to-market gains and losses from Form 4797, line 10, are  
included on Schedule M-3, Part II, line 14; and (b) any other  
Schedule M-3 entries required based on other results  
(non-mark-to-market gains and losses) included in the total  
reported on Form 4797, line 17, should be reported on  
Schedule M-3, Part II, line 21d, unless the instructions for  
Schedule M-3 require the amounts to be reported on another  
line.  
Line 16. Sale Versus Lease (for Sellers and/or  
Lessors)  
Line 15. Cost of Goods Sold  
Note. Also see the instructions for Part III, Line 28. Purchase  
Asset transfer transactions with periodic payments  
Report on line 15 any amounts deducted as part of cost of goods  
sold during the tax year, regardless of whether the amounts  
would otherwise be reported elsewhere in Part II or Part III.  
However, don't report the items mentioned in the next paragraph  
on line 15. Examples of amounts that must be included on  
line 15 are amounts attributable to inventory valuation, such as  
amounts attributable to cost-flow assumptions, additional costs  
required to be capitalized (including depreciation) such as  
section 263A costs, inventory shrinkage accruals, inventory  
obsolescence reserves, and lower of cost or market (LCM)  
write-downs.  
characterized for financial accounting purposes as either a sale  
or a lease may, under some circumstances, be characterized as  
the opposite for tax purposes. If the transaction is treated as a  
lease, the seller/lessor reports the periodic payments as gross  
rental income and also reports depreciation expense or  
deduction. If the transaction is treated as a sale, the seller/lessor  
reports gross profit (sale price less cost of goods sold) from the  
sale of assets and reports the periodic payments as payments of  
principal and interest income.  
On line 16, column (a), report the gross profit or gross rental  
income for financial accounting purposes for all sale or lease  
transactions that must be given the opposite characterization for  
Note. The entries in columns (a) and (d) are negative amounts.  
Don't report the following on line 15 or on Form 8916-A.  
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tax purposes. On line 16, column (d), report the gross profit or  
gross rental income for federal income tax purposes. Interest  
income amounts for such transactions must be reported on  
line 11 in column (a) or (d), as applicable. Depreciation expense  
for such transactions must be reported on Part III, line 25, in  
column (a) or (d), as applicable. Use columns (b) and (c) of lines  
11 and 16, and Part III, line 25, as applicable, to report the  
differences between columns (a) and (d).  
Example 17. Maple is a calendar year partnership that files  
and entirely completes Schedule M-3 for its 2023 tax year.  
Maple sells and leases property to customers. For financial  
accounting purposes, Maple accounts for each transaction as a  
sale. For U.S. income tax purposes, each of Maple's  
recognizable for U.S. income tax purposes in the current tax  
year. Use columns (b) and (c) of line 18, as applicable, to report  
differences between columns (a) and (d).  
Line 18 must not be used to report income recognized from  
long-term contracts. Instead, use line 19.  
Line 19. Income Recognition From Long-Term  
Contracts  
Report on line 19 the amount of net income or loss for financial  
statement purposes (or books and records, if applicable) or U.S.  
income tax purposes for any contract accounted for under a  
long-term contract method of accounting.  
transactions must be treated as a lease. In its financial  
statements, Maple treats the difference in the financial  
accounting and the U.S. income tax treatment of these  
transactions as temporary. During 2023, Maple reports in its  
financial statements $1,000 of sales and $700 of cost of goods  
sold with respect to 2023 lease transactions. Maple receives  
periodic payments of $500 in 2023 with respect to these 2023  
transactions and similar transactions from prior years and treats  
$400 as principal and $100 as interest income. For financial  
accounting purposes, Maple reports gross profit of $300 ($1,000  
− $700) and interest income of $100 from these transactions. For  
U.S. income tax purposes, Maple reports $500 of gross rental  
income (the periodic payments) and (based on other facts) $200  
of depreciation deduction on the property. On its 2023  
Schedule M-3, Maple must report on line 11 $100 in column (a),  
($100) in column (b), and $0 in column (d). In addition, Maple  
must report on line 16 $300 of gross profit in column (a), $200 in  
column (b), and $500 of gross rental income in column (d).  
Lastly, Maple must report on Part III, line 25, $200 in columns (b)  
and (d).  
Line 20. Original Issue Discount and Other  
Imputed Interest  
Report on line 20 any amounts of original issue discount (OID)  
and other imputed interest. The term “original issue discount and  
other imputed interest” includes, but isn't limited to:  
1. The excess of a debt instrument's stated redemption price  
at maturity over its issue price, as determined under section  
1273;  
2. Amounts that are imputed interest on a deferred sales  
contract under section 483;  
3. Amounts treated as interest or OID under the stripped  
bond rules under section 1286; and  
4. Amounts treated as OID under the below-market interest  
rate rules under section 7872.  
Line 21a. Income Statement Gain/Loss on Sale,  
Exchange, Abandonment, Worthlessness, or  
Other Disposition of Assets Other Than  
Inventory and Pass-Through Entities  
Line 17. Section 481(a) Adjustments  
With the exception of a section 481(a) adjustment that is  
required to be reported on Part I, line 10, for reportable  
transactions, any difference between an income or expense item  
attributable to an authorized (or unauthorized) change in method  
of accounting made for U.S. income tax purposes that results in  
a section 481(a) adjustment must be reported on line 17,  
regardless of whether a separate line for that income or expense  
item exists in Part II or Part III.  
Report on line 21a, column (a), all gains and losses on the  
disposition of assets except for (a) gains and losses on the  
disposition of inventory, and (b) gains and losses allocated to  
the partnership from a pass-through entity (for example, on  
Schedule K-1) that are included in the net income (loss) of the  
partnership reported on Part I, line 11. Reverse the amount  
reported in column (a) in column (b) or (c), as applicable. The  
corresponding gains and losses for U.S. income tax purposes  
are reported on lines 21b through 21g, as applicable.  
Example 18. Partnership Noble is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. Noble was depreciating certain fixed assets over  
an erroneous recovery period and, effective for its 2023 tax year,  
Noble receives IRS consent to change its method of accounting  
for the depreciable fixed assets and begins using the proper  
recovery period. The change in method of accounting results in a  
positive section 481(a) adjustment of $100,000 that is required  
to be spread over 4 tax years, beginning with the 2023 tax year.  
In its financial statements, Noble treats the section 481(a)  
adjustment as a temporary difference. Noble must report on  
line 17 $25,000 in columns (b) and (d) for its 2023 tax year and  
each of the subsequent 3 tax years (unless Noble is otherwise  
required to recognize the remainder of the section 481(a)  
adjustment earlier). Noble must not report the section 481(a)  
adjustment on Part III, line 25.  
Line 21b. Gross Capital Gains From Schedule D,  
Excluding Amounts From Pass-Through Entities  
Report on line 21b gross capital gains reported on Schedule D,  
Capital Gains and Losses, excluding capital gains from  
pass-through entities, which must be reported on line 7, 8, or 9,  
as applicable.  
Line 21c. Gross Capital Losses From  
Schedule D, Excluding Amounts From  
Pass-Through Entities, Abandonment Losses,  
and Worthless Stock Losses  
Report on line 21c gross capital losses reported on Schedule D,  
excluding capital losses from (a) pass-through entities, which  
must be reported on line 7, 8, or 9, as applicable; (b)  
Line 18. Unearned/Deferred Revenue  
abandonment losses, which must be reported on line 21e; and  
(c) worthless stock losses, which must be reported on line 21f.  
Report on line 18, column (a), amounts of revenues included on  
Part I, line 11, that were deferred from a prior financial  
accounting year. Report on line 18, column (d), amounts of  
revenues recognizable for U.S. income tax purposes in the  
current tax year that are recognized for financial accounting  
purposes in a different year. Also report on line 18, column (d),  
any amount of revenues reported on line 18, column (a), that are  
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Line 21d. Net Gain/Loss Reported on Form  
4797, Line 17, Excluding Amounts From  
Pass-Through Entities, Abandonment Losses,  
and Worthless Stock Losses  
Line 23. Total Income (Loss) Items  
Combine lines 1 through 22 and enter the total on line 23.  
Note. Line 15, Cost of goods sold, columns (a) and (d), are  
negative amounts that will affect the totals entered on line 23.  
Report on line 21d the net gain or loss reported on line 17 of  
Form 4797, excluding amounts from (a) pass-through entities,  
which must be reported on line 7, 8, or 9, as applicable; (b)  
abandonment losses, which must be reported on line 21e; and  
(c) worthless stock losses, which must be reported on line 21f.  
Line 24. Total Expense/ Deduction Items  
Report on line 24, columns (a) through (d), as applicable, the  
negative of the amounts reported on Part III, line 31, columns (a)  
through (d). For example, if Part III, line 31, column (a), reflects  
an amount of $1 million, then report on line 24, column (a),  
($1,000,000). Similarly, if Part III, line 31, column (b), reflects an  
amount of ($50,000), then report on line 24, column (b),  
$50,000.  
Note. Traders in securities or commodities that have made a  
valid election under section 475(f) to use the mark-to-market  
method to account for securities or commodities, see the  
instructions for Part II, line 14, earlier.  
Line 25. Other Items With No Differences  
Line 21e. Abandonment Losses  
If there is no difference between the financial accounting amount  
and the taxable amount of an entire item of income, gain, loss,  
expense, or deduction and the item isn't described or included  
on lines 1 through 22, or Part III, lines 1 through 30, report the  
entire amount of the item in columns (a) and (d) of line 25. If a  
portion of an item of income, loss, expense, or deduction has a  
difference and a portion of the item doesn't have a difference,  
don't report any portion of the item on line 25. Instead, report the  
entire amount of the item (that is, both the portion with a  
difference and the portion without a difference) on the applicable  
line of lines 1 through 22, or Part III, lines 1 through 30. See  
Example 11, earlier.  
Report on line 21e any abandonment losses, regardless of  
whether the loss is characterized as an ordinary loss or a capital  
loss.  
Line 21f. Worthless Stock Losses  
Report on line 21f any worthless stock loss, regardless of  
whether the loss is characterized as an ordinary loss or a capital  
loss. Attach a statement that separately states and adequately  
discloses each transaction that gives rise to a worthless stock  
loss and the amount of each loss.  
Line 21g. Other Gain/Loss on Disposition of  
Assets Other Than Inventory  
Part III. Reconciliation of Net Income  
(Loss) per Income Statement of  
Partnership With Income (Loss) per  
Return— Expense/Deduction Items  
Report on line 21g any gains or losses from the sale or exchange  
of property other than inventory that aren't reported on lines 21b  
through 21f.  
Line 22. Other Income (Loss) Items With  
Differences  
Note. Expense amounts that reduce financial income must be  
reported on Part III, column (a), as positive amounts. Deduction  
amounts that reduce taxable income must be reported on Part  
III, column (d), as positive amounts. Amounts reported on Part II,  
line 24, must be the negative of the amounts reported on Part III,  
line 31.  
Separately state and adequately disclose on line 22 all items of  
income (loss) with differences that aren't otherwise listed on  
lines 1 through 21. Attach a statement that describes and  
itemizes the type of income (loss) and the amount of each item  
and provides a description that states the income (loss) name for  
book purposes for the amount recorded in column (a) and  
describes the adjustment being recorded in column (b) or (c).  
The entire description completes the tax description for the  
amount included in column (d) for each item separately stated  
on this line.  
Lines 1 Through 4. Income Tax Expense  
If the partnership doesn't distinguish between current and  
deferred income tax expense in its financial statements (or its  
books and records, if applicable), report income tax expense as  
current income tax expense using lines 1 and 3, as applicable.  
The attached statement should have five columns. The first  
column has the description for the next four columns. The  
second column is Column (a), Income (Loss) per Income  
Statement. The third column is Column (b), Temporary  
Difference. The fourth column is Column (c), Permanent  
Difference. The fifth column is Column (d), Income (Loss) per  
Tax Return. For every item listed on the attached statement for  
line 22, columns (a) + (b) + (c) must equal column (d). Each item  
with amounts in columns (a), (b), (c), and (d) will be totaled and  
included as one line on line 22.  
Line 5. Equity-Based Compensation  
Report on line 5 any amounts for equity-based compensation or  
consideration that are reflected as expense for financial  
accounting purposes (column (a)) or deducted in the U.S.  
income tax return (column (d)) other than amounts reportable  
elsewhere on Schedule M-3, Parts II and III. Examples of  
amounts reportable on line 5 include expense/deduction items  
attributable to options to acquire capital interest units, profits  
interest units, and other rights to acquire partnership equity,  
regardless of whether such payments are made to employees or  
nonemployees, or as payment for property or compensation for  
services.  
A partnership should include tax-exempt income from  
forgiven Paycheck Protection Program (PPP) loans on line 22,  
column (c), as a negative number if it was included on line 22 in  
column (a) as Income per Income Statement.  
Line 6. Meals and Entertainment  
If any “comprehensive income,as defined by Statement of  
Financial Accounting Standards (SFAS) No. 130, is reported on  
this line, describe the item(s) in detail. Examples of sufficiently  
detailed descriptions include “Foreign currency translation  
adjustments—comprehensive income” and “Gains and losses  
on available-for-sale securities—comprehensive income.”  
Report on line 6, column (a), any amounts paid or accrued by the  
partnership during the tax year for meals, beverages, and  
entertainment that are accounted for in financial accounting  
income, regardless of the classification, nomenclature, or  
terminology used for such amounts, and regardless of how or  
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where such amounts are classified in the partnership's financial  
income statement or the income and expense accounts  
maintained in the partnership's books and records. Report only  
amounts not otherwise reportable elsewhere on Schedule M-3,  
Parts II and III (for example, Part II, line 15).  
financial accounting purposes, the amount reported in column  
(c) as a permanent difference will be the negative of the  
guaranteed payment income reported on Form 1065,  
Schedule K, line 4. If no guaranteed payment expense is  
recognized for financial accounting purposes, the amount  
reported in column (c) as a permanent difference will generally  
be zero. Any amount of guaranteed payments capitalized for tax  
purposes on Form 1065, page 1, but not capitalized for financial  
accounting purposes, will generally be reported as a negative  
temporary difference amount in column (b).  
Line 7. Fines and Penalties  
Report on line 7 any fines or similar penalties paid to a  
government or other authority for the violation of any law for  
which fines or penalties are assessed. All fines and penalties  
expensed in financial accounting income (paid or accrued) must  
be included on line 7, column (a), regardless of the government  
or other authority that imposed the fines or penalties, regardless  
of whether the fines and penalties are civil or criminal, regardless  
of the classification, nomenclature, or terminology used for the  
fines or penalties by the imposing authority in its actions or  
documents, and regardless of how or where the fines or  
penalties are classified in the partnership's financial income  
statement or the income and expense accounts maintained in  
the partnership's books and records. Also report on line 7,  
column (a), the reversal of any over accrual of any amount  
described in this paragraph. See sections 162(f) and 162(g) for  
additional guidance.  
Example 19.  
1. ArrowRoot is a calendar year partnership that files and  
entirely completes Schedule M-3 for its 2023 tax year.  
ArrowRoot has total income in 2023 of $5,000 for both financial  
accounting and tax accounting purposes before taking into  
account guaranteed payments expense or deductions. Partner  
Arrow is paid a deductible guaranteed payment of $3,000 for  
services rendered to the partnership during the tax year. Partner  
Root is paid a $1,000 guaranteed payment, which is capitalized  
to land for tax accounting. Both guaranteed payments, in the  
total amount of $4,000, are treated as expenses in arriving at net  
financial accounting income. There are no other expenses or  
deductions for financial accounting or tax accounting purposes.  
The amount shown on Part I, line 11, Net income (loss) per  
income statement of the partnership, is $1,000 ($5,000 − $3,000  
− $1,000 = $1,000). The amount shown on line 9, column (a), is  
$4,000, the amount of guaranteed payments expenses for  
financial accounting purposes. The amount shown on line 9,  
column (d), is ($1,000), the net amount deducted after taking  
into consideration the $4,000 of total guaranteed payments  
allocated to the partners as income on Schedule K, netted  
against $3,000 deducted on Form 1065, page 1, line 10. The  
amount reported on line 9, column (b), is a temporary difference  
of ($1,000), the negative of the amount of guaranteed payments  
capitalized for Form 1065, page 1. The amount reported on  
line 9, column (c), is a permanent difference of ($4,000), equal to  
the guaranteed payment income shown on Form 1065,  
Schedule K, line 4, expressed as a negative amount. Part II,  
line 23, reports $5,000 in column (a), $0 in column (b), $0 in  
column (c), and $5,000 in column (d). Part II, line 24, reports  
($4,000) in column (a), $1,000 in column (b), $4,000 in column  
(c), and $1,000 in column (d). Part II, line 26, reports $1,000 in  
column (a), $1,000 in column (b), $4,000 in column (c), and  
$6,000 in column (d).  
Report on line 7, column (d), any such amounts described in  
the preceding paragraph that are includible in taxable income,  
regardless of the financial accounting period in which such  
amounts were or are included in financial accounting net  
income. Complete columns (b) and (c), as appropriate.  
Don't report on line 7 amounts required to be reported in  
accordance with the instructions for line 8.  
Don't report on line 7 amounts recovered from insurers or any  
other indemnitors for any fines and penalties described above.  
Line 8. Judgments, Damages, Awards, and  
Similar Costs  
Report on line 8, column (a), the amount of any estimated or  
actual judgments, damages, awards, settlements, and similar  
costs, however named or classified, included in financial  
accounting income, regardless of whether the amount deducted  
was attributable to an estimate of future anticipated payments or  
actual payments. Also report on line 8, column (a), the reversal  
of any over accrual of any amount described in this paragraph.  
Report on line 8, column (d), any such amounts described in  
the preceding paragraph that are includible in taxable income,  
regardless of the financial accounting period in which such  
amounts were or are included in financial accounting net  
income. Complete columns (b) and (c), as appropriate.  
2. The facts are the same as in Example 19.1, except that no  
guaranteed payments expense is recognized for financial  
accounting purposes. The amount shown on Part I, line 11, is  
$5,000. On line 9, ArrowRoot reports $0 in column (a), ($1,000)  
in column (b), $0 in column (c), and ($1,000) in column (d). Part  
II, line 23, reports $0 in column (a), $1,000 in column (b), $0 in  
column (c), and $1,000 in column (d). On Part II, line 25,  
ArrowRoot reports $5,000 in column (a), $1,000 in column (b),  
$0 in column (c), and $6,000 in column (d).  
Don't report on line 8 amounts required to be reported in  
accordance with the instructions for line 7.  
Don't report on line 8 amounts recovered from insurers or any  
other indemnitors for any judgments, damages, awards, or  
similar costs described above.  
Line 10. Pension and Profit-Sharing  
Report on line 10 any amounts attributable to the partnership's  
pension plans, profit-sharing plans, and any other retirement  
plans.  
Line 9. Guaranteed Payments  
Include on line 9, column (a), the amount of guaranteed  
payments expense that is included on Part I, line 11. Report in  
column (d) the net amount of guaranteed payments deduction.  
The net amount of the deduction reported in column (d) is the  
amount reported as a deduction on Form 1065, page 1, line 10,  
reduced by the amount reported as income on Form 1065,  
Schedule K, line 4. The net amount of the guaranteed payments  
reported in column (d) will be zero if no guaranteed payments  
are capitalized and all are deducted on Form 1065, page 1,  
line 10, or a negative amount (reported in parentheses) if any of  
the guaranteed payments are capitalized by the partnership.  
Generally, if guaranteed payments expense is recognized for  
Line 11. Other Post-Retirement Benefits  
Report on line 11 any amounts attributable to other  
post-retirement benefits not otherwise includible on line 10 (for  
example, retiree health and life insurance coverage, dental  
coverage, etc.).  
Line 12. Deferred Compensation  
Report on line 12, column (a), any compensation expense  
included in the net income (loss) amount reported on Part I,  
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line 11, that isn't deductible for U.S. income tax purposes in the  
current tax year and that wasn't reported elsewhere on  
Schedule M-3, column (a). Report on line 12, column (d), any  
compensation deductible in the current tax year that wasn't  
included in the net income (loss) amount reported on Part I,  
line 11, for the current tax year and that isn't reportable  
elsewhere on Schedule M-3, including any compensation  
deductions deferred in a prior tax year. For example, report  
originations and reversals of deferred compensation subject to  
section 409A on line 12.  
Line 19. Amortization/Impairment of Goodwill  
Report on line 19 amortization of goodwill or amounts  
attributable to the impairment of goodwill.  
Line 20. Amortization of Acquisition,  
Reorganization, and Start-up Costs  
Report on line 20 amortization of acquisition, reorganization, and  
start-up costs. For purposes of columns (b), (c), and (d), include  
amounts amortizable under section 167 or 195.  
Line 14. Charitable Contribution of Intangible  
Property  
Line 21. Other Amortization or Impairment  
Write-Offs  
Report on line 14 any charitable contribution of intangible  
property, for example, contributions of:  
Report on line 21 any amortization or impairment write-offs not  
otherwise includible on Schedule M-3.  
Intellectual property, patents (including any amounts of  
Line 22. Reserved  
additional contributions allowable by virtue of income earned by  
donees subsequent to the year of donation), copyrights,  
trademarks;  
When using this line to figure amounts on other tax forms or  
worksheets, this line should be considered to be zero.  
Securities (including stocks and their derivatives, stock  
options, and bonds);  
Conservation easements (including scenic easements or air  
Line 23a. Depletion—Oil & Gas  
Form 1065 filers report on line 23a, column (a), any oil and gas  
depletion included on Part I, line 11.  
rights);  
Railroad rights of way;  
Mineral rights; and  
Line 23b. Depletion—Other Than Oil & Gas  
Other intangible property.  
Report on line 23b any depletion expense/deduction other than  
oil and gas that isn't required to be reported elsewhere on  
Schedule M-3 (for example, on Part II, line 7, 8, 9, or 15).  
Line 15. Organizational Expenses as per  
Regulations Section 1.709-2(a)  
Include on line 15, column (a), organizational expenses, as  
defined in Regulations section 1.709-2(a). Include on line 15,  
column (d), the amount of organizational expense deducted per  
section 709(b).  
Line 24. Intangible Drilling and Development  
Costs (IDC)  
Intangible drilling and development costs (IDC) are costs of  
developing oil, gas, or geothermal wells. Report on line 24,  
column (a), the total amount of intangible drilling and  
development costs (or such equivalent costs as classified in the  
partnership's financial statements) included on Part I, line 11,  
and report on line 24, column (d), the total amount of IDC paid or  
incurred during the current tax year under section 263(c) and  
Regulations section 1.612-4.  
Line 16. Syndication Expenses as per  
Regulations Section 1.709-2(b)  
Include on line 16 syndication expenses, as defined in  
Regulations section 1.709-2(b).  
Line 17. Current Year Acquisition/  
Reorganization Investment Banking Fees  
Line 25. Depreciation  
Report on line 25 any depreciation expense/deduction that isn't  
required to be reported elsewhere on Schedule M-3 (for  
example, on Part II, line 7, 8, 9, or 15).  
Report on line 17 any investment banking fees paid or incurred in  
connection with a taxable or tax-free acquisition of property (for  
example, ownership interests or assets) or a tax-free  
reorganization not otherwise reportable on Schedule M-3 (for  
example, line 15 or 16). Report on this line any investment  
banking fees paid or incurred at any stage of the acquisition or  
reorganization process, including, for example, fees paid or  
incurred to evaluate whether to investigate an acquisition, fees to  
conduct an actual investigation, and fees to consummate the  
acquisition or reorganization.  
Line 26. Bad Debt Expense  
Report on line 26, column (a), any amounts attributable to an  
allowance for uncollectible accounts receivable or actual  
write-offs of accounts receivable included on Part I, line 11.  
Report in column (d) the amount of bad debt expense deductible  
for federal income tax purposes under section 166.  
Line 18. Current Year Acquisition/  
Line 27. Interest Expense  
Reorganization Legal and Accounting Fees  
Attach Form 8916-A. Complete Part III and enter the amounts  
shown on line 5, columns (a) through (d), on Schedule M-3,  
line 27, columns (a) through (d), as applicable.  
Report on line 18 any legal and accounting fees paid or incurred  
in connection with a taxable or tax-free acquisition of property  
(for example, ownership interests or assets) or a tax-free  
reorganization not otherwise reportable on Schedule M-3 (for  
example, line 15 or 16). Report on this line any legal and  
accounting fees paid or incurred at any stage of the acquisition  
or reorganization process, including, for example, fees paid or  
incurred to evaluate whether to investigate an acquisition, fees to  
conduct an actual investigation, and fees to consummate the  
acquisition or reorganization.  
An entity that (a) is required to file a Schedule M-3 and has  
less than $50 million in total assets at the end of the tax year, or  
(b) isn't required to file a Schedule M-3 and voluntarily files a  
Schedule M-3, isn't required to file Form 8916-A but may  
voluntarily do so.  
Report on line 27, column (a), the total amount of interest  
expense included on Part I, line 11, and report on line 27,  
column (d), the total amount of interest deduction included on  
line 1 of the Analysis of Net Income (Loss) found on Form 1065  
that isn't reported elsewhere on Schedule M-3. In column (b) or  
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(c), as applicable, adjust for any amounts treated for U.S. income  
tax purposes as interest deduction that are treated as some  
other form of expense for financial accounting purposes, or vice  
versa. For example, adjustments to interest expense/deduction  
resulting from adjustments made in accordance with the  
instructions for line 28 should be made in columns (b) and (c), as  
applicable, of line 27.  
specified expenditures attributable to foreign research),  
beginning with the midpoint of the tax year in which the  
expenses are paid or incurred. See section 174.  
Report in column (a) the amount of expenses included in net  
income reported on Part I, line 11, that are related to research  
and development expenses. Report in column (d) the amount of  
amortization deductions included in total deductions on page 1  
of the return and/or separately reported on Schedule K of the  
return that are recognized and reported for section 174 research  
and experimental expenditures. In column (c), as applicable,  
include any adjustments for any amounts treated for U.S. income  
tax purposes as research or experimental expenditures that are  
treated as some other form of expense for financial accounting  
purposes, or vice versa. Report any difference in timing  
recognition in column (b).  
Don't report on Form 8916-A and on line 27 amounts reported  
in accordance with the instructions for (a) Part II, lines 7, 8, and  
9, Income (loss) from U.S. partnerships, foreign partnerships,  
and other pass-through entities; and (b) Part II, line 10, items  
relating to reportable transactions.  
Line 28. Purchase Versus Lease (for Purchasers  
and/or Lessees)  
Example 21.  
Note. Also see the instructions for Part II, line 16, for sellers  
and/or lessors.  
1. Partnership Beech is a calendar year taxpayer that files  
and entirely completes Schedule M-3 for its 2023 tax year.  
During 2023, Beech incurred $100,000 of research and  
development costs that Beech recognized as an expense in its  
financial statements. In compliance with section 174, Beech  
capitalizes and amortizes research and experimental  
Asset transfer transactions with periodic payments  
characterized for financial accounting purposes as either a  
purchase or a lease may, under some circumstances, be  
characterized as the opposite for tax purposes.  
If a transaction is treated as a lease, the purchaser/lessee  
reports the periodic payments as gross rental expense. If the  
transaction is treated as a purchase, the purchaser/lessee  
reports the periodic payments as payments of principal and  
interest and also reports depreciation expense or deduction with  
respect to the purchased asset.  
expenditures for U.S. income tax purposes. Accordingly, Beech  
must report $100,000 in column (a), $90,000 in column (b), and  
$10,000 [($100,000/5 years) × 1/2] in column (d).  
2. Partnership Flora is a calendar year taxpayer that files  
and entirely completes Schedule M-3 for its 2023 tax year.  
During 2023, Flora incurred $10,000 of research and  
development costs related to social sciences that it recognized  
as an expense in its financial statements. Flora amortizes  
research and experimental expenditures for U.S. income tax  
purposes. Because such costs aren't allowable costs under  
section 174, Flora must report $10,000 in column (a), permanent  
difference ($10,000) in column (c), and $0 in column (d). If such  
costs are otherwise deductible for U.S. income tax purposes,  
Flora must report this item of expense on Part III, line 30.  
3. Partnership Basil is a calendar year taxpayer that files and  
entirely completes Schedule M-3 for its 2023 tax year. During  
2023, Basil paid $75,000 to acquire or in-license intangible  
assets under a collaborative arrangement with another company  
that Basil recognized as a research and development expense in  
its financial statements. Because payments made to acquire  
rights to a product or technology are excluded costs from the  
definition of research and experimental expenditures, Basil must  
report $75,000 in column (a), ($75,000) in column (c), and $0 in  
column (d). Basil must report any amortization otherwise  
allowable related to the payments on Part III, line 21.  
Report in column (a) gross rent expense for a transaction  
treated as a lease for financial accounting purposes but as a sale  
for U.S. income tax purposes. Report in column (d) gross rental  
deductions for a transaction treated as a lease for U.S. income  
tax purposes but as a purchase for financial accounting  
purposes. Report interest expense or deduction amounts for  
such transactions on line 27, in column (a) or (d), as applicable.  
Report depreciation expense or deductions for such transactions  
on line 25, in column (a) or (d), as applicable. Use columns (b)  
and (c) of lines 25, 27, and 28, as applicable, to report the  
differences between columns (a) and (d) for such  
recharacterized transactions.  
Example 20. Spruce is a calendar year U.S. partnership  
that files and entirely completes Schedule M-3 for its 2023 tax  
year. Spruce acquired property in a transaction that, for financial  
accounting purposes, Spruce treats as a lease. Because of its  
terms, the transaction is treated for U.S. income tax purposes as  
a purchase, and Spruce must treat the periodic payments it  
makes partially as a payment of principal and partially as a  
payment of interest. In its financial statements, Spruce treats the  
difference between the financial accounting and U.S. income tax  
treatment of this transaction as a temporary difference. During  
2023, Spruce reports in its financial statements $1,000 of gross  
rental expense that, for U.S. income tax purposes, is  
Line 30. Other Expense/ Deduction Items With  
Differences  
Separately state and adequately disclose on line 30 all items of  
expense/deduction that aren't otherwise listed on lines 1 through  
29.  
recharacterized as a $700 payment of principal and a $300  
payment of interest, accompanied by a depreciation deduction of  
$1,200 (based on other facts). On its 2023 Schedule M-3,  
Spruce must report the following on line 28: column (a), $1,000,  
its financial accounting gross rental expense; column (b),  
($1,000); and column (d), $0. On line 27, Spruce reports $0 in  
column (a) and $300 in columns (b) and (d) for the interest  
deduction. On line 25, Spruce reports $0 in column (a) and  
$1,200 in columns (b) and (d) for the depreciation deduction.  
Attach a statement that describes and itemizes the type of  
expense/deduction and the amount of each item, and provides a  
description that states the expense/deduction name for book  
purposes for the amount recorded in column (a) and describes  
the adjustment being recorded in column (b) or (c). The entire  
description completes the tax description for the amount  
included in column (d) for each item separately stated on this  
line.  
The statement of details attached to the return for line 30  
must separately state and adequately disclose the nature and  
amount of the expense related to each reserve and/or contingent  
liability. The appropriate level of disclosure depends upon each  
taxpayer's operational activity and the nature of its accounting  
records. For example, if a partnership's net income amount  
Line 29. Research and Development Costs  
For tax years beginning after December 31, 2021, for U.S.  
income tax purposes, research and experimental expenditures  
paid or incurred by a taxpayer in connection with the taxpayer's  
trade or business must be amortized. The expenditures must be  
amortized ratably over the 5-year period (15-year period for  
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reported in the income statement includes anticipated expenses  
for a discontinued operation as a single amount, and its general  
ledger or other books, records, and work papers provide details  
for the anticipated expenses under more explanatory and  
defined categories such as employee termination costs, lease  
cancellation costs, loss on sale of equipment, etc., a supporting  
statement that lists those categories of expenses and their  
details will satisfy the requirement to separately state and  
adequately disclose. In order to separately state and adequately  
disclose the employee termination costs, it isn't required that an  
anticipated termination cost amount be listed for each employee,  
or that each asset (or category of asset) be listed along with the  
anticipated loss on disposition.  
in net income reported on Part I, line 11, that are related to  
reserves and contingent liabilities. Report on line 30, column (d),  
amounts related to liabilities for reserves and contingent  
liabilities that are deductible in the current tax year for U.S.  
income tax purposes. Examples of items that must be reported  
on line 30 include warranty reserves, restructuring reserves,  
reserves for discontinued operations, and reserves for  
acquisitions and dispositions. Only report on line 30 items that  
aren't required to be reported elsewhere on Schedule M-3, Parts  
II and III. For example, the expense for a reserve for inventory  
obsolescence must be reported on Part II, line 15.  
Example 22. Partnership Quail is a calendar year  
partnership that files and entirely completes Schedule M-3 for its  
2023 tax year. On July 1 of each year, Quail has a fixed liability  
for its annual insurance premiums that provides a 12-month  
coverage period beginning July 1 through June 30. In addition,  
Quail historically prepays 12 months of advertising expense on  
July 1. On July 1, 2023, Quail prepays its insurance premium of  
$500,000 and advertising expenses of $800,000. For financial  
accounting purposes, Quail capitalizes and amortizes the  
prepaid insurance and advertising over 12 months. For U.S.  
income tax purposes, Quail deducts the insurance premium  
when paid and amortizes the advertising over the 12-month  
period. In its financial statements, Quail treats the differences  
attributable to the financial statement treatment and U.S. income  
tax treatment of the prepaid insurance and advertising as  
temporary differences.  
The attached statement should have five columns. The first  
column has the description for the next four columns; the second  
column is Column (a), Expense per Income Statement; the third  
column is Column (b), Temporary Difference; the fourth column  
is Column (c), Permanent Difference; and the fifth column is  
Column (d), Deduction per Tax Return. For every item listed on  
the attached statement for line 30, columns (a) + (b) + (c) must  
equal column (d). Each item with amounts in columns (a), (b),  
(c), and (d) will be totaled and included as one line on line 30 of  
the face of the schedule.  
Comprehensive income. If any “comprehensive income,as  
defined by SFAS No. 130, is reported on this line, describe the  
item(s) in detail as, for example, “Foreign currency translation  
adjustments—comprehensive income” and “Gains and losses  
on available-for-sale securities—comprehensive income.”  
Quail also has a legal expense reserve where $300,000 was  
expensed for financial accounting purposes and a ($100,000)  
temporary difference was calculated to arrive at the income tax  
deduction of $200,000. The statement attached to Quail's return  
for Part III, line 30, must be separately stated and adequately  
disclosed as follows:  
Reserves and contingent liabilities. Report on line 30  
amounts related to the change in each reserve or contingent  
liability that isn't required to be reported elsewhere on  
Schedule M-3. Report on line 30, column (a), expenses included  
Column (a)  
Expense per Income  
Statement  
Column (b)  
Temporary Difference  
Column (c)  
Permanent Difference  
Column (d)  
Deduction per Tax Return  
Description  
Prepaid insurance premium  
expenses not capitalized  
$250,000  
300,000  
$250,000  
(100,000)  
$150,000  
-0-  
-0-  
-0-  
$500,000  
200,000  
Legal expense reserve  
Total line 30  
$550,000  
$700,000  
reflects an amount of $1 million, then report on Part II, line 24,  
column (a), ($1,000,000). Similarly, if line 31, column (b), reflects  
an amount of ($50,000), then report on Part II, line 24, column  
(b), $50,000.  
Line 31. Total Expense/ Deduction Items  
Enter on Part II, line 24, columns (a) through (d), as applicable,  
positive amounts from line 31 as negative (in parentheses) and  
negative amounts as positive. For example, if line 31, column (a),  
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