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Muoto 1120-S ohjeet M-3

Ohjeet M-3 (lomake 1120-S), Net-tuotto (Loss) sovitus S-yrityksille, joilla on yhteensä 10 miljoonaa dollaria tai enemmän

Rev joulukuu 2019

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  • 1120-s aikataulu M-3 - Nettotuotto (Loss) sovinto S-yrityksille, joilla on yhteensä 10 miljoonaa dollaria tai enemmän
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Department of the Treasury  
Internal Revenue Service  
Instructions for  
Schedule M-3 (Form 1120-S)  
(Rev. December 2019)  
Net Income (Loss) Reconciliation for S Corporations With Total Assets of  
$10 Million or More  
Section references are to the Internal Revenue  
Code unless otherwise noted.  
Department of the Treasury  
Internal Revenue Service Center  
Ogden, UT 84201-0013  
separate U.S. income tax returns. The  
consolidated accrual basis financial  
statements for C and D report total  
assets at the end of the tax year of $12  
million after intercompany eliminations.  
C reports separate company total  
year-end assets on its Schedule L of $7  
million. D reports separate company  
total year-end assets on its Schedule L  
of $6 million. Neither C nor D is required  
to file Schedule M-3 for the current tax  
year. C or D may voluntarily file  
Future Developments  
For the latest information about  
developments related to Schedule M-3  
(Form 1120-S) and its instructions, such  
as legislation enacted after they were  
published, go to  
Who Must File  
Any corporation required to file Form  
1120-S, U.S. Income Tax Return for an  
S Corporation, that reports on  
Schedule L of Form 1120-S total assets  
at the end of the corporation's tax year  
that equal or exceed $10 million must  
file Schedule M-3 (Form 1120-S). A  
corporation or group of corporations that  
completes Parts II and III of  
General Instructions  
Schedule M-3 for the current tax year. If  
C or D doesn't file Schedule M-3, it must  
file Schedule M-1. If C or D files  
Applicable schedule and instruc-  
tions. Due to the generally unchanging  
nature of Schedule M-3 (Form 1120-S),  
these instructions will no longer be  
updated annually, unless necessary.  
Schedule M-3, isn't required to  
Schedule M-3, it must either: (i)  
complete Form 1120-S, Schedule M-1,  
Reconciliation of Income (Loss) per  
Books With Income (Loss) per Return.  
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  
For previous tax years, see the  
applicable Schedule M-3 (Form 1120-S)  
and instructions. For example, use the  
2018 Schedule M-3 (Form 1120-S) with  
the 2018 Instructions for Schedule M-3  
(Form 1120-S) for tax years ending  
December 31, 2018, through December  
30, 2019.  
A U.S. corporation filing Form 1120-S  
that isn't required to file Schedule M-3  
may voluntarily file Schedule M-3  
instead of Schedule M-1.  
Schedule M-3.  
Completing Schedule M-3  
(Form 1120-S)  
Any corporation filing Schedule M-3  
must check the box on Form 1120-S,  
item C, indicating that Schedule M-3 is  
attached (whether required or  
voluntary).  
A corporation that is required to file  
Schedule M-3 (Form 1120-S) and has at  
least $50 million total assets at the end  
of the tax year must complete  
Purpose of Schedule  
Schedule M-3, Part I, asks certain  
questions about the corporation's  
financial statements and reconciles  
financial statement worldwide net  
income (loss) for the corporation (or  
consolidated financial statement group,  
if applicable), as reported on Part I,  
line 4a, to income (loss) per the income  
statement of the corporation for U.S.  
income tax purposes, as reported on  
Part I, line 11.  
Schedule M-3 (Form 1120-S) entirely.  
Example 1.  
A corporation that (a) is required to  
file Schedule M-3 (Form 1120-S) and  
has less than $50 million total assets at  
the end of the tax year or (b) isn't  
required to file Schedule M-3 (Form  
1120-S) and voluntarily files  
1. U.S. corporation A owns U.S.  
subsidiary B and foreign subsidiary F.  
For its current tax year, A prepares  
consolidated financial statements with B  
and F that report total assets of $12  
million. A files a U.S. income tax return  
with B (a corporation that has made a  
qualified subchapter S subsidiary  
election) and reports total assets on  
Schedule L of $8 million. A's U.S. tax  
group isn't required to file Schedule M-3  
for the current tax year. A may  
Schedule M-3 (Form 1120-S) must  
either (i) complete Schedule M-3 (Form  
1065) entirely or (ii) complete  
Schedule M-3 (Form 1120-S) through  
Part I and complete Form 1120-S,  
Schedule M-1 instead of completing  
Parts II and III of Schedule M-3 (Form  
1120-S). If the corporation chooses to  
complete Form 1120-S, Schedule M-1  
instead of completing Parts II and III of  
Schedule M-3 (Form 1120-S), line 1 of  
Form 1120-S, Schedule M-1 must equal  
line 11 of Part I of Schedule M-3 (Form  
1120-S).  
Schedule M-3, Parts II and III,  
reconcile financial statement net income  
(loss) for the U.S. tax return (per  
Schedule M-3, Part I, line 11) to total  
income (loss) on Form 1120-S,  
Schedule K, line 18.  
voluntarily file Schedule M-3 for the  
current tax year. If A doesn't file  
Schedule M-3, it must file  
Schedule M-1. If A files Schedule M-3, it  
must either: (i) complete Schedule M-3  
entirely; or (ii) complete Schedule M-3  
through Part I and complete  
Where To File  
If the corporation is required to file (or  
voluntarily files) Schedule M-3 (Form  
1120-S), the corporation must file Form  
1120-S and all attachments, schedules,  
including Schedule M-3 (Form 1120-S),  
and statements at the following  
address.  
Schedule M-1 instead of completing  
Parts II and III of Schedule M-3.  
For any part of Schedule M-3 (Form  
1120-S) that is completed, all columns  
must be completed, all applicable  
questions must be answered, all  
numerical data asked for must be  
2. U.S. corporation C owns U.S.  
subsidiary D. For its current tax year, C  
prepares consolidated financial  
statements with D, but C and D file  
Nov 21, 2019  
Cat. No. 48245B  
provided, any statement required to  
support a line item must be attached  
and provide the information required for  
that line item.  
Total assets shown on Schedule L,  
line 15, column (d), must equal the total  
assets of the corporation as of the last  
day of the tax year, and must be the  
same total assets reported by the  
corporation in the non-tax-basis  
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  
generally is disregarded as separate  
from its owner for U.S. income tax  
purposes (disregarded entity) mustn't  
be separately reported on Schedule M-3  
except, if required, on Part I, line 7a, 7b,  
or 7c. On Schedule M-3, Parts II and III,  
any item of income, gain, loss,  
Any corporation filing Schedule M-3  
must check the box on Form 1120-S,  
item C, indicating that Schedule M-3 is  
attached (whether required or  
voluntary).  
financial statements, if any, used for  
Schedule M-3. If the corporation doesn't  
prepare non-tax-basis financial  
statements, Schedule L must be based  
on the corporation's books and records.  
The Schedule L balance sheet can  
show tax-basis balance sheet amounts  
if the corporation is allowed to use  
books and records for Schedule M-3  
and the corporation's books and records  
reflect only tax-basis amounts.  
Other Issues Affecting  
Schedule M-3 Filing  
Requirements  
If a corporation was required to file  
Schedule M-3 for the preceding tax  
year, but reports on Form 1120-S,  
Schedule L, total assets at the end of  
the current tax year of less than $10  
million, the corporation isn't required to  
file Schedule M-3 for the current tax  
year.  
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 mustn't be  
reported on Part II, line 7, 8, or 9 as from  
a separate partnership or other  
Generally, total assets at the  
beginning of the year (Schedule L,  
line 15, column (b)) must equal total  
assets at the close of the prior year  
(Schedule L, line 15, 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 difference. In  
particular, indicate if the differences  
occurred because of acquisitions or  
mergers.  
pass-through. The financial statement  
income or loss of a disregarded entity  
other than a qualified subchapter S  
subsidiary (QSub) is included on Part I,  
line 7b, if and only if its financial  
For purposes of determining whether  
the corporation has total assets at the  
end of the current tax year of $10 million  
or more, the corporation's total assets  
must be determined on an overall  
accrual method of accounting unless  
both of the following apply: (a) the tax  
return of the corporation is prepared  
using an overall cash method of  
statement income or loss is included on  
Part I, line 11, but not on Part I, line 4a.  
The financial statement income or loss  
of a QSub is included on Part I, line 7c, if  
and only if its financial statement  
income or loss is included on Part I,  
line 11, but not on Part I, line 4a.  
accounting, and (b) no includible entity  
in the U.S. tax return prepares or is  
included in financial statements  
Qualified Subchapter S Subsidiaries  
(QSubs). Because a QSub is a  
prepared on an accrual basis.  
For purposes of measuring total  
assets at the end of the year, the  
corporation's assets may not be netted  
or reduced by the corporation's  
disregarded entity, for purposes of  
Schedule M-3, Schedule L, and the tax  
return in general, the subsidiary is  
deemed to have liquidated into the  
parent S corporation. As such, all  
QSubs are treated as divisions of the S  
corporation parent and they mustn't be  
separately reported on Schedule M-3  
except, if required, on Part I, line 7c.  
See the instructions for Part I,  
line 1, for a discussion of  
non-tax-basis income  
TIP  
statements and related non-tax-basis  
balance sheets to be used in the  
preparation of Schedule M-3 and of  
Form 1120-S, Schedule L.  
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  
a partnership may be shown as  
appropriate under the corporation's  
non-tax-basis method of accounting,  
including, if required by the  
Other Form 1120-S  
Schedules Affected by  
Schedule M-3  
Reportable Entity Partner  
Reporting Responsibilities  
A reportable entity partner to a  
partnership filing Form 1065, U.S.  
Return of Partnership Income, is an  
entity that:  
corporation's reporting methodology,  
the equity method of accounting for  
investments. If Schedule L is prepared  
on a tax-basis method, an investment  
by the corporation in a partnership must  
be shown as an asset and measured by  
the corporation's adjusted basis in its  
partnership interest. Any liabilities  
contributing to such adjusted basis must  
be shown on Schedule L as corporate  
liabilities. In any event, any investments  
or other assets reported on Schedule L  
can never be reported as negative  
amounts.  
Requirements  
Schedule L  
If a non-tax-basis income statement and  
related non-tax-basis balance sheet is  
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  
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 on any  
day of the tax year; and  
Was required to file Schedule M-3 on  
instructions for Part I, line 1, for a  
discussion of 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  
Schedule M-3 and the related  
its most recently filed U.S. federal  
income tax return or return of income  
filed prior to that day.  
For the purposes of these  
Schedule M-1  
A corporation that completes Parts II  
and III of Schedule M-3 isn't required to  
complete Form 1120-S, Schedule M-1.  
instructions:  
1. The parent corporation of a  
consolidated tax group is deemed to  
own all corporate and partnership  
non-tax-basis balance sheet amounts  
that must be used for Schedule L.  
Instructions for Schedule M-3 (Form 1120-S)  
-2-  
interests owned or deemed to be owned  
The reportable entity partner must  
is deemed to have non-tax-basis  
under these instructions by any member keep copies of required reports it makes income statements and the related  
of the tax consolidated group;  
to partnerships under these instructions. non-tax-basis balance sheets for the  
Each partnership must keep copies of  
the required reports it receives under  
these instructions from reportable entity  
partners.  
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  
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;  
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; and  
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.  
management, creditors, shareholders,  
government regulators, or any other  
third parties for a period ending with or  
within the tax year.  
Example 2. A, a limited liability  
company (LLC) filing a Form 1065 for its  
current tax year is owned 50% by U.S.  
corporation Z which files Form 1120-S.  
A owns 50% of each of B, C, D, and E,  
each also an LLC filing a Form 1065 for  
its current tax year. Z was first required  
to file Schedule M-3 (Form 1120-S) for  
its prior corporate tax year ended  
If 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 corporation must check “Yes” for  
Part I, line 1a, and use that income  
statement for Schedule M-3. If no  
certified non-tax-basis income  
December 31 and filed its Form 1120-S  
with Schedule M-3 on September 15.  
As of September 16, Z was a reportable  
entity partner regarding A and, through  
A, regarding B, C, D, and E. On October  
5, Z reports to A, B, C, D, and E, as it is  
required to do within 30 days of  
statement is prepared but an unaudited  
non-tax-basis income statement is  
prepared for the period ending with or  
within the tax year, the corporation must  
check “Yes” for Part I, line 1b, and use  
that income statement for  
September 16, that Z is a reportable  
entity partner directly owning (regarding  
A) or deemed to own indirectly  
Schedule M-3.  
(regarding B, C, D, and E) a 50%  
interest. So, because Z was a  
Order of priority in accounting  
standards. If two or more  
reportable entity partner for its current  
tax year, each of A, B, C, D, and E is  
required to file Schedule M-3 (Form  
non-tax-basis income statements are  
both certified non-tax-basis income  
1065) for its current tax year, regardless statements for the period, the income  
of whether they would otherwise be  
required to file Schedule M-3 for that  
year.  
statement prepared according to the  
following order of priority in accounting  
standards must be used.  
A reportable entity partner 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, after that 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. U.S. Generally Accepted  
Accounting Principles (GAAP).  
Specific Instructions  
for Part I  
2. International Financial Reporting  
Standards (IFRS).  
3. Any other International  
Part I. Financial  
Information and Net  
Income (Loss)  
Accounting Standards (IAS).  
4. Other regulatory accrual  
accounting.  
1. Name.  
2. Mailing address.  
Reconciliation  
5. Any other accrual accounting  
standard.  
Line 1. Questions Regarding  
the Type of Income Statement  
Prepared  
For Part I, lines 1 through 12, use only  
the financial statements of the U.S.  
corporation filing the U.S. income tax  
return.  
3. Taxpayer identification number  
6. Any fair market value standard.  
7. Any cash basis standard.  
(TIN or EIN), if applicable.  
4. Entity or organization type.  
If no non-tax-basis income statement  
is certified and two or more  
5. State or country in which it is  
organized.  
non-tax-basis income statements are  
prepared, the income statement  
prepared according to the first listed of  
the accounting standards listed above  
must be used.  
6. Date on which it first became a  
reportable entity partner.  
7. Date for which it is reporting a  
change in its ownership interest in the  
partnership, if applicable.  
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 for which it is reporting.  
Non-Tax-Basis Financial  
Statements and Tax-Basis  
Financial Statements  
If no non-tax-basis financial  
A tax-basis income statement is allowed  
statements are prepared for a U.S.  
corporation filing Schedule M-3 (Form  
1120-S), the U.S. corporation must  
check “No” on questions 1a and 1b, skip  
Part I, lines 2, 3a, and 3b, and enter the  
net income (loss) per the books and  
records of the U.S. corporation on Part I,  
line 4a.  
for Schedule M-3 and a tax-basis  
balance sheet for Schedule L only if no  
non-tax-basis income statement and no  
non-tax-basis balance sheet was  
9. Any change in that interest as of  
prepared for any purpose and the books  
and records of the corporation reflect  
only tax-basis amounts. The corporation  
the date for which it is reporting.  
Instructions for Schedule M-3 (Form 1120-S)  
-3-  
2. International Financial Reporting  
Standards (IFRS).  
For example, if the net income (after  
consolidation and elimination entries) of  
a nonincludible foreign  
Lines 2 and 3. Questions  
Regarding Income Statement  
Period and Restatements  
Enter the beginning and ending dates  
on line 2 for the corporation's annual  
income statement period ending with or  
within the current tax year.  
3. Tax basis.  
4. Other (Specify).  
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  
Report on Part I, lines 5a through 10,  
as instructed below, all adjustment  
amounts required to adjust worldwide  
net income (loss) reported on this Part I,  
line 4a (whether from financial  
The questions on Part I, lines 3a and  
3b, regarding income statement  
statements or books and records), to  
net income (loss) of the corporation that  
must be reported on Part I, line 11.  
Report on line 12a the worldwide  
consolidated total assets and total  
liabilities amounts for the corporation  
using the same financial statements (or  
book and records) used for the  
restatements refer to the worldwide  
consolidated income statement issued  
by the corporation filing the U.S. income  
tax return and used to prepare  
consolidation or elimination entries (for  
intercompany dividends, minority  
interests, etc.) not reportable on Part I,  
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).  
Schedule M-3. Answer “Yes” on lines 3a  
and/or 3b if the corporation's annual  
income statement has been restated for  
any reason. Attach a short explanation  
of the reasons for the restatement in net  
income for each annual income  
worldwide consolidated income (loss)  
amount reported on line 4a.  
statement period that is restated,  
including the original amount and  
restated amount of each annual  
Line 6. Net Income (Loss) of  
Nonincludible U.S. Entities  
Line 5. Net Income (Loss) of  
Nonincludible Foreign Entities  
Remove the financial 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 U.S. tax return  
(nonincludible U.S. entity). In addition,  
on Part I, 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 net income (loss)  
of any nonincludible U.S. entity  
Remove the financial net income  
statement period's net income.  
(line 5a) or loss (line 5b) of each foreign  
entity that is included on line 4a and isn't  
an includible entity in the U.S. tax return  
(nonincludible foreign entity). In  
Line 4. Worldwide Consolidated  
Net Income (Loss) per Income  
Statement  
Report on Part I, line 4a, the worldwide  
consolidated net income (loss) per the  
income statement (or books and  
records, if applicable) of the  
corporation.  
addition, on Part I, line 8, adjust for  
consolidation eliminations and correct  
for minority interest and intercompany  
dividends between any nonincludible  
foreign entity and the entity filing Form  
1120-S. Don't remove in Part I the  
financial net income (loss) of any  
In completing Schedule M-3, the  
corporation must use financial  
accounted for on line 4a using the  
equity method.  
nonincludible foreign entity accounted  
for on line 4a using the equity method.  
statement amounts from the financial  
statement type checked “Yes” on Part I,  
line 1, or from its books and records if  
Part I, line 1b, is checked “No.”  
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  
Attach a supporting statement that  
provides the name, EIN, and net income  
(loss) included on line 4a that is  
If a corporation prepares  
removed on this line 6 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  
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 Part I, line 2.  
If the corporation prepares  
non-tax-basis financial statements and  
the income statement period differs  
from the corporation's tax year, the  
income statement period indicated on  
Part I, line 2, applies for purposes of  
Part I, lines 4 through 8.  
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 consolidation or  
nonincludible foreign entity without  
regard to the effect of consolidation or  
elimination entries. If there are  
elimination entries. If there are  
consolidation or elimination entries  
relating to nonincludible U.S. entities  
whose income (loss) is reported on the  
attached statement that aren't  
consolidation or elimination entries  
relating to nonincludible foreign entities  
whose income (loss) is reported on the  
attached statement that aren't  
If the corporation doesn't prepare  
non-tax-basis financial statements and  
has checked “No” on Part I, line 1b,  
enter the net income (loss) per the  
books and records of the U.S.  
reportable on Part I, line 8, the net  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
reportable on Part I, line 8, the net  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
corporation on Part I, line 4a.  
Indicate on Part I, line 4b, which of  
the following accounting standards were  
used for line 4a.  
statement, so that the separate financial  
statement, so that the separate financial accounting income (loss) of each  
accounting income (loss) of each  
nonincludible foreign entity remains  
separately stated.  
nonincludible U.S. entity remains  
separately stated. For example, if the  
net income (after consolidation and  
1. U.S. Generally Accepted  
Accounting Principles (GAAP).  
Instructions for Schedule M-3 (Form 1120-S)  
-4-  
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  
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  
Include on Part I, 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  
Part I, line 4a, required as a result of  
removing amounts on Part I, 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 Part I, line 7a, 7b,  
or 7c. This is necessary in order that the  
consolidation entries and intercompany  
elimination entries included in the  
amount reported on Part I, line 11, are  
only those applicable to the financial net  
income (loss) of includible entities for  
the financial statement period. For  
nonincludible U.S. legal entity from each disregarded entity or other QSub  
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 Part I, line 8, should be  
reported on the attached supporting  
statement as a net amount on a line  
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 other  
disregarded entities or other QSub  
whose income (loss) is reported on the  
attached statement that aren't  
separate and apart from lines that report reportable on Part I, line 8, the net  
each nonincludible U.S. entity's  
separate net income (loss).  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
Lines 7a, 7b, and 7c. Net  
Income (Loss) of Other Foreign  
Disregarded Entities, Net  
Income (Loss) of Other  
Disregarded Entities (Except  
Qualified Subchapter S  
Subsidiaries), and Net Income  
(Loss) of Other Qualified  
Subchapter S Subsidiaries  
(QSubs)  
Include on line 7a the financial income  
of any foreign disregarded entity that  
isn't included on Part I, line 4a, but is  
included in Part I, line 11 (other foreign  
disregarded entities). Include on line 7b  
or 7c 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  
statement, so that the separate financial example, adjustments must be reported  
accounting income (loss) of each other  
disregarded entity or other QSub  
on line 8 to remove minority interest and  
to reverse the elimination of  
remains separately stated. For example, intercompany dividends included on  
if the net income (after consolidation  
and elimination entries) of a  
Part I, line 4a, that relate to the net  
income of entities removed on Part I,  
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 Part I, line 7a, 7b, or 7c, and  
other entities included in the U.S.  
sub-consolidated group of other  
disregarded entities is being reported  
on line 7b, the attached supporting  
statement should report the income  
(loss) of each separate other  
disregarded entity from each 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 Part I,  
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  
disregarded entity's separate net  
income (loss).  
income tax return. See Example 3A, 3B,  
and 4 in the instructions for line 11.  
If a corporate owner of an interest in  
another entity: (a) accounts for the  
interest in entity in the owner  
corporation's separate general ledger  
on the equity method, and (b) fully  
consolidates entity in the owner  
therefore not included in the income  
reported on Part I, line 4a. Include on  
line 7b the financial income of any U.S.  
disregarded entity that isn't a qualified  
subchapter S subsidiary (QSub) or a  
foreign disregarded entity and that isn't  
included in the income reported on Part  
I, line 4a, but is included in Part I, line 11  
(other disregarded entities). Include on  
line 7c the financial income of any QSub  
that isn't included in the income  
corporation's consolidated financial  
statements, but entity isn't includible in  
the owner corporation's U.S. income tax  
return, then, as part of reversing all  
consolidation and elimination entries for  
the nonincludible entity, the corporate  
owner must reverse on Schedule M-3,  
Part I, line 8, the elimination of the equity  
income inclusion from entity. If the  
owner corporation doesn't account for  
entity on the equity method on its own  
general ledger, it won't have eliminated  
the equity income for consolidated  
financial statement purposes, so it will  
have no elimination of equity income to  
reverse.  
Line 8. Adjustment to  
Eliminations of Transactions  
Between Includible Entities and  
Nonincludible Entities  
Adjustments on Part I, line 8, to reverse  
certain financial accounting  
consolidation or elimination entries are  
necessary to ensure that transactions  
between includible entities and  
reported on line 4a, but is included on  
line 11 (other QSub). In addition, on Part  
I, line 8, adjust for consolidation  
nonincludible U.S. or foreign entities  
aren't eliminated, in order to report the  
correct total amount on Part I, line 11.  
Also, additional consolidation entries  
and elimination entries may be  
eliminations and correct for minority  
interest and intercompany dividends for  
any other disregarded entity or other  
QSub.  
necessary on Part I, line 8, related to  
transactions between includible entities  
that are in the consolidated financial  
group and other disregarded entities  
and QSubs that aren't in the  
Attach a supporting statement that  
provides the name, EIN, and net income  
(loss) per the financial statement or  
books and records on this line 7 for  
each separate other disregarded entity  
or other QSub. Also state the total  
assets and total liabilities for each such  
separate included entity and include  
those assets and liabilities amounts in  
The attached supporting statement  
for Part I, 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 intercompany eliminations that  
consolidated financial group but that are  
reported on Part I, line 7a, 7b, or 7c, in  
order to report the correct total amount  
on Part I, line 11.  
Instructions for Schedule M-3 (Form 1120-S)  
-5-  
net to zero on Part I, line 8, such as  
intercompany interest income and  
expense.  
entries (including workpaper  
in the net income amount on line 4a  
remain eliminated in the net income  
amount on line 11. Transactions  
adjustments) and dividend income or  
other income received from  
nonincludible entities. If the corporation  
prepares unconsolidated financial  
statements using the same accounting  
method used to determine worldwide  
between the corporation and the  
Line 9. Adjustment To  
Reconcile Income Statement  
Period to Tax Year  
Include on line 9 any adjustments  
necessary to the income (loss) of  
includible entities to reconcile  
differences between the corporation's  
income statement period reported on  
line 2 and the corporation's tax year.  
Attach a statement describing the  
adjustment.  
nonincludible entities that are eliminated  
in the net income amount on line 4a are  
included in the net income amount on  
consolidated net income (loss) for Part I, line 11 since the elimination of those  
line 4a, 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 items 3 and 4 under  
Example 3B, later.  
transactions were reversed on line 8.  
Example 3B.  
1. U.S. corporation P owns 60% of  
corporation DS1 which is fully  
consolidated in P's financial statements.  
P doesn't account for DS1 in P's  
separate general ledger on the equity  
method. DS1 has net income of $100  
(before minority interests) and pays  
dividends of $50, of which P receives  
$30. The dividend is eliminated in the  
consolidated financial statements. In its  
financial statements, P consolidates  
DS1 and includes $60 of net income  
($100 less the minority interest of $40)  
on Part I, line 4a.  
Example 3A. U.S. corporation P  
files a Form 1120-S U.S. tax return and  
prepares certified audited income  
statements for GAAP. P owns 100% of  
the stock of U.S. corporations DS1  
through DS75, between 51% and 99%  
of the stock of U.S. corporations DS76  
through DS100, and 100% of the stock  
of foreign entities FS1 through FS50. P  
eliminates all dividend income from DS1  
through DS100 and FS1 through FS50  
in financial statement consolidation  
entries. Furthermore, P eliminates the  
minority interest ownership, if any, of  
DS76 through DS100 in financial  
Line 10. Other Adjustments To  
Reconcile to Amount on Line 11  
Include on line 10 any other  
adjustments to reconcile net income  
(loss) on Part I, line 4a, through Part I,  
line 9, with net income (loss) on Part I,  
line 11.  
For any adjustments reported on Part  
I, line 10, attach a supporting statement  
with an explanation of each net  
P must remove the $100 net income  
of DS1 on Part I, line 6a. P must reverse  
on Part I, line 8, the elimination of the  
$40 minority interest net income of DS1.  
In addition, P reverses its elimination of  
the $30 intercompany dividend in its  
financial statements on Part I, line 8.  
The net result is that P includes the $30  
dividend from DS1 at Part I, line 11, and  
on Part II, line 6, column (a). P's  
adjustment included on line 10.  
Line 11. Net Income (Loss) per  
Income Statement of the  
Corporation  
Report on line 11 the net income (loss)  
per the income statement (or books and  
records, if applicable) of the  
statement consolidation entries.  
P must check “Yes” on Part I, line 1a.  
On Part I, line 4a, P must report the  
consolidated net income for the  
consolidated financial statement group  
of P, DS1 through DS100, and FS1  
through FS50. P must remove the net  
income (loss) of FS1 through FS50 on  
Part I, line 5a or 5b, as applicable, and  
remove on Part I, line 6a or 6b, as  
applicable, any net income (loss) from  
DS1 through DS75 where a QSub  
election hasn't been made by P. P must  
remove the net income (loss) before  
minority interests of DS76 through  
DS100 on Part I, line 6a or 6b, as  
applicable. P must reverse on Part I,  
line 8, the elimination of any  
dividend income included on the tax  
return from DS1 must be reported on  
Part II, line 6, column (d).  
corporation. Amounts reported in  
column (a) of Parts II and III (see later)  
must be reported on the same  
accounting method used to report the  
amount of net income (loss) per income  
statement of the corporation on Part I,  
line 11.  
Don't, in any event, report on this  
line 11 the net income of entities not  
included in the U.S. income tax return  
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  
this Part I, line 11, only the financial  
accounting net income of only the  
entities included in the U.S. income tax  
return.  
2. U.S. corporation C owns 60% of  
the capital and profits interests in U.S.  
LLC N. C doesn't account for N in C's  
separate general ledger on the equity  
method. N has net income of $100  
(before minority interests) and makes no  
distributions during the tax year. C  
treats N as a corporation for financial  
statement purposes and as a  
partnership for U.S. income tax  
purposes. In its financial statements, C  
consolidates N and includes $60 of net  
income ($100 less the minority interest  
of $40) on Part I, line 4a.  
transactions between the includible  
entity (P and any QSubs) and the  
nonincludible entities (DS1 through  
DS75 with no QSub election, DS76  
through DS100 and FS1 through FS50),  
including dividends received from  
non-QSub DS1 through DS75, DS76  
through DS100, and FS1 through FS50  
and the minority interest's share of the  
net income (loss) of DS76 through  
DS100.  
C must remove the $100 net income  
of N on Part I, line 6a. C must reverse on  
Part I, line 8, the elimination of the $40  
minority interest net income of N. The  
result is that C includes no income for N  
either on Part I, line 11, or on Part II,  
line 7, column (a). C's taxable income  
from N must be reported by C on Part II,  
line 7, column (d).  
Whether or not the corporation  
prepares financial statements, Part I,  
line 11, must include all items that  
impact the net income (loss) of the  
corporation even if they aren't recorded  
in the profit and loss accounts in the  
corporation's general ledger, including,  
for example, all post-closing adjusting  
P reports on Part I, line 11, the  
consolidated financial statement net  
income (loss) attributable to the  
3. U.S. corporation P owns 60% of  
corporation DS1, which is fully  
corporation and QSubs. Intercompany  
transactions between the corporation  
and the QSubs that had been eliminated  
consolidated in P's financial statements.  
P accounts for DS1 in P's separate  
general ledger on the equity method.  
Instructions for Schedule M-3 (Form 1120-S)  
-6-  
   
DS1 has net income of $100 (before  
DS1 is a QSub, 100% of the net income  
Specific Instructions for  
Parts II and III  
minority interests) and pays dividends of of both P and DS1 must be reported on  
$50, of which P receives $30. The  
dividend reduces P's investment in DS1  
for equity method reporting on P's  
separate general ledger where P  
includes its 60% equity share of DS1  
income, which is $60. In its financial  
statements, P eliminates the DS1 equity  
method income of $60 and consolidates  
DS1, including $60 of net income ($100  
less the minority interest of $40) on Part  
I, line 4a.  
Form 1120-S of P's U.S. income tax  
return, and the intercompany interest  
income and expense must be removed  
by consolidation elimination entries.  
General Reporting information  
A schedule or statement may be  
attached to any line even if none is  
required.  
P must report its financial statement  
net income of $1,040 on Part I, line 4a,  
and reports DS1's net income of $100  
on Part I, line 7c. Then, in order to  
For each line item in Parts II and III,  
report in column (a) the amount of net  
income (loss) included in Part I, line 11,  
and report in column (d) the amount  
included in total income (loss) on Form  
1120-S, Schedule K, line 18.  
reflect the full consolidation of the  
financial accounting net income of P  
and DS1 at Part I, line 11, the following  
consolidation and elimination entries are  
P must remove the $100 net income  
of DS1 on Part I, line 6a. P must reverse reported on Part I, line 8: offsetting  
on Part I, 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 P  
includes the $60 of equity method  
income from DS1 at Part I, line 11, and  
on Part II, line 5, column (a). P's  
entries to remove the $40 of interest  
income received from DS1 included by  
P on line 4a, and to remove the $40 of  
interest expense of DS1 included in  
line 7c for a net change of zero. The  
result is that Part I, line 11, reports  
$1,140: $1,040 from line 4a, and $100  
from line 7c. Stated another way, Part I,  
line 11, includes the entire $1,000 net  
Part II, line 26, column (a) must  
equal Part I, line 11, and column  
(d) must equal the amount on  
TIP  
Form 1120-S, Schedule K, line 18.  
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).  
dividend income included on the tax  
return from its investment in DS1 must  
be reported on Part II, line 6, column (d). income of P, measured before  
recognition of the intercompany interest  
4. U.S. corporation C owns 60% of  
income from DS1 and the consolidation  
the capital and profits interests in U.S.  
of DS1 operations, plus the entire $140  
LLC N. C accounts for N in C's separate  
net income of DS1, measured before  
interest expense to P. P's U.S. income  
tax group isn't required to include on the  
attached supporting statement for Part I,  
line 8, the offsetting adjustment to the  
intercompany elimination of interest  
income and interest expense (though it  
is permitted to do so).  
general ledger on the equity method. N  
has net income of $100 (before minority  
interests) and makes no distributions  
during the tax year. C treats N as a  
corporation for financial statement  
purposes and as a partnership for U.S.  
income tax purposes. For equity method  
reporting on C's separate general  
ledger, C includes its 60% equity share  
of N income, which is $60. In its  
financial statements, C eliminates the  
$60 of N net income ($100 less the  
minority interest of $40) on Part I,  
line 4a.  
If financial statements are prepared  
by the corporation under 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 column (c). Generally, under to  
GAAP, a temporary difference affects  
(creates, increases, or decreases) a  
deferred tax asset or liability.  
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  
corporations that file Schedule M-3.  
Report on lines 12a, 12b, 12c, and 12d  
the total amount (not just the  
If the corporation doesn't prepare  
financial statements, or the financial  
statements aren't prepared under  
GAAP, report in column (b) any  
C must remove the $100 net income  
of N on Part I, line 6a. C must reverse on  
Part I, line 8, the elimination of the $40  
minority interest net income of N and the  
elimination of the $60 of N equity  
corporation'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 lines 12a  
through 12d must be reported as  
positive amounts.  
difference that the corporation believes  
will reverse in a future tax year (that is,  
have an opposite effect on total income  
(loss) in a future tax year (or years) due  
to the difference in timing of recognition  
for financial accounting and U.S.  
method income. The result is that C  
includes the $60 of equity method  
income for N on Part I, line 11, and on  
Part II, line 7, column (a). C's taxable  
income from N must be reported by C  
on Part II, line 7, column (d).  
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 corporation 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).  
On line 12a, enter the worldwide  
consolidated total assets and total  
liabilities of all of the entities included in  
computing Part I, line 4a. 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 removed in  
completing Part I, line 6. On line 12d,  
enter total assets and total liabilities  
included in completing Part I, line 7.  
Example 4. U.S. corporation P  
owns 100% of the stock of QSub  
corporation DS1. DS1 is included in P's  
federal income tax return, even though  
DS1 isn't included in P's consolidated  
financial statements on either a  
If the corporation is unable to  
consolidated basis or on the equity  
method. DS1 has current year net  
income of $100 after taking into account  
its $40 interest payment to P. P has net  
income of $1,040 after recognition of the  
interest income from DS1. Because  
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).  
Instructions for Schedule M-3 (Form 1120-S)  
-7-  
 
Example 5. At the end of  
Corporation A's first tax year, it wasn't  
required to file Schedule M-3 for any  
reason.  
amount would otherwise be reported on  
Schedule M, Part II or Part III. So, if a  
taxpayer is required to file Form 8886,  
Reportable Transaction Disclosure  
Statement, the amounts attributable to  
that reportable transaction must be  
reported on Part II, line 10.  
Furthermore, in applying the two  
preceding paragraphs, a corporation 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 corporation's financial  
statements or exists in the corporation's  
books and records, regardless of the  
nomenclature associated with that item  
in the financial statements or books and  
records. Accurate completion of  
A may elect to file Schedule M-3  
instead of completing Schedule M-1.  
If A 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  
A corporation is required to report in  
column (a) of Parts II and III the amount  
of any item specifically listed on  
Schedule M-1 instead of completing  
Parts II and III of Schedule M-3.  
Schedule M-3 that is in any manner  
included in the corporation's current  
year financial statement net income  
(loss) or in an income or expense  
Schedule M-3 requires reporting  
amounts according to the substantive  
nature of the specific line items included  
in Schedule M-3 and consistent  
If A elects to complete Schedule M-3  
entirely, it must complete all columns of  
Parts II and III.  
If A 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.  
account maintained in the corporation's  
books and records, even if there is no  
difference between that amount and the  
amount included in total income (loss)  
unless (a) otherwise provided in these  
instructions or (b) the amount is  
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 25, in column  
(a), regardless of whether the amounts  
are recorded or stated under different  
nomenclature in the financial  
attributable to a reportable transaction  
described in Regulations section  
Example 6. Corporation B is a U.S.  
corporation that files a U.S. tax return  
and prepares GAAP financial  
1.6011-4(b) so it is reported on Part II,  
line 10. For example, with the exception  
of interest income reflected on a  
statements. In prior years, B acquired  
intellectual property (IP) and goodwill.  
The IP is amortizable for both U.S.  
income tax and financial statement  
purposes. In the current year, B's annual  
amortization expense for IP is $9,000 for  
U.S. income tax purposes and $6,000  
for financial statement purposes. In its  
financial statements, B treats the  
difference in IP amortization as a  
temporary difference. The goodwill isn't  
amortizable for U.S. income tax  
Schedule K-1 received by a corporation  
as a result of the corporation's  
statements or the books and records  
such as: “Provision for doubtful  
investment in a partnership or other  
pass-through entity, all interest income  
included on Part I, line 11, whether from  
affiliated companies, 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 in Part I, line 11,  
paid to a government or other authority  
for the violation of any law for which  
fines or penalties are assessed must be  
included on Part III, line 9, column (a),  
regardless of the government authority  
that imposed the fines or penalties,  
regardless of whether the fines or  
penalties are civil or criminal, regardless  
of the classification, nomenclature, or  
terminology attached to the fines or  
penalties by the imposing authority in its  
actions or documents.  
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 9, column (a), regardless of  
the terminology or nomenclature  
attached to them by the corporation in  
its books and records or financial  
statements.  
purposes and is subject to impairment  
for financial statement purposes. In the  
current year, B records an impairment  
charge on the goodwill of $5,000. In its  
financial statements, B treats the  
goodwill impairment as a permanent  
difference. B must report the  
With limited exceptions, Part II  
includes lines for specific items of  
income, gain, or loss (income items).  
(See Part II, lines 1 through 21.) If an  
income item is described in Part II, 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 difference and a  
portion of the item doesn't have a  
difference, and the item isn't described  
in Part II, lines 1 through 21, report and  
describe the entire amount of the item  
on Part II, line 22.  
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). B 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).  
If a corporation 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  
corporation has capitalized the item of  
income or expense and reports the  
amount in its financial statement  
Reporting Requirements  
for Parts II and III  
With limited exceptions, Part III  
includes lines for specific items of  
expense or deduction (expense items).  
(See Part III, lines 1 through 28.) If an  
expense item is described on Part III,  
lines 1 through 28, report the amount of  
the item on the applicable line,  
General Reporting  
Requirements  
If an amount is attributable to a  
balance sheet or in asset and liability  
accounts maintained in the  
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, regardless of whether the  
regardless of whether there is a  
corporation's books and records, the  
corporation must report the proper tax  
treatment of the item in columns (b), (c),  
and (d), as applicable.  
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  
Instructions for Schedule M-3 (Form 1120-S)  
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doesn't have a difference and the item  
isn't described in Part III, lines 1 through  
28, report and describe the entire  
in the financial statements or books and  
reserves are expenses in D's current  
records of the taxpayer, under which the financial statements but aren't  
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),  
deductions for U.S. income tax  
purposes in its current tax years. D  
mustn't combine the Schedule M-3  
differences for the three reserve  
accounts. D must report the amounts  
attributable to the allowance for  
uncollectible accounts receivable on  
amount of the item on Part III, line 31.  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, loss, expense, or deduction  
and the item isn't described or included  
in Part II, lines 1 through 21, or Part III,  
lines 1 through 28, 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  
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  
including how the adjustment is  
identified in the accounting records. The Part III, line 25, and must separately  
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 31.  
state and adequately disclose the  
amounts attributable to each of the  
other two reserves, coupons  
outstanding and warranty costs, on a  
required, attached statement that  
supports the amounts at Part III, line 31.  
Each description should adequately  
describe all four columns of Part II,  
line 22, or Part III, line 31. If additional  
information is required to provide an  
acceptable description, provide a  
supporting statement.  
D must also provide a description for  
each reserve that meets the  
requirements for Part III, line 31,  
discussed earlier under Required  
III, line 31. In this example, an  
acceptable description would be  
"Coupon Issue Reserves - Rewards  
Expense" and "Future Warranty  
Expense Reserve."  
Example 7. Corporation C is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. C placed in service 10  
depreciable fixed assets in a previous  
year. C's total depreciation expense for  
its current tax year for five of the assets  
is $50,000 for income statement  
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 28, and the  
line doesn't indicate to “attach  
There is no need to add the title  
of the reserve account to the  
TIP  
purposes and $70,000 for U.S. income  
tax purposes. C's total annual  
description if the account name  
for the amount in column (a) is already  
part of the adjustment description.  
statement,” and the specific instructions  
for the line don't call for an attachment  
of a statement, then the item is  
depreciation expense for its current tax  
year for the other five assets is $40,000  
for income statement purposes and  
$30,000 for U.S. income tax purposes.  
In its financial statements, C 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. C must combine all of its  
considered separately stated and  
adequately disclosed if the item is  
reported on the applicable line and the  
amount(s) of the item(s) are reported in  
the applicable columns of the applicable  
line. See the instructions for Part II, lines  
1 through 6, for specific additional  
information required to be provided for  
these particular lines.  
Example 9. Corporation E is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On January 2 of its  
current tax year, E establishes an  
allowance for uncollectible accounts  
receivable (bad debt reserve) of  
$100,000. During its current tax year, E  
increased the reserve by $250,000 for  
additional accounts receivable that may  
become uncollectible. Additionally,  
during its current tax year, E decreases  
the reserve by $75,000 for accounts  
receivable that were discharged in  
bankruptcy during its current tax year.  
The balance in the reserve account on  
December 31 of its current tax year is  
$275,000. The $100,000 amount to  
establish the reserve account and the  
$250,000 to increase the reserve  
depreciation adjustments. Accordingly,  
C must report on Part III, line 24, for its  
current 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).  
Example 8. Corporation D is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On December 31, of its  
current tax year, D establishes three  
reserve accounts in the amount of  
$100,000 for each account. One  
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  
mustn't 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.  
Required statements for Part II,  
line 22, and Part III, line 31. A  
separate statement must be attached to  
Schedule M-3 (Form 1120-S) that  
includes a detailed description of each  
item and adjustment entered on Part II,  
line 22, and Part III, line 31.  
account are expenses on E's current tax  
year financial statements but aren't  
deductible for U.S. income tax purposes  
in its current tax year. However, the  
$75,000 decrease to the reserve is  
deductible for U.S. income tax purposes  
in its current tax year. In its financial  
statements, E treats the reserve  
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, D  
treats the three reserve accounts as  
giving rise to temporary differences that  
will reverse in future years. The three  
account as giving rise to a temporary  
difference that will reverse in future tax  
years. E must report on Part III, line 25,  
for its current tax year income statement  
bad debt expense of $350,000 in  
The description for each amount  
entered in column (a) must be readily  
identifiable to the name of the account  
column (a), a temporary difference of  
Instructions for Schedule M-3 (Form 1120-S)  
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($275,000) in column (b), and U.S.  
income tax bad debt expense of  
$75,000 in column (d).  
foreign corporations on Part II, lines 2  
through 4, as applicable.  
Also include on line 3 passive foreign  
investment company (PFIC)  
mark-to-market gains and losses under  
section 1296. Don't report such gains  
and losses on Part II, line 14.  
Line 2. Gross Foreign  
Dividends Not Previously  
Taxed  
Example 10. Corporation F is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, F incurs $200 in meal expenses  
and $100 in entertainment expenses  
that F deducts in computing net income  
per the income statement. All of the  
$200 meal expense is subject to the  
50% limitation under section 274(n).  
The $100 of entertainment expenses is  
disallowed as a deduction under section  
274(a). In its financial statements, F  
treats the limitation on deductions for  
meals and entertainment as a  
Line 4. Gross Foreign  
Except as otherwise provided in this  
paragraph, report on line 2, column (d),  
the amount (before any withholding tax)  
of any foreign dividends included in  
current year total income (loss) on Form  
1120-S, Schedule K, line 18, and report  
on line 2, column (a), the amount of  
dividends from any foreign corporation  
included in Part I, line 11. Don't report  
on line 2 any amounts that must be  
reported on Part II, line 3, or dividends  
that were previously taxed and must be  
reported on Part II, line 4. (See the  
Distributions Previously Taxed  
Report on line 4, column (a), any  
distributions received from foreign  
corporations that were included in 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 income under  
sections 959 and 1293(c). Remove  
such amount 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 31, or Part II, line 25, as applicable.  
Since previously taxed foreign  
permanent difference. Because meal  
and entertainment expenses are  
instructions below for Part II, lines 3 and  
4.) Report withholding taxes on Part III,  
line 31, or Part II, line 25, as applicable.  
specifically described in Part III, line 8, F  
must report all of its meal and  
distributions aren't currently taxable,  
line 4, column (d), is shaded. Also, see  
the instructions above for Part II, line 2.  
entertainment expenses on this line,  
regardless of whether there is a  
For any dividends reported on Part II,  
line 2, that are received on a class of  
voting stock of which the corporation  
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: (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).  
difference. Accordingly, F must report  
$300 in column (a), $200 in column (c),  
and $100 in column (d). F must report  
all meal and entertainment expenses,  
whether allowed fully or subject to  
limitations, on Part III, line 8. No amount  
should be reflected on Part II, line 25.  
Line 5. Income (Loss) From  
Equity Method U.S.  
Corporations  
Report on line 5, column (a), the  
financial income (loss) included in 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 Part II,  
line 6, dividends received from any U.S.  
corporation accounted for on the equity  
method.  
Part II. Reconciliation of  
Net Income (Loss) per  
Income Statement of the  
Corporation With Total  
Income (Loss) per Return  
Line 3. Subpart F, QEF, and  
Similar Income Inclusions  
Line 6. U.S. Dividends Not  
Lines 1 Through 9. Additional  
Information for Each Entity  
Report on line 3, column (d), the amount  
included in income under section 951  
(relating to Subpart F), the amount  
included in income under section 951A  
(relating to global intangible low-taxed  
income (GILTI)), gains or other income  
inclusions resulting from elections under  
sections 1291(d)(2) and 1298(b)(1), and  
any amount included in income  
Eliminated in Tax Consolidation  
Report on line 6, column (a), the amount  
of dividends included in Part I, line 11,  
that were received from any U.S.  
For any item reported on Part II, lines 1,  
and 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 Part  
II, lines 2 and 6 through 9, for the  
specific information required for those  
particular lines.  
corporation. Report on line 6, column  
(d), the amount of any U.S. dividends  
included in total income (loss) on Form  
1120-S, Schedule K, line 18.  
pursuant to section 1293 (relating to  
qualified electing funds (QEFs)). The  
amount of Subpart F income  
For any dividends included on Part II,  
line 6, that are received on classes of  
voting stock in which the corporation  
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  
Part II, line 6: (1) the name of the  
corresponds to the total of the amounts  
reported by the corporation on  
Line 1. Income (Loss) From  
Equity Method Foreign  
Corporations  
Schedule I, lines 1 through 4, of all  
Forms 5471, Information Return of U.S.  
Persons With Respect To Certain  
Foreign Corporations. The amount of  
QEF income corresponds to the total of  
the amounts reported by the corporation  
on all Forms 8621, Information Return  
by a Shareholder of a Passive Foreign  
Investment Company or Qualified  
Electing Fund. See Form 8621 and the  
Instructions for Form 8621.  
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  
Report on line 1, column (a), the  
financial income (loss) included in 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  
indirectly owned, and (5) the item  
amounts for columns (a) through (d).  
Instructions for Schedule M-3 (Form 1120-S)  
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supporting statement for Part II, line 10,  
each sequentially numbered reportable  
transaction and the amounts required  
for Part II, line 10, columns (a) through  
(d).  
Line 7. Income (Loss) From  
U.S. Partnerships and Line 8.  
Income (Loss) From Foreign  
Partnerships  
For any interest owned by the  
corporation 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 Part II, line 7 or 8, as  
described below.  
1. In column (a), the sum of the  
corporation's distributive share of  
income or loss from a U.S. or foreign  
partnership that is included in Part I,  
line 11.  
Line 9. Income (Loss) From  
Other Pass-Through Entities  
For any interest in a pass-through entity  
(other than an interest in a partnership  
reportable on Part II, line 7 or 8, as  
applicable) owned by the corporation  
(other than an interest in a disregarded  
entity), report the following on line 9.  
1. In column (a), the sum of the  
corporation's distributive share of  
income or loss from the pass-through  
entity that is included in Part I, line 11.  
2. In column (b) or (c), as  
applicable, the sum of all differences, if  
any, attributable to the pass-through  
entity.  
In lieu of the requirements of the  
preceding paragraph, a corporation will  
be considered to have separately stated  
and adequately disclosed a reportable  
transaction if the corporation attaches a  
supporting statement that provides the  
following for each reportable  
transaction.  
1. A description of the reportable  
transaction disclosed on Form 8886 for  
which amounts are reported on Part II,  
line 10.  
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.  
3. In column (d), the sum of all  
taxable amounts of income, gain, loss,  
or deduction reportable on the  
corporation's Schedules K-1 received  
from the pass-through entity (if  
applicable).  
2. In column (b) or (c), as  
applicable, the sum of all differences, if  
any, attributable to the corporation'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  
For each pass-through entity  
reported on line 9, attach a supporting  
statement that provides that entity's  
name, EIN (if applicable), the  
corporation's distributive share of  
income or loss from a U.S. or foreign  
partnership (that is, the sum of all  
amounts reportable on the corporation's  
Schedule(s) K-1 received from the  
partnership (if applicable)), without  
regard to any limitations computed at  
the partner level.  
corporation's end of year profit-sharing  
percentage (if applicable), the  
corporation's end of year loss-sharing  
percentage (if applicable), and the  
amounts reported by the corporation in  
column (a), (b), (c), or (d) of line 9, as  
applicable.  
If a transaction is a listed transaction  
described in Regulations section  
1.6011-4(b)(2), the description also  
must include the description provided  
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.  
For each partnership reported on  
line 7 or 8, attach a supporting  
Line 10. Items Relating to  
Reportable Transactions  
statement that provides the name, EIN  
(if applicable), end of year profit-sharing  
percentage (if applicable), end of year  
loss-sharing percentage (if applicable),  
and the amount reported in column (a),  
(b), (c), or (d) of lines 7 or 8, as  
applicable.  
Any amounts attributable to any  
reportable transactions (as described in  
Regulations section 1.6011-4(b)) must  
be included on Part II, line 10,  
Example 12. Corporation J is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. J incurred seven  
different abandonment losses during its  
current tax year. One loss of $12 million  
results from a reportable transaction  
described in Regulations section  
regardless of whether the difference, or  
differences, would otherwise be  
Example 11. U.S. corporation H is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. H has an investment in  
a U.S. partnership USP. H prepares  
financial statements in accordance with  
GAAP. In its financial statements, H  
treats the difference between financial  
statement net income and taxable  
reported elsewhere in Part II or Part III.  
So, if a taxpayer is required to file Form  
8886 for any reportable transaction  
described in Regulations section  
1.6011-4(b), the amounts attributable to  
that reportable transaction must be  
reported on Part II, line 10. In addition,  
all income and expense amounts  
attributable to a reportable transaction  
must be reported on Part II, line 10,  
columns (a) and (d), even if there is no  
difference between the financial  
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. J  
income from its investment in USP as a  
permanent difference. For its current tax  
year, H's financial statement net income  
includes $10,000 of income attributable  
to its share of USP's net income. H's  
Schedule K-1 from USP reports $5,000  
of ordinary income, $7,000 of long-term  
capital gains, $4,000 of charitable  
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. J must separately state  
and adequately disclose the $12 million  
and $5 million losses on Part II, line 10.  
The $12 million loss and the $5 million  
loss will be adequately disclosed if J  
attaches a supporting statement for  
line 10 that lists each of the sequentially  
numbered forms, Form 8886-X1 and  
amounts and the taxable amounts.  
Each difference attributable to a  
reportable transaction must be  
separately stated and adequately  
disclosed. A corporation will be  
contributions, and $200 of section 179  
expense. H must report on Part II, line 7, considered to have separately stated  
$10,000 in column (a), a permanent  
and adequately disclosed a reportable  
difference of ($2,200) in column (c), and transaction on line 10 if the corporation  
$7,800 in column (d).  
sequentially numbers each Form 8886  
and lists by identifying number on the  
Instructions for Schedule M-3 (Form 1120-S)  
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Form 8886-X2, and for each reportable  
transaction reports the appropriate  
amounts required for Part II, line 10,  
columns (a) through (d). Alternatively,  
J'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  
files a Schedule M-3, isn't required to  
file Form 8916-A but may voluntarily do  
so.  
current tax year report accounts  
receivable of $35,000, an allowance for  
bad debts of $10,000, and accounts  
payable of $17,000 related to current  
year acquisition and reorganization  
legal and accounting fees. In addition,  
for L's year ending December 31 of its  
current tax year, L reported financial  
statement depreciation expense of  
$15,000 and depreciation for U.S.  
income tax purposes of $25,000. For L's  
current tax year using an overall cash  
method of accounting, L doesn't  
Report on Part II, line 11, column (a),  
the total amount of interest income  
included on Part I, line 11, and report on  
Part II, line 11, column (d), the total  
amount of interest income included on  
Form 1120-S, Schedule K, line 18, that  
isn't required to be reported elsewhere  
on Schedule M-3. In columns (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  
transaction for the loss, and reports the  
appropriate amounts required for Part II,  
line 10, columns (a) through (d). J must  
report the losses attributable to the  
other five abandonment losses on Part  
II, line 21e, regardless of whether a  
difference exists for any or all of those  
abandonment losses.  
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, L treats both the difference  
in overall accounting methods used for  
financial statement and U.S. income tax  
purposes and the difference in  
Example 13. Corporation K is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. K enters into a  
instructions for Part II, line 16, should be  
made in columns (b) and (c) of this  
line 11.  
Don't report on this line 11 or include  
on Form 8916-A amounts reported in  
accordance with instructions for Part II,  
lines 7, 8, 9, 10, and 20.  
depreciation expense as temporary  
differences. L must combine all  
transaction with contractual protection  
that is a reportable transaction  
adjustments attributable to the  
differences related to the overall  
described in Regulations section  
1.6011-4(b)(4). This reportable  
accounting methods on Part II, line 12.  
As a result, L must report on Part II,  
line 12, $8,000 in column (a) ($35,000 –  
$10,000 – $17,000), ($8,000) in column  
(b), and zero in column (d). L mustn't  
report the accrual to cash adjustment  
attributable to the legal and accounting  
fees on Part III, line 17. Because the  
difference in depreciation expense  
doesn't relate to the use of the cash or  
accrual method of accounting, L must  
report the depreciation difference on  
Part III, line 24, and report $15,000 in  
column (a), $10,000 in column (b), and  
$25,000 in column (d).  
transaction is the only reportable  
transaction for K's current 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  
Line 12. Total Accrual to Cash  
Adjustment  
This line is completed by a corporation  
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  
difference, K is required to report on  
Part II, line 10, the following amounts:  
($7 million) in column (a), zero in  
columns (b) and (c), and ($7 million) in  
column (d). The transaction will be  
adequately disclosed if K 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 tax shelter  
registration number, if any, and the type  
of reportable transaction disclosed on  
Form 8886.  
purposes (or vice versa). With the  
exception of amounts required to be  
reported on Part II, line 10, the  
corporation must report on Part II,  
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,  
Line 13. Hedging Transactions  
Report on line 13, column (a), the net  
gain or loss from hedging transactions  
included on Part I, line 11. Report in  
column (d) the amount of income (loss)  
from hedging transactions as defined in  
section 1221(b)(2). Use columns (b)  
and (c) to report all differences caused  
by treating hedging transactions  
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  
differently for financial accounting  
purposes and for U.S. income tax  
accounting must be reported on the  
appropriate lines of Schedule M-3 (for  
example, a depreciation difference must  
be reported on Part III, line 24).  
purposes. For example, if a portion of a  
hedge is considered ineffective under  
GAAP but still is 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  
Line 11. Interest Income  
Attach Form 8916-A, Supplemental  
Attachment to Schedule M-3. Complete  
Part II and enter the amounts shown on  
line 6, columns (a) through (d), on  
Schedule M-3, line 11, columns (a)  
through (d), as applicable.  
Example 14. Corporation L is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. L prepares financial  
statements in accordance with GAAP  
using an overall accrual method of  
accounting. L uses an overall cash  
method of accounting for U.S. income  
tax purposes. L's financial statements  
for the year ending December 31 of its  
Any corporation that files Form  
purposes, must also be reported here.  
1120-S that (a) is required to file  
a Schedule M-3 and has less  
TIP  
Report hedging gains and losses  
computed under the mark-to-market  
method of accounting on line 13 and not  
on Part II, line 14.  
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  
Instructions for Schedule M-3 (Form 1120-S)  
-12-  
Report any gain or loss from  
inventory hedging transactions on  
line 13 and not on Part II, line 15.  
(including depreciation) such as section  
263A costs, inventory shrinkage  
accruals, inventory obsolescence  
reserves, and lower of cost or market  
(LCM) write-downs.  
Complete Part I of Form 8916-A.  
Enter the amounts from line 8, columns  
(a) through (d) of Form 8916-A, on  
Schedule M-3, Part II, line 15, columns  
(a) through (d), as applicable. Attach  
Form 8916-A.  
purposes and $30,000 for U.S. income  
tax purposes. In addition, C incurs $200  
of meal expenses that C 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, C treats the  
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” are  
described in section 475(e)(2).  
“Securities” don't include any items  
specifically excluded from sections  
475(c)(2) and 475(e)(2), such as certain  
contracts to which section 1256(a)  
applies.  
$50,000 depreciation and $100 of the  
meals as other costs in computing cost  
of goods sold. C must include on  
Schedule M-3, Part II, line 15, in column  
(a), the $50,000 of depreciation and  
$100 of meals. C 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 meal expenses). In addition, C must  
report on Part III, line 24, for its current  
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 8, meals and  
The entries in columns (a) and  
(d) of Schedule M-3, line 15, are  
negative amounts.  
TIP  
Don't report the following on line 15  
or on Form 8916-A.  
Amounts reportable on Part II, line 10.  
Any gain or loss from inventory  
hedging transactions reportable on Part  
II, line 13.  
Amounts reportable on Part II, line 16.  
Amounts reportable on Part II, line 19.  
Mark-to-market income or (loss)  
Report hedging gains and losses  
computed under the mark-to-market  
method of accounting on Part II, line 13,  
and not on line 14.  
Traders in securities and commodi-  
ties. For a trader in securities or  
commodities that made a valid election  
under section 475(f) to use the  
associated with the inventories of  
dealers in securities under section 475  
reportable on Part II, line 14.  
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  
Section 481(a) adjustments related to  
cost of goods sold or inventory valuation  
reportable on Part II, line 17.  
included on Part II, line 15, detailed in  
this example and reported on Part II,  
line 15, in the appropriate columns.  
Fines and penalties reportable on  
Part III, line 9.  
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 marking 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  
(Form 1120-S), Part II, line 14; (b) any  
other Schedule M-3 entries required  
based on other results (non  
Judgments, damages, awards, and  
Line 16. Sale Versus Lease (for  
Sellers and/or Lessors)  
similar costs, reportable on Part III,  
line 10.  
Amounts included on Part III, line 28.  
Also see the instructions at Part  
Form 8916-A. Any corporation filing  
Form 1120-S 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.  
If you are required to (or voluntarily)  
file Form 8916-A, complete Part I to  
provide a detailed schedule of cost of  
goods sold. Enter the amounts from  
line 8, columns (a) through (d) of Form  
8916-A, on Schedule M-3, Part II,  
line 15, columns (a) through (d), as  
applicable. Attach Form 8916-A.  
Example 15. Corporation C is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. C placed in service 10  
depreciable fixed assets in a previous  
tax year. C's total depreciation expense  
for its current tax year for five of the  
assets is $50,000 for financial  
III, line 28.  
TIP  
Asset transfer transactions with periodic  
payments 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  
mark-to-market gains and losses)  
included in the total reported on Form  
4797, line 17, should be reported on  
Schedule M-3 (Form 1120-S), Part II,  
line 21d, unless the instructions for  
Schedule M-3 require the amounts to be  
reported on another line.  
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.  
Line 15. Cost of Goods Sold  
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.  
On Part II, 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  
U.S. income tax purposes. On Part II,  
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  
Examples of amounts that must be  
included as cost of goods sold items are accounting purposes and $70,000 for  
amounts attributable to inventory  
valuation, such as amounts attributable  
to cost-flow assumptions, additional  
costs required to be capitalized  
U.S. income tax purposes. C's total  
annual depreciation expense for its  
current tax year for the other five assets  
is $40,000 for financial accounting  
Instructions for Schedule M-3 (Form 1120-S)  
-13-  
reported on Part II, line 11, in column (a)  
or (d), as applicable. Depreciation  
expense for such transactions must be  
reported on Part III, line 24, in column  
(a) or (d), as applicable. Use columns  
(b) and (c) of Part II, lines 11 and 16,  
and Part III, line 24, as applicable to  
report the differences between column  
(a) and (d).  
Example 17. Corporation N is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. N was depreciating  
certain fixed assets over an erroneous  
recovery period and, effective for its  
current tax year, N 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  
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.  
Example 16. Corporation M is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. M sells and leases  
property to customers. For financial  
accounting purposes, M accounts for  
each transaction as a sale. For U.S.  
income tax purposes, each of M's  
transactions must be treated as a lease.  
In its financial statements, M treats the  
difference in the financial accounting  
and the U.S. income tax treatment of  
these transactions as temporary. During  
its current tax year, M reports in its  
financial statements $1,000 of sales and  
$700 of cost of goods sold regarding its  
current tax year lease transactions. M  
receives periodic payments of $500 in  
its current tax year for these current tax  
year transactions and similar  
spread over 4 tax years, beginning with  
the current tax year. In its financial  
statements, N treats the section 481(a)  
adjustment as a temporary difference. N  
must report on Part II, line 17, $25,000  
in columns (b) and (d) for its current tax  
year and each of the subsequent 3 tax  
years (unless N is otherwise required to  
recognize the remainder of the 481(a)  
adjustment earlier). N mustn't report the  
section 481(a) adjustment on Part III,  
line 24.  
Line 21a. Income Statement  
Gain/Loss on Sale, Exchange,  
Abandonment, Worthlessness,  
or Other Disposition of Assets  
Other Than Inventory and  
Pass-Through Entities  
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 corporation  
from a pass-through entity (for example,  
on Schedule K-1) that are included in  
the net income (loss) of the corporation  
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  
Part II, lines 21b through 21g, as  
Line 18. Unearned/Deferred  
Revenue  
Report on line 18, column (a), amounts  
of revenues included in Part I, line 11,  
that were deferred from a prior financial  
accounting year. Report on line 18,  
column (d), amounts of revenues  
transactions from prior years and treats  
$400 as principal and $100 as interest  
income. For financial accounting  
purposes, M reports gross profit of $300  
($1,000 – $700) and interest income of  
$100 from these transactions. For U.S.  
income tax purposes, M reports $500 of  
gross rental income (the periodic  
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 recognizable for U.S.  
income tax purposes in the current tax  
year. Use columns (b) and (c) of line 18,  
as applicable, to report the differences  
between columns (a) and (d).  
applicable.  
payments) and (based on other facts)  
$200 of depreciation deduction on the  
property. On its current tax year  
Line 21b. Gross Capital Gains  
From Schedule D, Excluding  
Amounts From Pass-Through  
Entities  
Schedule M-3, M must report on Part II,  
line 11, $100 in column (a), ($100) in  
column (b), and zero in column (d). In  
addition, M must report on Part II,  
Report on line 21b gross capital gains  
reported on Schedule D (Form 1120-S),  
Capital Gains and Losses and Built-in  
Gains, or Form 8949, Sales and Other  
Dispositions of Capital Assets,  
excluding capital gains from  
line 16, $300 of gross profit in column  
(a), $200 in column (b), and $500 of  
gross rental income in column (d).  
Lastly, M must report on Part III, line 24,  
$200 in columns (b) and (d).  
Line 18 mustn't be used to report  
income recognized from long-term  
contracts. Instead, use line 19.  
Line 19. Income Recognition  
From Long-Term Contracts  
pass-through entities, which must be  
reported on Part II, lines 7, 8, or 9, as  
applicable.  
Line 17. Section 481(a)  
Adjustments  
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  
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 (Form 1120-S)  
or Form 8949, excluding capital losses  
from (a) pass-through entities, which  
must be reported on Part II, lines 7, 8, or  
9, as applicable; (b) abandonment  
losses, which must be reported on Part  
II, line 21e; and (c) worthless stock  
With the exception of a section 481(a)  
adjustment that is required to be  
reported on Part II, line 10, for  
reportable transactions, any difference  
between an income or expense item  
attributable to an authorized (or  
accounting.  
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:  
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 Part II,  
line 17, regardless of whether a  
separate line for that income or expense  
item exists in Part II or Part III.  
Instructions for Schedule M-3 (Form 1120-S)  
-14-  
losses, which must be reported on Part  
II, line 21f.  
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  
deduction and the item isn't described  
or included in Part II, lines 1 through 22,  
or Part III, lines 1 through 31, 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 Part  
II, lines 1 through 22, or Part III, lines 1  
through 31. See Example 10, earlier.  
Line 21d. Net Gain/Loss  
Reported on Form 4797,  
Line 17, Excluding Amounts  
From Pass-Through Entities,  
Abandonment Losses, and  
Worthless Stock Losses  
Report on line 21d the net gain or loss  
reported on line 17 of Form 4797,  
excluding amounts from (a)  
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 attached statement should have  
five columns. The first column has the  
description for the next four columns.  
The second column is column (a)  
pass-through entities, which must be  
reported on Part II, lines 7, 8, or 9, as  
applicable; (b) abandonment losses,  
which must be reported on Part II,  
line 21e; and (c) worthless stock losses,  
which must be reported on Part II,  
line 21f. The amount reported on  
line 21d is the amount that would have  
been carried to line 17 of Form 4797 in  
the case of a corporation that isn't an S  
corporation.  
income (loss) per income statement,  
third column is column (b) temporary  
difference, the fourth column is column  
(c) permanent difference, and the fifth  
column is column (d) income (loss) per  
tax return. Every item listed on the  
attached statement for line 22 must  
always have columns (a) + (b) + (c) =  
(d). Each item with amounts in columns  
(a), (b), (c), and (d) will be totaled and  
included as one line on line 22.  
Part III. Reconciliation of  
Net Income (Loss) per  
Income Statement of the  
Corporation With Total  
Income (Loss) per  
Return—Expense/  
Deduction Items  
Traders in securities or  
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  
commodities that have made a  
valid election under section  
TIP  
Expense amounts that reduce  
financial accounting income  
must be reported on Part III,  
TIP  
475(f) to use the mark-to-market  
method to account for securities or  
commodities, see the instructions for  
Part II, line 14.  
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 32.  
adjustments—comprehensive income”  
and “Gains and losses on  
Line 21e. Abandonment Losses  
Report on line 21e any abandonment  
losses, regardless of whether the loss is  
characterized as an ordinary loss or a  
capital loss.  
available-for-sale  
securities—comprehensive income.”  
Line 23. Total Income (Loss)  
Items  
Combine lines 1 through 22 and enter  
the total on line 23.  
Lines 1 Through 6. Income Tax  
Expense  
Line 21f. Worthless Stock  
Losses  
If the corporation 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, 3,  
and 5, as applicable.  
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 15, Cost of goods sold,  
columns (a) and (d), are  
TIP  
negative amounts which will  
affect the totals entered on line 23.  
Line 24. Total Expense/  
Deduction Items  
Line 7. Equity-Based  
Compensation  
Report on Part II, line 24, columns (a)  
through (d), as applicable, the negative  
of the amounts reported on Part III,  
line 32, columns (a) through (d). For  
example, if Part III, line 32, column (a),  
reflects an amount of $1 million, then  
report on Part II, line 24, column (a), ($1  
million). Similarly, if Part III, line 32,  
column (b), reflects an amount of  
($50,000), then report on Part II, line 24,  
column (b), $50,000.  
Report on line 7 any amounts for  
equity-based compensation or  
Line 21g. Other Gain/Loss on  
Disposition of Assets Other  
Than Inventory  
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.  
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 7 include payments attributable  
to stock options (including incentive  
stock options and nonqualified stock  
options), employee stock purchase  
plans (ESPPs), phantom stock options,  
phantom stock units, stock warrants,  
stock appreciation rights, and restricted  
stock, regardless of whether such  
Line 22. Other Income (Loss)  
Items With Differences  
Separately state and adequately  
Line 25. Other Items With No  
Differences  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, gain, loss, expense, or  
disclose on Part II, line 22, all items of  
income (loss) with differences that aren't  
otherwise listed on Part II, lines 1  
through 21. Attach a statement that  
itemizes the type of income (loss) and  
Instructions for Schedule M-3 (Form 1120-S)  
-15-  
payments are made to employees or  
non-employees, or as payment for  
property or compensation for services.  
other indemnitors for any fines and  
penalties described above.  
income (loss) amount reported in Part I,  
line 11, for the current tax year and that  
isn't reportable elsewhere on  
Line 10. Judgments, Damages,  
Awards, and Similar Costs  
Schedule M-3. For example, report  
originations and reversals of deferred  
compensation subject to section 409A  
on line 13.  
Line 8. Meals and  
Entertainment  
Report on line 10, column (a), the  
amount of any estimated or actual  
judgments, damages, awards,  
Report on line 8, column (a), any  
amounts paid or accrued by the  
corporation during the tax year for  
meals, beverages, and entertainment  
that are accounted for in financial  
accounting income, regardless of the  
classification, nomenclature, or  
Line 15. Charitable  
Contribution of Intangible  
Property  
Report on line 15 any charitable  
contribution of intangible property, for  
example, contributions of:  
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  
terminology used for such amounts, and anticipated payments or actual  
regardless of how or where such  
amounts are classified in the  
payments. Also report on line 10,  
column (a), the reversal of any  
Intellectual property, patents  
(including any amounts of additional  
contributions allowable by virtue of  
income earned by donees subsequent  
to the year of donation), copyrights,  
trademarks;  
corporation's financial income statement overaccrual of any amount described in  
or the income and expense accounts  
maintained in the corporation'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).  
this paragraph.  
Report on line 10, column (d), any  
such amounts as are 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.  
Securities (including stocks and their  
derivatives, stock options, and bonds);  
Conservation easements (including  
scenic easements or air rights);  
Line 9. Fines and Penalties  
Railroad rights of way;  
Mineral rights; and  
Report on line 9 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 this line 9,  
column (a), regardless of the  
Other intangible property.  
Line 16. Current Year  
Don't report on this Part III, line 10,  
amounts required to be reported in  
accordance with instructions for Part III,  
line 9.  
Acquisition or Reorganization  
Investment Banking Fees  
Report on line 16 any investment  
banking fees paid or incurred in  
Don't report on this Part III, line 10,  
amounts recovered from insurers or any  
other indemnitors for any judgments,  
damages, awards, or similar costs  
described above.  
government or other authority that  
imposed the fines or penalties,  
connection with a taxable or tax-free  
acquisition of property (for example,  
stock or assets) or a tax-free  
regardless of whether the fines and  
penalties are civil or criminal, regardless  
of the classification, nomenclature, or  
terminology used for the fines or  
reorganization. Report on this line any  
investment banking fees incurred at any  
stage of the acquisition or  
Line 11. Pension and  
Profit-Sharing  
Report on line 11 any amounts  
attributable to the corporation's pension  
plans, profit-sharing plans, and any  
other retirement plans.  
penalties by the imposing authority in its  
actions or documents, and regardless of  
how or where the fines or penalties are  
classified in the corporation's financial  
income statement or the income and  
expense accounts maintained in the  
corporation's books and records. Also  
report on line 9, column (a), the reversal  
of any overaccrual of any amount  
described in this paragraph. See section  
162(f) for additional guidance.  
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. Also include on this  
line 16 investment banking fees incurred  
in connection with the liquidation of a  
subsidiary, a spin-off of a subsidiary, or  
an initial public stock offering.  
Line 12. Other Post-Retirement  
Benefits  
Report on line 12 any amounts  
attributable to other post-retirement  
benefits not otherwise includible on Part  
III, line 11 (for example, retiree health  
and life insurance coverage, dental  
coverage, etc.).  
Line 17. Current Year  
Acquisition or Reorganization  
Legal and Accounting Fees  
Report on line 9, column (d), any  
such amounts as 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.  
Report on line 17 any legal and  
accounting fees paid or incurred in  
connection with a taxable or tax-free  
acquisition of property (for example,  
stock or assets) or tax-free  
Line 13. Deferred  
Compensation  
Report on line 13, column (a), any  
compensation expense included in the  
net income (loss) amount reported in  
Part I, line 11, that isn't deductible for  
U.S. income tax purposes in the current  
tax year and that wasn't reported  
reorganization. Report on this line any  
legal and accounting fees incurred at  
any stage of the acquisition or  
Don't report on this Part III, line 9,  
amounts required to be reported in  
accordance with instructions for Part III,  
line 10.  
reorganization process including, for  
example, fees paid or incurred to  
evaluate whether to investigate an  
acquisition, fees to conduct an actual  
elsewhere on Schedule M-3, column  
(a). Report on line 13, column (d), any  
compensation deductible in the current  
Don't report on this Part III, line 9,  
amounts recovered from insurers or any tax year that wasn't included in the net  
Instructions for Schedule M-3 (Form 1120-S)  
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investigation, and fees to consummate  
the acquisition. Also include on this line  
legal and accounting fees incurred in  
connection with the liquidation of a  
subsidiary, a spin-off of a subsidiary, or  
an initial public stock offering.  
gas that isn't required to be reported  
elsewhere on Schedule M-3 (for  
life insurance policy if the corporation is  
directly or indirectly a beneficiary under  
the policy or if the policy has a cash  
value. Report in column (d) the amount  
of the premiums that are deductible for  
federal income tax purposes.  
example, on Part II, line 7, 8, 9, or 15).  
Line 24. Depreciation  
Report on line 24 any depreciation  
expense that isn't required to be  
reported elsewhere on Schedule M-3  
(for example, on Part II, line 7, 8, 9, or  
15).  
Line 18. Current Year  
Acquisition/Reorganization  
Other Costs  
Line 28. Purchase Versus  
Lease (for Purchasers and/or  
Lessees)  
Report on line 18 any other fees paid or  
incurred in connection with a taxable or  
tax-free acquisition of property (for  
example, stock or assets) or a tax-free  
reorganization not otherwise reportable  
on Schedule M-3 (for example, Part III,  
line 16 or 17). Report on this line any  
fees paid or incurred at any stage of the  
acquisition or reorganization process  
including, for example, fees paid or  
incurred to evaluate whether to  
Line 25. Bad Debt Expense  
Also see the instructions for  
sellers and/or lessors in the  
instructions for Part II, line 16.  
TIP  
Report on line 25, 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.  
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.  
Line 26. Interest Expense  
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 regarding the purchased  
asset.  
investigate an acquisition, fees to  
conduct an actual investigation, and  
fees to consummate the acquisition.  
Also include on this line other  
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.  
acquisition/reorganization costs  
incurred in connection with the  
Any corporation that files Form  
liquidation of a subsidiary, a spin-off of a  
subsidiary, or an initial public stock  
offering.  
1120-S that (a) is required to file  
a Schedule M-3 and has less  
TIP  
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.  
Line 19. Amortization/  
Impairment of Goodwill  
Report on line 19 amortization of  
goodwill or amounts attributable to the  
impairment of goodwill.  
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 for such transactions on Part  
III, line 26, in column (a) or (d), as  
applicable. Report depreciation  
Line 20. Amortization of  
Acquisition, Reorganization,  
and Start-Up Costs  
Report on Part III, line 26, column (a),  
the total amount of interest expense  
included on Part I, line 11, and report on  
Part III, line 26, column (d), the total  
amount of interest deduction included  
on Form 1120-S, Schedule K, line 18,  
that isn't required to be reported  
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, 195, or 248.  
expense or deductions for such  
elsewhere on Schedule M-3. In columns  
(b) or (c), as applicable, include any  
adjustments 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  
transactions on Part III, line 24, in  
column (a) or (d), as applicable. Use  
columns (b) and (c) of Part III, lines 24,  
26, and 28, as applicable, to report the  
differences between column (a) and (d)  
for such recharacterized transactions.  
Line 21. Other Amortization or  
Impairment Write-Offs  
Report on line 21 any amortization or  
impairment write-offs not otherwise  
includible on Schedule M-3.  
Example 18. U.S. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. X acquired property in  
a transaction that, for financial  
expense/deduction resulting from  
adjustments made in accordance with  
the instructions for Part III, line 28,  
should be made in columns (b) and (c),  
as applicable, of this line 26.  
Line 22.  
When using this line to figure amounts  
on other tax forms or worksheets, this  
line should be considered to be zero.  
accounting purposes, X treats as a  
lease. Because of its terms, the  
Line 23a. Depletion—Oil & Gas  
Report on line 23a, column (a), any oil  
and gas depletion included on Part I,  
line 11.  
Don't report on Form 8916-A and on  
line 26 amounts reported in accordance  
with the instructions for Part II, lines 7, 8,  
9, and 10.  
transaction is treated for U.S. income  
tax purposes as a purchase and X must  
treat the periodic payments it makes  
partially as payment of principal and  
partially as payment of interest. In its  
financial statements, X treats the  
difference between the financial  
Line 23b. Depletion—Other  
than Oil & Gas  
Line 27. Corporate Owned Life  
Insurance Premiums  
Report on line 23b any depletion  
Report on line 27 all amounts of  
accounting and U.S. income tax  
expense/deduction other than oil and  
insurance premiums attributable to any  
treatment of this transaction as a  
Instructions for Schedule M-3 (Form 1120-S)  
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temporary difference. During its current  
tax year, X reports in its financial  
statements $1,000 of gross rental  
expense that, for U.S. income tax  
purposes, is recharacterized as a $700  
payment of principal and a $300  
which they are paid or incurred, or they  
may be deferred and amortized.  
column (d). X must also report $6,000 in  
column (a), ($4,000) in column (b), and  
$2,000 in column (d) on Part III, line 24.  
Example 19. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, X incurred $100,000 of research  
and development costs that X  
Example 22. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, X incurred $10,000 of research  
and development costs related to social  
sciences that it recognized as an  
payment of interest, accompanied by a  
depreciation deduction of $1,200  
(based on other facts). On its current tax  
year Schedule M-3, X must report the  
following on Part III, line 28: column (a),  
$1,000, its financial accounting gross  
rental expense; column (b), ($1,000);  
and column (d), zero. On Part III, line 26,  
X reports zero in column (a) and $300 in  
columns (b) and (d) for the interest  
deduction. On Part III, line 24, X reports  
zero in column (a) and $1,200 in  
recognized as an expense in its  
financial statements. Also, X incurred  
$20,000 in attorney fees in obtaining a  
expense in its financial statements. X  
patent application that X capitalized and adopted the current expense method for  
amortized in its financial statements. X  
recognized a $2,000 amortization  
deduction. In compliance with its  
research and experimental  
expenditures for U.S. income tax  
purposes. Because such costs aren't  
allowable costs under section 174, X  
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, X must report this  
adopted method of accounting under  
section 174, X deducts research and  
experimental expenditures for U.S.  
income tax purposes. Accordingly, X  
must report $100,000 in column (a),  
$20,000 in column (b), and $120,000 in  
columns (b) and (d) for the depreciation  
deduction.  
Line 29. Research and  
Development Costs  
column (d). X must also report $2,000 in item of expense on Part III, line 31.  
column (a), ($2,000) in column (b), and  
Example 23. Corporation X is a  
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  
expense. Report in column (d) the  
amount of deductions included in Form  
1120-S, line 21, and/or separately  
reported on Form 1120-S, Schedule K,  
that are recognized and reported as  
Section 174 research and experimental  
expenditures consistent with the  
corporation’s adopted method of  
accounting for such 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). For  
example, if the taxpayer's financial  
accounting method doesn't specify  
otherwise, column (b) adjustments  
include adjustments for timing  
$0 in column (d) on Part III, line 21.  
calendar year taxpayer that files and  
Example 20. Assume the same  
entirely completes Schedule M-3 for its  
facts as Example 19 except Corporation current tax year. During its current tax  
X elected to capitalize and amortize its  
research and expenditures over 60  
months for all its research programs for  
U.S. tax purposes. X first realized  
year, X paid $75,000 to acquire or  
in-license intangible assets under a  
collaborative arrangement with another  
company that X recognized as a  
benefits from such expenditures on  
August 1. Accordingly, X must report  
$100,000 in column (a), a temporary  
difference of ($90,000) ($20,000 less  
($120,000/60 months X 55 months)) in  
column (b), and $10,000 in column (d).  
research and development expense in  
its financial statements. X adopted the  
current expense method for research  
and experimental expenditures for U.S.  
income tax purposes. Because  
payments made to acquire rights to a  
product or technology are excluded  
costs from the definition of research and  
experimental expenditures, X must  
report $75,000 in column (a), ($75,000)  
in column (c), and $0 in column (d). X  
must report any amortization otherwise  
allowable related to the payments on  
Part III, line 21.  
Example 21. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. X adopted the current  
expense method for research and  
experimental expenditures for U.S.  
income tax purposes. During it current  
tax year, X incurred $50,000 of research  
and development costs that X  
Line 30. Section 118 Exclusion  
recognized as an expense in its  
Report on line 30 any inducements  
received in the current year and treated  
as contributions to the capital of a  
corporation by a non-shareholder. The  
following non-shareholder contributions  
to capital are not eligible for exclusion  
under section 118.  
financial statements. Also, X undertook  
to develop a new machine for its  
differences between financial and tax  
accounting for: (1) deferral and  
business. X expended $30,000 on the  
project of which $10,000 represents  
actual costs of material, labor, and  
component cost to construct the  
amortization of research expenditures,  
(2) reduction of section 174  
expenditures under section 280C or  
section 482, (3) costs attributable to  
obtaining a patent, (4) research in social  
sciences, and (5) cost elements for  
property of a character subject to  
depreciation.  
machine, and $20,000 represents  
research costs not attributable to the  
machine itself. X capitalized all costs of  
$30,000 related to the machine and  
recognized $6,000 of depreciation  
expense in its financial statements. X’s  
depreciation expense on the $10,000 of  
costs related to the machine itself was  
$2,000 for U.S. income tax purposes.  
Accordingly, X must report $50,000 in  
column (a), $20,000 (research costs  
which aren't attributable to the machine  
itself) in column (b), and $70,000 in  
Any contribution in aid of construction  
or any other contribution as a customer  
or potential customer.  
Any contribution by any civic group.  
Any contribution by any governmental  
entity, except any contribution made  
after December 22, 2017, and made  
pursuant to a master development plan  
that was approved prior to December  
22, 2017, by a governmental entity.  
Section 174 provides two methods  
for the treatment of research and  
experimental expenditures paid or  
incurred by a taxpayer in connection  
with the taxpayer’s trade or business.  
These expenditures may be treated as  
expenses not chargeable to a capital  
account and deducted in the year in  
Instructions for Schedule M-3 (Form 1120-S)  
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Report in column (a) any income  
amount as a negative number and any  
expense amount as a positive number.  
lease cancellation costs, loss on sale of  
equipment, etc., a supporting statement  
that lists those categories of expenses  
and their details will satisfy the  
deductible in the current tax year for  
U.S. income tax purposes. Examples of  
reserves that are allowed for book  
purposes, but not for tax purposes,  
include warranty reserves, restructuring  
reserves, reserves for discontinued  
operations, and reserves for  
Corporations must identify on an  
accompanying statement referencing  
line 36 the fair market value of land or  
other property (including cash) provided  
to the corporation by any  
requirement to separately state and  
adequately disclose. In order to  
separately state and adequately  
disclose the employee termination  
acquisitions and dispositions. Only  
costs, it isn't required that an anticipated report on line 31 items that aren't  
non-shareholder, including a  
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.  
required to be reported elsewhere on  
governmental unit as an inducement, or  
for any other purpose.  
Schedule M-3, Parts II and III.  
Example 24. Corporation Q is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On July 1 of each year,  
Q has a fixed liability for its annual  
insurance premiums on its home office  
building that provides a 12-month  
coverage period beginning July 1  
through June 30. In addition, Q  
On the accompanying statement,  
also identify any inducements that  
include refundable or transferable tax  
credits, including transferable credits  
that were sold.  
The statement must separately state,  
adequately disclose, and identify all of  
the dollar amounts summarized by this  
line. An accompanying statement is  
required even if there are no dollar  
amounts reported on line 30.  
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. Every item listed on the attached  
statement for line 31 must always have  
columns (a) + (b) + (c) = (d). Each item  
with amounts in columns (a), (b), (c),  
and (d) will be totaled and included as  
one line on line 31.  
historically prepays 12 months of  
advertising expense on July 1. On July  
1 of its current tax year, Q prepays its  
insurance premium of $500,000 and  
advertising expenses of $800,000. For  
financial accounting purposes, Q  
Line 31. Other Expense/  
Deduction Items With  
Differences  
capitalizes and amortizes the prepaid  
insurance and advertising over 12  
months. For U.S. income tax purposes,  
Q deducts the insurance premium when  
paid and amortizes the advertising over  
the 12-month period. In its financial  
statements, Q treats the differences  
attributable to the financial statement  
treatment and U.S. income tax  
Separately state and adequately  
disclose on Part III, line 31, all items of  
expense/deduction that aren't otherwise  
listed on Part III, lines 1 through 30.  
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  
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  
treatment of the prepaid insurance and  
advertising as temporary differences.  
available-for-sale  
securities—comprehensive income.”  
Q 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 Q's return for Part III, line 31,  
must be separately stated and  
Reserves and contingent liabilities.  
Report on line 31 amounts related to the  
change in each reserve or contingent  
liability that isn't required to be reported  
elsewhere on Schedule M-3. For  
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.  
example: (1) amounts relating to  
The statement of details attached to  
the Schedule M-3 for line 31 must  
separately state and adequately  
changes in reserves for litigation must  
be reported on Part III, line 10; and (2)  
amounts relating to changes in reserves  
for uncollectible accounts receivable  
must be reported on Part III, line 25. See  
Example 8 and Example 9, earlier; and  
Example 24, later.  
adequately disclosed as shown below.  
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 corporation’s net income  
amount reported in the income  
Line 32. Total Expense/  
Deduction Items  
Report on Part II, line 24, columns (a)  
though (d), as applicable, the negative  
of the amounts reported on Part III,  
line 32, columns (a) through (d), as  
applicable. Report positive amounts as  
negative and negative amounts as  
positive. For example, if Part III, line 32,  
column (a), reflects an amount of $1  
million, then report on Part II, line 24,  
column (a), ($1 million). Similarly, if Part  
III, line 32, column (b), reflects an  
Report on line 31, the amortization of  
various items of prepaid expense, such  
as prepaid subscriptions and license  
fees, prepaid insurance, etc.  
Report on line 31, column (a),  
expenses included in net income  
reported on Part I, line 11, that are  
related to reserves and contingent  
liabilities. Report on line 31, column (d),  
amounts related to liabilities for reserves  
and contingent liabilities that are  
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,  
amount of ($50,000), then report on Part  
II, line 24, column (b), $50,000.  
Instructions for Schedule M-3 (Form 1120-S)  
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Line 31—Example 24  
Statement Concerning Other Expense/Deduction Items With Differences  
Column (a) Expense Column (b) Temporary  
Column (c)  
Permanent Difference  
Column (d) Deduction  
per Tax Return  
Description  
per Income Statement  
Difference  
Prepaid insurance premium  
expensed not capitalized  
$250,000  
$300,000  
$550,000  
$250,000  
($100,000)  
$150,000  
-0-  
-0-  
-0-  
$500,000  
$200,000  
$700,000  
Legal expense reserve  
Total line 31  
Instructions for Schedule M-3 (Form 1120-S)  
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