Formulaire 1120-PC Instructions pour l'annexe M-3
Instructions pour l'annexe M-3 (formulaire 1120-PC), Rapprochement du revenu net (perte) pour les sociétés d'assurances américaines ayant un actif total de 10 millions de dollars ou plus
Rév. Janvier 2024
Formulaires associés
- Formulaire 1120-PC Annexe M-3 - Rapprochement du revenu net (perte) des sociétés d'assurances américaines ayant un actif total de 10 millions de dollars ou plus
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form
1120-PC)
(Rev. January 2024)
(For use with the December 2021 revision of Schedule M-3 (Form 1120-PC))
Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance
Companies With Total Assets of $10 Million or More
Section references are to the Internal Revenue Code unless
otherwise noted.
corporation's tax year that equal or exceed $10 million must
complete and file Schedule M-3 instead of Schedule M-1,
Reconciliation of Income (Loss) per Books With Income (Loss)
per Return.
Future Developments
A corporation filing a non-consolidated Form 1120-PC that
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For the latest information about developments related to
Schedule M-3 (Form 1120-PC), and its instructions, such as
legislation enacted after they were published, go to IRS.gov/
reports on Schedule L for Form 1120-PC total assets that equal
or exceed $10 million must complete and file Schedule M-3
instead of Schedule M-1. The corporation must check box (1)
Non-consolidated return, at the top of page 1 of Schedule M-3.
Any U.S. consolidated tax group consisting of a U.S. parent
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What’s New
corporation and additional includible corporations listed on Form
851, Affiliations Schedule, required to file Form 1120-PC that
reports on Schedule L of Form 1120-PC total consolidated
assets at the end of the tax year that equal or exceed $10 million
must complete and file Schedule M-3 instead of Schedule M-1,
and must check box (2) Consolidated return (Form 1120-PC
only), or (3) Mixed 1120/L/PC group, as applicable, at the top of
page 1 of Schedule M-3.
Amortization of research and development costs. Specified
research or experimental costs paid or incurred in tax years
beginning after December 31, 2021, must be capitalized and
amortized. See the instructions for Line 37. Research and
Development Costs, later.
General Instructions
A U.S. property and casualty insurance company filing Form
1120-PC that is not required to file Schedule M-3 may voluntarily
file Schedule M-3 in place of Schedule M-1. A property and
casualty insurance company filing Schedule M-3 must check
Item A, box 3, on Form 1120-PC, page 1, indicating that
Schedule M-3 is attached, whether required or voluntary. A
property and casualty insurance company filing Schedule M-3
must not file Schedule M-1.
Purpose of Schedule
Schedule M-3, Part I, asks certain questions about the
corporation's financial statements and reconciles financial
statement net income (loss) for the corporation (or consolidated
financial statement group, if applicable), as reported on
Schedule M-3, Part I, line 4a, to net income (loss) of the
corporation for U.S. taxable income purposes, as reported on
Schedule M-3, Part I, line 11.
Example 1.
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 consolidated U.S. income tax return with B and
reports total consolidated assets on Schedule L of $8 million. A's
U.S. consolidated tax group is not required to file Schedule M-3
for the current tax year.
2. U.S. property and casualty insurance company C owns
U.S. property and casualty insurance company D. For its current
tax year, C prepares consolidated financial statements with D
but C and D file 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.
Schedule M-3, Parts II and III, reconcile financial statement
net income (loss) for the U.S. corporation (or consolidated tax
group, if applicable), as reported on Schedule M-3, Part I,
line 11, to the subtotal on Form 1120-PC, Schedule A, line 35 (or
Schedule B, line 19, if applicable). For property and casualty
insurance companies that prepare an annual statement, financial
statement net income (loss) should be reported on the statutory
basis on Schedule M-3, Part I, line 11.
Where To File
If the corporation is required to file (or voluntarily files)
Schedule M-3 (Form 1120-PC), the corporation must file Form
1120-PC and all attachments and schedules, including
Schedule M-3 (Form 1120-PC), at the following address.
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012
3. Foreign corporation A owns 100% of both U.S. property
and casualty insurance company B and U.S. property and
casualty insurance company C. C owns 100% of U.S. property
and casualty insurance company D. For its current tax year, A
prepares a consolidated worldwide financial statement for the
ABCD consolidated group. The ABCD consolidated financial
statement reports total year-end assets of $25 million. A is not
Who Must File
Any domestic corporation or group of corporations required to
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file Form 1120-PC, U.S. Property and Casualty Insurance
Company Income Tax Return, that reports on the balance sheet,
Schedule L of Form 1120-PC, total assets at the end of the
Feb 1, 2024
Cat. No. 39943A
required to file a U.S. income tax return. B files a separate U.S.
income tax return and reports separate company total year-end
assets on its Schedule L of $12 million. C files a consolidated
U.S. income tax return with D and, after eliminating
year-end assets of all includible corporations listed on Form 851,
net of eliminations for intercompany transactions and balances
between the includible corporations. In addition, for purposes of
determining for Schedule M-3 whether the corporation (or U.S.
consolidated tax group) has total assets at the end of the current
tax year of $10 million or more, the corporation's total
intercompany transactions between C and D, reports
consolidated total year-end assets on Schedule L of $8 million. B
is required to file Schedule M-3 because its total year-end assets
reported on Schedule L equal at least $10 million. The CD U.S.
consolidated tax group is not required to file Schedule M-3
because its total year-end assets reported on Schedule L do not
equal at least $10 million.
consolidated assets must be determined on an overall accrual
method of accounting unless both of the following apply: (a) the
tax returns of all includible corporations in the U.S. consolidated
tax group are prepared using an overall cash method of
accounting, and (b) no includible corporation in the U.S.
consolidated tax group prepares or is included in financial
statements prepared on an accrual basis.
Special Filing Requirements for Mixed Groups
If the parent company of a U.S. consolidated tax group files Form
1120-PC and files Schedule M-3, all members of the group must
file Schedule M-3. However, if the parent corporation of a U.S.
consolidated tax group files Form 1120-PC and any member of
the group files a Form 1120 or Form 1120-L, U.S. Life Insurance
Company Income Tax Return, that member must file a Form
1120 Schedule M-3 or a Form 1120-L Schedule M-3,
Note. See the instructions for Part I, line 1, for a discussion of
non-tax-basis income statements and related non-tax-basis
balance sheets to be used in the preparation of Schedule M-3
and Form 1120-PC, Schedule L.
Other Form 1120-PC Schedules
Affected by Schedule M-3
Requirements
respectively, and the group must comply with the mixed group
consolidated Schedule M-3 reporting described under
later. A mixed group must also file Form 8916, Reconciliation of
Schedule M-3 Taxable Income with Tax Return Taxable Income
for Mixed Groups, and, if applicable, Form 8916-A,
Report on Schedules L and Form 1120-PC, Schedule A (or
Schedule B, if applicable), amounts for the U.S. corporation or, if
applicable, the U.S. consolidated tax group.
Supplemental Attachment to Schedule M-3.
Schedule L, Balance Sheet
If the parent company of a U.S. consolidated tax group files
Form 1120-PC, and any member of the group files Form 1120 or
Form 1120-L, and the consolidated Schedule L reported in the
return includes the assets of all of the companies (insurance
companies as well as the non-insurance companies), in order to
determine if the group meets the $10 million threshold test for
the requirement to file Schedule M-3, use the amount of total
assets reported on Schedule L of the consolidated return. If the
parent company of a U.S. consolidated tax group files Form
1120-PC and any member of the group files Form 1120 or Form
1120-L and the consolidated Schedule L reported in the return
does not include the assets of one or more of the insurance
companies in the U.S. consolidated tax group, in order to
determine if the group meets the $10 million threshold test for
the requirement to file Schedule M-3, use the sum of the amount
of total assets reported on the consolidated Schedule L plus the
amounts of all assets reported on Forms 1120 and 1120-L that
are included in the consolidated return but not included on the
consolidated Schedule L.
If a non-tax-basis income statement and related non-tax-basis
balance sheet are prepared for any purpose for a period ending
with or within the tax year, Schedule L must be prepared
showing non-tax-basis amounts. See the instructions for
Schedule M-3, Part I, line 1, for the 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
non-tax-basis balance sheet amounts that must be used for
Schedule L.
Total assets shown on Schedule L, line 15, column (d), must
equal the total assets of the property and casualty insurance
company (or, in the case of a U.S. consolidated tax group, the
total assets of all members of the group listed on Form 851) as of
the last day of the tax year. The same amount of total assets
must be reported by the property and casualty insurance
company (or by each member of the U.S. consolidated tax
group) in the non-tax-basis financial statements, if any, used for
Schedule M-3. If the property and casualty insurance company
prepares non-tax-basis financial statements, Schedule L must
equal the sum of the non-tax-basis financial statement total
assets for each corporation listed on Form 851 and included in
the consolidated U.S. income tax return (includible corporation)
net of eliminations for intercompany transactions between
includible corporations. If the property and casualty insurance
company does not prepare non-tax-basis financial statements,
Schedule L must be based on the property and casualty
company's books and records. The Schedule L balance sheet
may show tax-basis balance sheet amounts if the property and
casualty insurance company is allowed to use books and
records for Schedule M-3 and the property and casualty
insurance company's books and records reflect only tax-basis
amounts.
For insurance companies included in the consolidated U.S.
income tax return, see instructions for Part I, lines 10a, 10b, 10c,
and 11, and Part II, line 7, for guidance on Schedule M-3
reporting of intercompany dividends and statutory accounting
adjustments.
Other Issues Affecting Schedule M-3
Filing Requirements
If a property and casualty insurance company was required to
file Schedule M-3 for the preceding tax year but reports on
Schedule L of Form 1120-PC total consolidated assets at the
end of the current tax year of less than $10 million, the property
and casualty insurance company is not required to file
Schedule M-3 for the current tax year. The property and casualty
insurance company may voluntarily file Schedule M-3 for the
current tax year. If for a subsequent tax year the property and
casualty insurance company is required to file Schedule M-3, the
property and casualty insurance company must complete
Schedule M-3 in its entirety for that subsequent tax year.
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-year opening balance sheet
amount and the prior-year closing balance sheet amount, attach
a statement that reports the balance sheet item, the prior closing
In the case of a U.S. consolidated tax group, total assets at
the end of the tax year must be determined based on the total
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Instructions for Schedule M-3 (Form 1120-PC)
amount, the current opening amount, and a short explanation of
the change. Reasons for these differences include mergers and
acquisitions.
For the purposes of these instructions, the following rules
apply.
1. The parent corporation of a consolidated tax group is
deemed to own all corporate and partnership interests owned or
deemed to be owned under these instructions by any member of
the tax consolidated group.
2. The owner of a disregarded entity is deemed to own all
corporate and partnership interests owned or deemed to be
owned under these instructions by the disregarded entity.
3. The owner of 50% or more of a corporation by vote on any
day of the corporation’s tax year is deemed to own all corporate
and partnership interests owned or deemed to be owned under
these instructions by the corporation during its tax year.
4. The owner of 50% or more of partnership income, loss, or
capital on any day of the partnership tax year is deemed to own
all corporate and partnership interests owned or deemed to be
owned under these instructions by the partnership during the
partnership tax year.
5. The beneficial owner of 50% or more of the beneficial
interest of a trust or nominee arrangement on any day of the trust
or nominee arrangement tax year is deemed to own all corporate
and partnership interests owned or deemed to be owned under
these instructions by the trust or nominee arrangement.
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 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 corporation's
reporting methodology, the equity method of accounting for
investments. If Schedule L is prepared on a tax basis, 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.
Schedule M-2
The amount shown on Schedule M-2, line 2, Net income (loss)
per books, must equal the amount shown on Schedule M-3, Part
I, line 11. Schedule M-2 must reflect activity only of corporations
included in the consolidated U.S. income tax return.
Consolidated Return (Form 1120-PC)
A reportable entity partner with respect to a partnership (as
defined above) must report the following to the partnership within
30 days of first becoming a reportable entity partner and, after
first reporting to the partnership under these instructions,
thereafter within 30 days of the date of any change in the interest
it owns or is deemed to own, directly or indirectly, under these
instructions, in the partnership.
Report on Form 1120-PC each item of income, gain, loss,
expense, or deduction net of elimination entries for intercompany
transactions between includible corporations. The corporation
must not report as dividends on Form 1120-PC, Schedule A, any
amounts received from an includible corporation unless the
corporation receiving the intercompany dividends is an
insurance company and only to the extent that the insurance
company is required to include intercompany dividends in
taxable income. (See the instructions for Part I, lines 10a, 10b,
10c, and 11, for a discussion of intercompany dividends and
insurance company statutory accounting.) In general, dividends
received from an includible corporation must be eliminated in
consolidation rather than offset by the dividends-received
deduction.
1. Name.
2. Mailing address.
3. Taxpayer identification number (TIN or EIN), if applicable.
4. Entity or organization type.
5. State or country in which it is organized.
6. Date on which it first became a reportable entity partner.
Entity Considerations for
Schedule M-3
7. Date with respect to 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 with respect to which it is
reporting.
For purposes of Schedule M-3, references to the classification of
an entity (for example, as a corporation, a partnership, or a trust)
are references to the treatment of the entity for U.S. income tax
purposes. An entity that is generally disregarded as separate
from its owner for U.S. income tax purposes (disregarded entity)
must not be separately reported on Schedule M-3 except, if
required, on Part I, line 7a or 7b. On Schedule M-3, Parts II and
III, any item of income, gain, loss, deduction, or credit of a
disregarded entity must be reported as an item of its owner. In
particular, the income or loss of a disregarded entity must not be
reported on Part II, line 9, 10, or 11 as a separate partnership or
other pass-through entity. The financial statement income or loss
of a disregarded entity is included on Part I, line 7a or 7b, only if
its financial statement income or loss is included on Part I,
line 11, but not on Part I, line 4a.
9. Any change in that interest as of the date with respect to
which it is reporting.
The reportable entity partner must retain copies of required
reports it makes to partnerships under these instructions. Each
partnership must retain copies of the required reports it receives
under these instructions from reportable entity partners.
Example 2.
1. Z, a U.S. property and casualty insurance company, owns
50% of A, an LLC filing Form 1065 for 2023. A owns 50% of B, C,
D, and E, which are also LLCs filing a Form 1065 for calendar
year 2023. Z was first required to file Schedule M-3 (Form
1120-PC) for its corporate tax year ended December 31, 2022,
and filed its Schedule M-3 with Form 1120-PC for 2022 on
October 15, 2023. As of October 16, 2023, Z was a reportable
entity partner with respect to A and, through A, with respect to B,
C, D, and E. On November 5, 2022, Z reports to A, B, C, D, and
E, as it is required to do within 30 days of October 16, that Z is a
reportable entity partner directly owning (with respect to A) or
deemed to own indirectly (with respect to B, C, D, and E) a 50%
interest. Therefore, because Z was a reportable entity partner for
2023, each of A, B, C, D, and E is required to file Schedule M-3
Reportable Entity Partner Reporting
Responsibilities
A reportable entity partner with respect to a partnership filing
Form 1065, U.S. Return of Partnership Income, is an entity that:
Owns or is deemed to own, directly or indirectly, under these
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instructions a 50% or greater interest in the income, loss, or
capital of the partnership on any day of the tax year; and
Was required to file Schedule M-3 on its most recently filed
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U.S. income tax return or return of income filed prior to that day.
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Instructions for Schedule M-3 (Form 1120-PC)
(Form 1065), for 2023, regardless of whether they would
otherwise be required to file Schedule M-3 for that year.
Note. Complete only one Schedule M-3, Part I, for each
consolidated group. A subsidiary of a consolidated group does
not complete Schedule M-3, Part I. Enter on Part I the name and
EIN of the common parent of the consolidated group.
Indicate on each Schedule M-3, Parts II and III, on the line
after the common parent's name and EIN, whether the
Schedule M-3, Parts II and III, is for the:
2. P, a U.S. property and casualty insurance company, is the
parent of a financial consolidation group with 50 domestic
subsidiaries, DS1 through DS50, and 50 foreign subsidiaries,
FS1 through FS50, all 100% owned on October 16, 2023. On
October 15, 2023, P filed a consolidated tax return on Form
1120-PC and was required to file Schedule M-3 for the tax year
ending December 31, 2022. On October 16, 2023, DS1, DS2,
DS3, FS1, and FS2 each acquire a 10% partnership interest in
partnership K, which files Form 1065 for the tax year ending
December 31, 2023. P is deemed to own, directly or indirectly
(under these instructions), all corporate and partnership interests
of DS1, DS2, and DS3, as the parent of the tax consolidation
group and therefore is deemed to own 30% of K on October 16,
2023. P is deemed to own, directly or indirectly (under these
instructions), all corporate and partnership interests of FS1 and
FS2 as the owner of 50% or more of each corporation by vote
and therefore is deemed to own 20% of K on October 16, 2023.
P is therefore deemed to own 50% of K on October 16, 2023.
Since P owns or is deemed to own, directly or indirectly (under
these instructions), 50% or more of K on October 16, 2023, and
was required to file Schedule M-3 with its most recently filed U.S.
income tax return filed prior to that date, P is a reportable entity
partner of K as of October 16, 2023. On November 5, 2023, P
reports to K that P is a reportable entity partner as of October 16,
2023, deemed to own (under these instructions) a 50% interest
in K. K is, therefore, required to file Schedule M-3 when it files its
Form 1065 for its tax year ending December 31, 2023.
1. Consolidated group,
2. Parent corporation,
3. Consolidation eliminations, or
4. Subsidiary corporation,
by checking the appropriate box. If Parts II and III are for a
subsidiary in a consolidated return, also enter the name and EIN
of the subsidiary.
Schedule M-3 Consolidation for Mixed Groups
(1120/L/PC)
Special Schedule M-3 consolidation rules apply to a mixed
group, that is, a consolidated tax group that:
1. Includes both a corporation that is an insurance company
and a corporation that is not an insurance company, or
2. Includes both a life insurance company and a property
and casualty insurance company, or
3. Includes a life insurance company, a property and
casualty insurance company, and a corporation that is not an
insurance company.
Mixed group consolidation for Schedule M-3, Parts II and III,
requires:
1. Subgroup sub-consolidation of the 1120 subgroup, the
1120-PC subgroup, and the 1120-L subgroup, each with its own
sub-consolidated Schedule M-3, Parts II and III, and
2. Consolidation of the subgroup sub-consolidation totals on
a consolidated Schedule M-3, Part II, that ties to a consolidated
Schedule M-3, Part I, and a consolidated Form 8916,
Reconciliation of Schedule M-3 Taxable Income with Tax Return
Taxable Income for Mixed Groups.
Consolidated Schedule M-3 Versus
Consolidating Schedules M-3 for
Form 1120-PC Groups
A consolidated tax return group with a parent corporation that
files a Form 1120-PC is a mixed group if any member is a life
insurance company (files Form 1120-L, U.S. Life Insurance
Company Income Tax Return) or is not an insurance company.
later.
In addition to one Schedule M-3, Part II, and one
A U.S. consolidated tax group must file a consolidated
Schedule M-3. Parts I, II, and III of the consolidated
Schedule M-3, Part III, for each corporation in the three subgroup
sub-consolidations, there will generally be a total of six additional
Schedule M-3, Parts II, and six additional Schedule M-3, Parts
III, for the subgroup sub-consolidations. Specifically, there must
be one Part II, and one Part III, for each subgroup's
Schedule M-3 must reflect the activity of the entire U.S.
consolidated tax group. The parent corporation must also
complete Parts II and III of a separate Schedule M-3 to reflect the
parent's own activity. In addition, Parts II and III of a separate
Schedule M-3 must be completed by each includible corporation
to reflect the activity of that includible corporation. Lastly, it will
generally be necessary to complete Parts II and III of a separate
Schedule M-3 for consolidation eliminations.
sub-consolidated amounts and one Part II, and one Part III, for
each subgroup's sub-consolidation eliminations amounts.
At the mixed group consolidated level, there must be a
consolidated Schedule M-3, Part II, and, if applicable, a Part II,
for consolidation eliminations not includible in the subgroup
eliminations. At the consolidated level there must also be a
consolidated Schedule M-3, Part I, and a consolidated Form
8916. For a mixed group, there is no Schedule M-3, Part III, at
the consolidated level. At the consolidated level, use the
Schedule M-3 (Form 1120, 1120-PC, or 1120-L), Parts I and II,
that match the form on which the parent corporation reports and
the entire consolidated group files.
If a U.S. consolidated tax group that is not a mixed group
consists of four includible corporations (the parent and three
subsidiaries) all filing Form 1120-PC, the U.S. consolidated tax
group must complete six Schedules M-3 as follows.
One consolidated Schedule M-3 with Parts I, II, and III
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completed to reflect the activity of the entire U.S. consolidated
tax group.
Parts II and III of a separate Schedule M-3 for each of the four
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includible corporations to reflect the activity of each includible
corporation.
The corporation must check the applicable mixed group
checkboxes on all Schedules M-3, Parts I, II, and III, as
discussed below.
Parts II and III of a separate Schedule M-3 to eliminate
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intercompany transactions between includible corporations and
to include limitations on deductions (for example, charitable
contribution limitations and capital loss limitations) and carryover
amounts (for example, charitable contribution carryovers and
capital loss carryovers).
Subgroup Sub-Consolidation: 1120 Subgroup,
1120-PC Subgroup, and 1120-L Subgroup
Limitations, and Carryovers, later.
A subgroup Schedule M-3, Parts II and III, sub-consolidation
must be prepared with all necessary eliminations within the
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Instructions for Schedule M-3 (Form 1120-PC)
subgroup for each of the three possible subgroups that are in
fact present.
8916, line 1. Form 8916, line 8, must equal taxable income
reported on the tax return.
One subgroup for those corporations reporting on Form 1120,
One subgroup for those corporations reporting on Form
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Completion of Mixed Group Checkboxes for
Schedule M-3, Part II and Part III
1120-PC, and
One subgroup for those reporting on Form 1120-L.
•
The parent corporation is included in the subgroup that
corresponds to the form on which it reports and the entire
consolidated group files. For example, in the case of a Form
1120-PC parent and Form 1120-PC consolidated group, the
parent is included in the Form 1120-PC subgroup
Note. The following discussion of checkboxes will assume that
the 1120-PC subgroup includes the corporate parent of the
mixed group.
Forms 1120, 1120-PC, and 1120-L, Schedule M-3, Parts II
and III, each have a checkbox (5) at the top indicating a mixed
group. Checkbox (5) and one or more other applicable
checkboxes must be checked for a mixed group.
sub-consolidation. Each subgroup uses its own Schedule M-3
(Form 1120, 1120-PC, or 1120-L), Parts II and III, for each
corporation within the subgroup and for the subgroup
sub-consolidation and the subgroup eliminations.
For example, an 1120-PC parent corporation included in the
1120-PC subgroup must check Form 1120-PC, Schedule M-3,
Parts II and III, box (2) Parent corporation, and box (5) Mixed
1120/L/PC group. An 1120-PC subsidiary corporation within the
1120-PC subgroup must check Form 1120-PC, Schedule M-3,
Parts II and III, box (4) Subsidiary corporation, and box (5) Mixed
1120/L/PC group. An 1120 subsidiary corporation within the
1120 subgroup must check Form 1120, Schedule M-3, Parts II
and III, box (4) Subsidiary corporation, and box (5) Mixed
1120/L/PC group. An 1120-L subsidiary corporation within the
1120-L subgroup must check Form 1120-L, Schedule M-3, Parts
II and III, box (4) Subsidiary corporation, and box (5) Mixed
1120/L/PC group.
The three subgroup sub-consolidation taxable income
calculations on Schedule M-3 must follow the separate return
requirements of the regulations under section 1502 and all other
applicable regulations taking into account the amounts
separately reported on Form 8916. Capital loss limitation and
carryforward used and charitable deduction limitation and
carryforward used are not taken into account in the
determination of the three subgroup sub-consolidated taxable
incomes on Schedule M-3, but are reflected on Form 8916 and
in the calculation of the life/non-life loss limitation and
carryforward used. See Life/Non-Life Loss Limitation and
Carryforward Used Calculations, later.
The reconciliation totals for book, temporary difference,
permanent difference, and taxable income for each subgroup are
reported on Form 1120, 1120-PC, or 1120-L, as applicable,
Schedule M-3, Part II, line 29a, columns (a), (b), (c), and (d), and
equal the sum of the line amounts on Part II, lines 26 through 28.
For a mixed group, Schedule M-3, Part II, lines 29b, 29c, and 30
are blank on the Form 1120, 1120-PC, or 1120-L, as applicable,
for the separate corporations (parent and subsidiary) and for the
three subgroup sub-consolidations.
The 1120 subgroup sub-consolidation Form 1120,
Schedule M-3, Parts II and III, must be indicated by checking box
(5) Mixed 1120/L/PC group, and box (6) 1120 group for the
sub-consolidation, and by checking box (5) Mixed 1120/L/PC
group, and box (7) 1120 eliminations, for the eliminations. The
1120-PC subgroup sub-consolidation Form 1120-PC,
Schedule M-3, Parts II and III, must be indicated by checking box
(5) Mixed 1120/L/PC group, and box (6) 1120-PC group for the
sub-consolidation, and by checking box (5) Mixed 1120/L/PC
group, and box (7) 1120-PC eliminations, for the eliminations.
The 1120-L subgroup sub-consolidation Form 1120-L,
Note. A sub-consolidation is required for every subgroup, even
if the subgroup consists of only one corporation. In addition,
Form 8916-A, if applicable, is required at the sub-consolidated
level and the sub-consolidated elimination level.
Schedule M-3, Parts II and III, must be indicated by checking box
(5) Mixed 1120/L/PC group, and box (6) 1120-L group for the
sub-consolidation, and by checking box (5) Mixed 1120/L/PC
group, and box (7) 1120-L eliminations, for the eliminations.
Reconciliation of Mixed Group Subgroup
Sub-Consolidation Amounts to Schedule M-3, Part
I, Line 11, and to Tax Return Taxable Income
A mixed group with a Form 1120-PC parent corporation
completes a consolidated level Form 1120-PC, Schedule M-3,
Parts I and II, and a consolidated Form 8916. The mixed group
consolidated Schedule M-3, Part II, must be indicated by
checking box (1) Consolidated group, and box (5) Mixed
1120/L/PC group. If a consolidated level Part II for consolidation
eliminations not includible in the subgroup eliminations is
applicable, that Part II must be indicated by checking box (3)
Consolidated eliminations, and box (5) Mixed 1120/L/PC group.
At the consolidated level, use the Schedule M-3 (Form 1120,
1120-PC, or 1120-L), Parts I and II, that matches the form on
which the parent corporation reports and the entire consolidated
group files. For a mixed group, the consolidated Schedule M-3,
Part II, lines 29a, 29b, and 29c amounts report the applicable
amounts from the three subgroup sub-consolidation Part II,
line 29a, amounts. (If a consolidated level Part II for
Life/Non-Life Loss Limitation and Carryforward
Used Calculations
consolidation eliminations not includible in the subgroup
eliminations is applicable, the applicable amounts must be
adjusted by the applicable elimination amounts.) The
consolidated Schedule M-3, Part II, line 30, amounts are the
sums of the applicable amounts on the consolidated Part II, lines
29a, 29b, and 29c. For a mixed group, the consolidated Part II,
lines 1 through 28, are blank and no consolidated Part III is
required to be completed.
The applicable life/non-life loss limitation and all carryforward
used calculations are made using the amounts determined for
taxable income in the three subgroup sub-consolidations and
other applicable amounts separately reported on Form 8916.
The calculated life/non-life loss limitation or carryforward used
amounts, if any, are not entered on Schedule M-3. The
calculated amounts, if any, are entered on Form 8916.
For mixed groups, the consolidated Part II, line 30, column
(a), must equal Part I, line 11, with appropriate adjustments for
statutory accounting requirements reflected on Part I, lines 10a
and 10b. The consolidated taxable income indicated on Part II,
line 30, column (d), must equal the amount shown on Form
5
Instructions for Schedule M-3 (Form 1120-PC)
Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers
Specific Instructions
Part I. Financial Information and Net
Income (Loss) Reconciliation
Generally, a corporation (or any member of a U.S. consolidated
tax group) required to file Schedule M-3 must complete the form
in its entirety. In particular, a corporation filing a nonconsolidated
return that meets the filing requirements for Schedule M-3 must
complete Parts I, II, and III. Such a corporation does not check
any of the checkboxes at the top of Parts II and III. In the case of
a U.S. consolidated tax group, Part I must be completed once,
on the consolidated Schedule M-3, by the parent corporation.
Parts II and III must be completed by the parent corporation,
each includible corporation, and a consolidating eliminations
entity.
When To Complete Part I
Part I must be completed for any tax year for which the property
and casualty insurance company files Schedule M-3. Check
either box (1) Non-consolidated return, (2) Consolidated return
(Form 1120-PC only), or (3) Mixed 1120/L/PC group, as
applicable. In addition, check box (4) Dormant subsidiaries
schedule attached, if applicable.
Line 1. Questions Regarding the Type of Income
Statement Prepared
Except as otherwise provided in these instructions, when a
Schedule M-3 (Form 1120-PC) is filed, all applicable Part I
questions must be answered; all applicable columns in Parts II
and III must be completed; all numerical data required in Parts I,
II, and III must be provided; and any statement required to
support a line item in Parts I, II, or III must be attached and must
provide the information for that line item.
For Schedule M-3, Part I, lines 1 through 12, use only the
financial statements of the U.S. property and casualty insurance
company filing the U.S. income tax return (or the consolidated
financial statements for the U.S. parent corporation of a U.S.
consolidated tax group). If the U.S. property and casualty
insurance company filing a U.S. income tax return (or the U.S.
parent corporation of a U.S. consolidated tax group) prepares its
own financial statements but is controlled by another corporation
(U.S. or foreign) that prepares financial statements that include
the U.S. corporation, the U.S. corporation (or the U.S. parent
corporation of a U.S. consolidated tax group) must use for its
Schedule M-3, Part I, its own financial statements and not the
financial statements of the controlling corporation.
All detailed statements for Part II and Part III of Schedule M-3
must be attached for each separate entity included in the
consolidated Part II and Part III, including those for the parent
company and the eliminations entity, if applicable. It is not
required that the same supporting detailed information be
presented for Part II and Part III of the consolidated
Schedule M-3.
If a non-publicly traded U.S. parent property and casualty
insurance company of a U.S. consolidated tax group prepares
financial statements and that group includes a publicly traded
subsidiary that files financial statements with the Securities and
Exchange Commission (SEC), the consolidated financial
statements of the parent property and casualty insurance
company are the appropriate financial statements for purposes
of completing Part I. Do not use any separate company financial
statements that might be prepared for publicly traded
subsidiaries.
If an item attributable to an includible corporation is not
shared by or allocated to the appropriate member of the group
but is retained in the parent corporation's financial statements (or
books and records, if applicable), then the item must be reported
by the parent corporation in its separate Schedule M-3. For
example, if the parent of a U.S. consolidated tax group prepares
financial statements that include all members of the U.S.
consolidated tax group and the parent does not allocate the
group's income tax expense, as reflected in the financial
statements, among the members of the group but retains it in the
parent corporation, the parent corporation must report on its
separate Schedule M-3 the U.S. consolidated tax group's
income tax expense, as reflected in the financial statements.
Non-Tax-Basis Financial Statements and Tax-Basis
Financial Statements
Any adjustments made at the consolidated group level that
are not attributable to any specific member of the U.S.
consolidated tax group (for example, disallowance of net capital
losses, contribution deduction carryovers, and limitation of
contribution deductions) must not be reported on the separate
consolidating parent or subsidiary Schedules M-3 but rather on
the consolidated Schedule M-3 and on the consolidating
Schedule M-3 for consolidation eliminations (or on Form 8916 in
the case of a mixed group).
A tax-basis income statement for Schedule M-3 and a tax-basis
balance sheet for Schedule L are allowed only if no
non-tax-basis income statement and no non-tax-basis balance
sheet were prepared for any purpose and the books and records
of the corporation reflect only tax-basis amounts. The
corporation is deemed to have non-tax-basis income statements
and the related non-tax-basis balance sheets for the current tax
year for purposes of Schedule M-3 and Schedule L if such
non-tax-basis financial statements were prepared for and
presented to management, creditors, shareholders, government
regulators, and any other third parties for a period ending with or
within the tax year.
If an includible corporation has (1) no activity for the tax year
(for example, because the corporation is a dormant or inactive
corporation), (2) no amount for the corporation was included in
Part I, line 11, and (3) the corporation has no amounts to report
on Part II and Part III of Schedule M-3 for the tax year, the parent
corporation of the U.S. consolidated tax group may attach to the
consolidated Schedule M-3 a statement that provides the name
and employer identification number (EIN) of the includible
corporation instead of filing a blank Part II and Part III of
Schedule M-3 for the entity. On page 1, check box (4) Dormant
subsidiaries schedule attached.
If a Form 10-K is filed with the SEC 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 Form
10-K is not filed and a non-tax-basis income statement is
prepared that is a certified non-tax-basis income statement for
the period ending with or within the tax year, the corporation
must check “Yes,” for Part I, line 1b, and use that income
statement for Schedule M-3. If Form 10-K is not filed and no
certified non-tax-basis income statement is prepared for the
period ending with or within the tax year, the corporation must
6
Instructions for Schedule M-3 (Form 1120-PC)
check “Yes,” for Part I, line 1c, and use that income statement for
Schedule M-3.
Line 3. Questions Regarding Publicly Traded
Voting Common Stock
Order of priority in accounting standards. If no Form 10-K is
filed and two or more non-tax-basis income statements are both
certified non-tax-basis income statements for the period, the
income statement prepared according to the following order of
priority in accounting standards must be used.
The primary U.S. publicly traded voting common stock class is
the most widely held or most heavily traded within the United
States, as determined by the property and casualty insurance
company. If the property and casualty insurance company has
more than one class of publicly traded voting common stock,
attach a list of the classes of publicly traded voting common
stock and the trading symbol and the nine-digit CUSIP number
of each class.
1. U.S. Generally Accepted Accounting Principles (GAAP).
2. International Financial Reporting Standards (IFRS).
3. Any other International Accounting Standards (IAS).
4. Statutory accounting for insurance companies.
5. Other regulatory accrual accounting.
6. Any other accrual accounting standard.
7. Any fair market value standard.
8. Any cash basis standard.
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). A corporation filing a non-consolidated Form
1120-PC for itself must report its worldwide income on Part I,
line 4a.
If no non-tax-basis income statement is certified and two or
more non-tax-basis income statements are prepared, the
income statement prepared according to the accounting
standards first listed in the order of priority above must be used.
In completing Schedule M-3, the property and casualty
insurance company must use financial statement amounts from
the financial statement type checked “Yes” on Part I, line 1, or
from its books and records if Part I, line 1c, is checked “No.” If
Part I, line 1a, is checked “Yes,” report on Part I, line 4a, the net
income amount reported in the income statement presented to
the SEC on the corporation's Form 10-K (the Form 10-K for the
security identified on Part I, line 3b, if applicable).
If no non-tax-basis financial statements are prepared for a
U.S. property and casualty insurance company (or, in the case of
a U.S. consolidated tax group, for the U.S. parent corporation's
consolidated group) filing Schedule M-3, the U.S. property and
casualty insurance company (or the U.S. parent corporation of a
U.S. consolidated tax group) must check “No” on questions 1a,
1b, and 1c; skip Part I, lines 2a through 3c; and enter the net
income (loss) per the books and records of the U.S. property and
casualty insurance company (or U.S. consolidated tax group) on
Part I, line 4a.
If a property and casualty insurance company prepares
non-tax-basis financial statements, the amount on Part I, 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 2a.
If no non-tax-basis financial statements are prepared for a
U.S. property and casualty insurance company (or, in the case of
a U.S. consolidated tax group, for the U.S. parent corporation's
consolidated group) filing Schedule M-3, and the U.S. property
and casualty insurance company is owned by a foreign
If the property and casualty insurance company 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 2a, applies for
purposes of Part I, lines 4a through 8.
corporation that prepares financial statements that include the
U.S. corporation (or the U.S. parent corporation's consolidated
group), the U.S. corporation (or the U.S. parent corporation of
the U.S. consolidated tax group) must check “No” on questions
1a, 1b, and 1c; skip Part I, lines 2a through 3c; and enter the net
income (loss) per the books and records of the U.S. corporation
(or U.S. consolidated tax group) on Part I, line 4a.
If the property and casualty insurance company does not
prepare non-tax-basis financial statements, and has checked
“No” on Part I, line 1c, enter the net income (loss) per the books
and records of the U.S. corporation or the U.S. consolidated tax
group on Part I, line 4a.
Indicate on Part I, line 4b, which of the following accounting
standards were used for line 4a.
Line 2. Questions Regarding Income Statement
Period and Restatements
1. U.S. Generally Accepted Accounting Principles (GAAP).
2. International Financial Reporting Standards (IFRS).
3. Statutory.
Enter the beginning and ending dates on line 2a for the property
and casualty insurance company's income statement period
ending with or within this tax year.
4. Other (specify).
The questions on Part I, lines 2b and 2c, regarding income
statement restatements, refer to the worldwide consolidated
income statement issued by the corporation filing the U.S.
income tax return (the consolidated financial statements for the
U.S. parent corporation of a U.S. consolidated tax group) and
used to prepare Schedule M-3. Answer “Yes” on lines 2b and/or
2c if the property and casualty insurance company's 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 statement period that is restated, including
the original amount and restated amount of each annual
statement period's net income. The attached statement is not
required to report restatements on an entity-by-entity basis.
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
statements or books and records), to net income (loss) of
includible corporations 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 books and records) used for the
worldwide consolidated income (loss) amount reported on Part I,
line 4a.
If a U.S. property and casualty insurance company (a) has net
income (loss) included on Part I, line 4a, and removed on Part I,
line 6a or 6b, on another U.S. corporation's Schedule M-3, (b)
files its own Form 1120-PC (separate or consolidated), (c) does
not have a separate non-tax-basis financial statement (certified
or otherwise) of its own, and (d) reports on Schedule L of its own
7
Instructions for Schedule M-3 (Form 1120-PC)
Form 1120-PC total consolidated assets that equal or exceed
$10 million at the end of the corporation's tax year, the property
and casualty insurance company must answer questions 1a, 1b,
and 1c of Part I, as appropriate, for its own Form 1120-PC and
must report on Part I, line 4a, the amount for the corporation's
net income (loss) that is removed on Part I, line 6a or 6b, of the
other corporation's Schedule M-3. However, if in the
circumstances described immediately above, the property and
casualty insurance company does have separate non-tax-basis
financial statements (certified or otherwise) of its own,
independent of the amount of the corporation's net income
included in Part I, line 4a, of the other U.S. corporation, the
corporation must answer questions 1a, 1b, and 1c of Part I, as
appropriate, for its own Form 1120-PC, based on its own
separate income statement, and must report on Part I, line 4a,
the net income amounts shown on its separate income
statement.
(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 corporation. Do not remove in Part I the
financial net income (loss) of any nonincludible U.S. entity
accounted for on Part I, line 4a, using the equity method.
Attach a supporting statement that provides the name, EIN,
and net income (loss) included on Part I, line 4a, that is removed
on 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
nonincludible U.S. entity without regard to the effect of
consolidation or 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 are not
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 statement, so that the separate
financial accounting income (loss) of each nonincludible U.S.
entity remains separately stated.
Note. See the instructions for Part I, line 10, for adjustments that
may be necessary to reconcile financial statement income to
statutory income for the property and casualty insurance
company.
Line 5. Net Income (Loss) of Nonincludible
Foreign Entities
For example, if the net income (after consolidation and
elimination entries) of a nonincludible U.S. sub-consolidated
group is being reported on line 6a, the attached supporting
statement should report the income (loss) of each separate
nonincludible U.S. legal entity from each such entity's own
financial accounting net income statement or books and records,
and any consolidation or elimination entries (for intercompany
dividends, minority interests, etc.) not reportable on 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 U.S. entity's separate net income (loss).
Remove the financial net income (line 5a) or loss (line 5b) of
each foreign entity that is included on Part I, line 4a, and is not an
includible corporation in the U.S. consolidated tax group
(nonincludible foreign entity). In addition, on Part I, line 8, adjust
for consolidation eliminations and correct for minority interest
and intercompany dividends between any nonincludible foreign
entity and any includible corporation. Do not remove in Part I the
financial net income (loss) of any nonincludible foreign entity
accounted for on Part I, line 4a, using the equity method.
Attach a supporting statement that provides the name, EIN (if
applicable), and net income (loss) included on Part I, line 4a, that
is removed on line 5 for each separate nonincludible foreign
entity. Also state the total assets and total liabilities for each such
separate nonincludible foreign entity and include those assets
and liabilities amounts in the total assets and total liabilities
reported on Part I, line 12b. The amounts of income (loss)
detailed on the supporting statement should be reported for
each separate nonincludible foreign entity without regard to the
effect of consolidation or elimination entries. If there are
consolidation or elimination entries relating to nonincludible
foreign entities whose income (loss) is reported on the attached
statement that are not 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 statement, so that
the separate financial accounting income (loss) of each
nonincludible foreign entity remains separately stated.
Lines 7a, 7b, and 7c. Net Income (Loss) of Other
Foreign Disregarded Entities, Net Income (Loss)
of Other U.S. Disregarded Entities, and Net
Income (Loss) of Other Includible Entities
Include on Part I, line 7a, 7b, or 7c, the financial net income or
(loss) of each foreign or U.S. disregarded entity or other
includible corporation that is not included in the consolidated
financial group and therefore not included in the income reported
on Part I, line 4a. Include on line 7a or 7b the financial net
income or (loss) of any disregarded entity that is not included in
the income reported on Part I, line 4a, but is included on Part I,
line 11 (other disregarded entities). Include on line 7c the
financial net income or (loss) of any entity not a disregarded
entity that is not included in the income reported on Part I,
line 4a, but is included on line 11 (other includible corporations).
In addition, on Part I, line 8, adjust for consolidation eliminations
and correct for minority interest and intercompany dividends for
any other disregarded entity or other includible entities.
For example, if the net income (after consolidation and
elimination entries) of a nonincludible foreign sub-consolidated
group is being reported on line 5a, the attached supporting
statement should report the income (loss) of each separate
nonincludible foreign legal entity from each such entity's own
financial accounting net income statement or books and records,
and any consolidation or elimination entries (for intercompany
dividends, minority interests, etc.) not reportable on 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).
Attach a supporting statement that provides the name, EIN,
and net income (loss) per the financial statement or books and
records for each separate other disregarded entity or other
includible entity reported on line 7. Also state the total assets
and total liabilities for each such separate included entity and
include those assets and liabilities amounts in the total assets
and total liabilities reported on Part I, line 12d. The amounts of
income (loss) detailed on the supporting statement should be
reported for each separate other disregarded entity or other
includible entity without regard to the effect of consolidation or
elimination entries solely between or among the entities listed. If
there are consolidation or elimination entries relating to such
other disregarded entity or other includible entities whose
income (loss) is reported on the attached statement that are not
Line 6. Net Income (Loss) of Nonincludible U.S.
Entities
Remove the financial net income (line 6a) or loss (line 6b)
included on Part I, line 4a, for each U.S. entity that is not an
includible corporation in the U.S. consolidated tax group
8
Instructions for Schedule M-3 (Form 1120-PC)
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 statement, so that the separate
financial accounting income (loss) of each other disregarded
entity or other includible entity remains separately stated.
inclusion from the entity. If the owner corporation does not
account for the entity on the equity method on its own general
ledger, it will not have eliminated the equity income for
consolidated financial statement purposes, and therefore will
have no elimination of equity income to reverse.
For example, if the net income (after consolidation and
elimination entries) of a sub-consolidated group of other
disregarded entities is being reported on line 7a or 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).
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 is not necessary, but it is permitted, to report
intercompany eliminations that net to zero on Part I, line 8, such
as intercompany interest income and expense.
Line 9. Adjustment To Reconcile Income
Statement Period to Tax Year
Include on line 9 any adjustments necessary to the income (loss)
of includible corporations to reconcile differences between the
corporation's income statement period reported on line 2a and
the corporation's tax year. Attach a statement describing the
adjustment.
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
nonincludible U.S. or foreign entities are not eliminated, in order
to report the correct total amount on Part I, line 11. Also,
additional consolidation entries and elimination entries may be
necessary on Part I, line 8, related to transactions between
includible entities that are in the consolidated financial statement
group and other disregarded entities and other includible entities
that are not in the consolidated financial statement 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.
Statutory accounting for an insurance company subsidiary
acquired or merged may require the use of a financial statement
period for income reported on Part I, line 11, that differs from the
period reported on Part I, line 4a, or line 7. Report on Part I,
line 10b, adjustments to income because of the differences in
accounting period.
Line 10a. Intercompany Dividend Adjustments
To Reconcile to Line 11,
Line 10b. Other Statutory Accounting
Adjustments To Reconcile to Line 11, and
Line 10c. Other Adjustments To Reconcile to
Amount on Line 11
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 eliminations
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.
Include on lines 10a, 10b, and 10c 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. Include on
line 10a the amount of any intercompany dividend adjustment
required by statutory accounting. Include on line 10b the amount
of any other required statutory accounting adjustment. Include
on line 10c the amount of any other adjustment not required by
statutory accounting.
Normally, all intercompany dividends will have been
eliminated or excluded from the financial accounting
consolidated net income (loss) reported on Part I, line 4a.
However, an insurance company may be required to include
certain intercompany dividends on Part I, line 11, so that the
amount reported on Part I, line 11, agrees with statutory
accounting net income (Annual Statement). If the net income
(loss) of a corporation that files Form 1120-PC or Form 1120-L is
included on Part I, line 4a, or line 7, and is computed on a basis
other than statutory accounting, include on line 10a the
adjustments necessary such that Part I, line 11, includes
intercompany dividends in the net income (loss) for the
corporation to the extent required by statutory accounting
principles. For insurance companies included in the
consolidated U.S. income tax return, see the instructions for Part
I, line 11, and Part II, line 7.
For example, adjustments must be reported on line 8 to
remove minority interest and to reverse the elimination of
intercompany dividends included on 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 reflect any
minority interest ownership in the net income of other
disregarded entities or other includible entities reported on Part I,
line 7a, 7b, or 7c. Consolidation and elimination entries must
also be reported on line 8 to eliminate any intercompany
dividends between corporations or entities whose income is
included on Part I, line 7a, 7b, or 7c, and other entities included
in the consolidated U.S. income tax return. See line 11,
examples 3, 4, and 5.
If a corporate owner of an interest in another entity (a)
accounts for the interest in the entity in the owner corporation's
separate general ledger on the equity method, and (b) fully
consolidates the entity in the owner corporation's consolidated
financial statements, but the entity is not includible in the owner
corporation's consolidated 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
Statutory accounting for an insurance company subsidiary
acquired or merged may require the use of a financial statement
period for income reported on Part I, line 11, that differs from the
period reported on Part I, line 4a, or line 7. Report on Part I,
line 10b, adjustments to income because of such differences in
accounting period.
For any adjustments reported on Part I, lines 10a, 10b, and
10c, attach a supporting statement that provides, for each
9
Instructions for Schedule M-3 (Form 1120-PC)
corporation to which an adjustment relates, the name and EIN of
the corporation; the amount of net income included in Part I
before any adjustments on line 10; the amount of net income
included on Part I, line 11; the amount of the net adjustment that
is attributable to intercompany dividend adjustments required to
be reported by statutory accounting and included on Part I,
line 10a; the amount of the net adjustment attributable to other
statutory accounting requirements and included on Part I,
line 10b; and the amount of the remainder of the net adjustment
not required because of statutory accounting and included on
Part I, line 10c. If any net adjustment is included for the
corporation on Part I, line 10b or 10c, attach a supplemental
supporting statement identifying the line (10b or 10c), and the
type and amount of each adjustment included in the net
adjustment.
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. 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:
a. The elimination of dividends received by P and DS1
through DS75 from DS76 through DS100 and FS1 through
FS50; and
b. The recognition of minority interests' share of the net
income (loss) of DS76 through DS100. (Note. The minority
interests' share, if any, of the income of DS1 through DS75 must
be reported on Part II, line 8.)
P reports on Part I, line 11, the consolidated financial
statement net income (loss) attributable to the includible
corporations. Intercompany transactions between the includible
corporations that had been eliminated in the net income amount
on Part I, line 4a, remain eliminated in the net income amount on
line 11. Transactions between the includible corporations and
the nonincludible entities that are eliminated in the net income
amount on Part I, line 4a, are included in the net income amount
on line 11 since the elimination of those transactions was
reversed on line 8.
2. Foreign corporation F owns 100% of the stock of U.S.
property and casualty insurance company P. P owns 100% of the
stock of DS1, 60% of the stock of DS2, and 100% of the stock of
FS1. F prepares certified audited financial statements. P does
not prepare any financial statements. P files a consolidated U.S.
income tax return with DS1.
P must not complete Schedule M-3, Part I, with reference to
the financial statements of its foreign parent F. P must check
“No” on Part I, lines 1a, 1b, and 1c, skip lines 2a through 3c of
Part I, and enter worldwide net income (loss) per the books and
records of the includible corporations (P and DS1) on Part I,
line 4a. If the amount on Part I, line 4a, includes the income
(loss) of DS2 and FS1 or is not on the statutory basis, P must
enter any necessary adjustments on lines 5a through 10 in order
for Part I, line 11, to report the net income (loss) of includible
corporations P and DS1, net of eliminations for transactions
between P and DS1.
Line 11. Net Income (Loss) per Income
Statement of Includible Corporations
Report on line 11 the net income (loss) per the income statement
(or books and records, if applicable) of the property and casualty
insurance company. In the case of a U.S. consolidated tax group,
report the consolidated income statement net income (loss) of all
corporations listed on Form 851 and included in the consolidated
U.S. income tax return for the tax year. Amounts reported in
column (a) of Parts II and III (see instructions, later) must be
reported on the same accounting method used to report the
amount of net income (loss) per income statement of includible
corporations on Part I, line 11, which for insurance companies is
usually statutory accounting. For insurance companies included
in the consolidated U.S. income tax return, see the instructions
for Part I, line 10, and Part II, line 7.
Do not, in any event, report on line 11 the net income of
entities not listed on Form 851 other than disregarded entities
and not included in the consolidated U.S. income tax return for
the tax year. For example, it is not permissible to remove the
income of nonincludible entities on lines 5 and/or 6, discussed
earlier, 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 consolidated 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 corporations included in the consolidated U.S. income tax
return.
Example 4.
1. U.S. property and casualty insurance company P owns
60% of corporation DS1 which is fully consolidated in P's
financial statements. P does not 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.
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 on Part I, line 11, and on Part II, line 7,
column (a). P's dividend income included on the tax return from
DS1 must be reported 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 are not recorded in the profit
and loss accounts in the corporation's general ledger, including,
for example, all post-closing adjusting entries (including
workpaper adjustments) and dividend income or other income
received from nonincludible corporations.
Example 3.
1. U.S. property and casualty insurance company P is
publicly traded and files Form 10-K with the SEC. P owns 80% or
more of the stock of 75 U.S. corporations, DS1 through DS75;
between 51% and 79% of the stock of 25 U.S. corporations,
DS76 through DS100; and 100% of the stock of 50 foreign
subsidiaries, 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 DS1 through
DS100 in financial statement consolidation entries. P's SEC
Form 10-K includes P, DS1 through DS100, and FS1 through
FS50 on a fully consolidated basis. P files a consolidated U.S.
income tax return with DS1 through DS75.
2. U.S. property and casualty insurance company C owns
60% of the capital and profits interests in U.S. LLC N. C does not
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.
P must check “Yes” on Part I, line 1a. On Part I, line 4a, P
must report the consolidated net income from the SEC Form
10-K for the consolidated financial statement group of P, DS1
10
Instructions for Schedule M-3 (Form 1120-PC)
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 9, column (a). C's
taxable income from N must be reported by C on Part II, line 9,
column (d).
3. U.S. property and casualty insurance company P owns
60% of corporation DS1, which is fully consolidated in P's
financial statements. P accounts 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 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.
P's consolidated U.S. income tax return, even though DS1 is not
included in P's consolidated financial statements on either a
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 DS1 is an
includible corporation, 100% of the net income of both P and
DS1 must be reported on Form 1120-PC, Schedule A, of the
PDS consolidated U.S. income tax return, and the intercompany
interest income and expense must be removed by consolidation
elimination entries.
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 reflect the full consolidation of the
financial accounting net income of P and DS1 at Part I, line 11,
Net income (loss) per income statement of includible
corporations, the following consolidation and elimination entries
are reported on Part I, line 8: (a) offsetting entries to remove the
$40 of interest income received from DS1 included by P on Part
I, line 4a, and to remove the $40 of interest expense of DS1
included in line 7c for a net change of zero; and (b) an entry to
reflect the $20 minority interest in the net income of DS1 (DS1
net income of $100 times 20% minority interest). The result is
that Part I, line 11, reports $1,120: $1,040 from Part I, line 4a,
$100 from line 7, and ($20) from line 8. Stated another way, Part
I, line 11, includes the entire $1,000 net income of P, measured
before recognition of the intercompany interest income from DS1
and the consolidation of DS1 operations, plus the entire $140 net
income of DS1, measured before interest expense to P, less the
minority interest ownership of $20 in DS1's separate net income
($100). The consolidated U.S. income tax group is required to
include on the attached supporting statement for Part I, line 8,
the details of the adjustment to the minority interest in the net
income of DS1, but is not required to report the offsetting
adjustment to the intercompany elimination of interest income
and interest expense (though it is permitted to do so).
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 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 6, column (a). P's dividend income included on the
tax return from its investment in DS1 must be reported on Part II,
line 7, column (d).
4. U.S. property and casualty insurance company C owns
60% of the capital and profits interests in U.S. LLC N. C
accounts 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. 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 equity method income and
consolidates N including $60 of net income ($100 less the
minority interest of $40) on Part I, line 4a.
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 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 9, column (a). C's taxable income from N must be reported
by C on Part II, line 9, column (d).
5. U.S. property and casualty insurance company C owns
60% of the capital and profits interests in U.S. LLC N. C
accounts for N in C's separate general ledger on the equity
method. N has net income of $100 (before minority interests)
and pays a $50 cash distribution, of which C receives $30. The
distribution reduces C's investment in N for equity method
reporting on C's separate general ledger. 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 equity method income and
consolidates N and includes $60 of net income ($100 less the
minority interest of $40) on Part I, line 4a.
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 corporation's share) of assets and liabilities
of entities included or removed on Part I, lines 4, 5, 6, and 7.
Assets and liabilities reported on Part I, lines 12a through 12d,
must be reported as positive amounts.
On line 12a, enter the worldwide consolidated total assets
and total liabilities of all of the entities included in completing
Part I, line 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.
Specific Instructions for Parts II and
III
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 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 9, column (a). C's taxable income from N must be reported
by C on Part II, line 9, column (d).
For U.S. consolidated tax returns, file supporting statements for
each includible corporation. See Consolidated Return in the
Instructions for Form 1120-PC.
General Format for Parts II and III
Check the applicable box(es) at the top of pages 2 and 3 of
Schedule M-3 to indicate whether the Schedule M-3 is for the:
Example 5. U.S. property and casualty insurance company
1. Consolidated group,
2. Parent corporation,
P owns 80% of the stock of corporation DS1. DS1 is included in
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Instructions for Schedule M-3 (Form 1120-PC)
3. Consolidated eliminations,
4. Subsidiary corporation, or
5. Mixed 1120/L/PC group.
$5,000. In its financial statements, B treats the goodwill
impairment as a permanent difference. B must report the
amortization attributable to the IP on Part III, line 28, 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 27, and report $5,000 in column (a), a
permanent difference of ($5,000) in column (c), and $0 in
column (d).
Also check the applicable box to indicate whether the
Schedule M-3 is for a sub-consolidated (6) 1120-PC group; or
(7) 1120-PC eliminations. See Consolidated Schedule M-3
earlier.
Reporting Requirements for Parts II
and III
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 the subtotal on Form
1120-PC, Schedule A, line 35 (or Schedule B, line 19, if
applicable).
Except for mixed group consolidation, the number of Parts II
must equal the number of Parts III filed by the corporation. Mixed
groups should see Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC), earlier.
Note. A statement or explanation may be attached to any line
General Reporting Requirements
even if none is required.
If an amount is attributable to a reportable transaction described
in Regulations section 1.6011-4(b), the amount must be reported
in columns (a), (b), (c), and (d), as applicable, of Part II, line 12,
regardless of whether the amount would otherwise be reported
on Part II or Part III. Thus, if a taxpayer files Form 8886,
Reportable Transaction Disclosure Statement, the amounts
attributable to that reportable transaction must be reported on
Part II, line 12.
For any item of income, gain, loss, expense, or deduction for
which there is a difference between columns (a) and (d), the
portion of the difference that is temporary must be entered in
column (b) and the portion of the difference that is permanent
must be entered in column (c).
If financial statements are prepared by the property and
casualty insurance company in accordance with statutory
accounting principles (SAP), differences that are treated as
temporary for SAP must be reported in column (b) and
differences that are permanent (that is, not temporary for SAP)
must be reported in column (c). Generally, pursuant to SAP, a
temporary difference affects (creates, increases, or decreases) a
deferred tax asset or liability.
A property and casualty insurance company is required to
report in column (a) of Parts II and III the amount of any item
specifically listed on Schedule M-3 that is in any manner
included in the property and casualty insurance company's
current-year annual statement net income (loss) or in an income
or expense account maintained in the property and casualty
insurance company's books and records. The amount should be
reported even if there is no difference between that amount and
the amount included in taxable income unless (a) otherwise
provided in these instructions or (b) the amount is attributable to
a reportable transaction described in Regulations section
1.6011-4(b) and is therefore reported on Part II, line 12. For
example, with the exception of interest income reflected on a
Schedule K-1 received by a property and casualty insurance
company as a result of the property and casualty insurance
company's investment in a partnership or other pass-through
entity, all interest income, whether from unconsolidated affiliated
companies, third parties, banks, or other entities; whether
imputed interest or not; whether from foreign or domestic
sources; whether taxable or exempt from tax; and regardless of
how or where the income is classified in the property and
casualty insurance company's annual statement, must be
included on Part II, line 13, column (a). Likewise, all fines and
penalties 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 11, 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; and regardless of how or where the fines
or penalties are classified in the property and casualty insurance
company's summary of operations or the income and expense
accounts maintained in the property and casualty insurance
company's books and records.
If the property and casualty insurance company does not
prepare financial statements, or the financial statements are not
prepared in accordance with SAP, report in column (b) any
difference that the property and casualty insurance company
believes will reverse in a future tax year (that is, have an opposite
effect on taxable income in a future tax year (or years) due to the
difference in timing of recognition for financial accounting and
U.S. income tax purposes) or is the reversal of such a difference
that arose in a prior tax year. Report in column (c) any difference
that the property and casualty insurance company believes will
not reverse in a future tax year (and is not the reversal of such a
difference that arose in a prior tax year).
If the property and casualty insurance company is unable to
determine whether a difference between column (a) and column
(d) for an item will reverse in a future tax year or is the reversal of
a difference that arose in a prior tax year, report the difference for
that item in column (c).
Example 6. In its first year of operation, property and
casualty insurance company A is not required to file a
Schedule M-3. If A voluntarily files Schedule M-3, all applicable
Part I questions must be answered and all applicable columns in
Parts II and III must be completed.
Example 7. Property and casualty insurance company B is a
U.S. publicly traded corporation that files a U.S. consolidated tax
return and prepares consolidated SAP/GAAP financial
statements. In prior years, B acquired intellectual property (IP)
and goodwill through several corporate acquisitions. 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 is not amortizable for U.S. income tax purposes and is
subject to impairment for financial statement purposes. In the
current year, B records an impairment charge on the goodwill of
If a property and casualty insurance company would be
required to report in Parts II and III, column (a), the amount of
any item specifically listed on Schedule M-3 in accordance with
the preceding paragraph, except that the property and casualty
insurance company has capitalized the item of income or
expense and reports the amount in its annual statement or in
asset and liability accounts maintained in the property and
casualty insurance company's books and records, the property
12
Instructions for Schedule M-3 (Form 1120-PC)
and casualty insurance company must report the proper tax
treatment of the item in columns (b), (c), and (d), as applicable.
P and A must report this expense/deduction in Part II, line 28,
columns (a) and (d). B must report the following on Part III,
line 39, in column (a), B's expense recognized in the financial
statements when accrued; in column (d), B's real estate tax
expense recognized for U.S. income tax purposes; and in
column (b) or (c), as applicable, the difference between B's real
estate tax expense in its financial statements and its real estate
tax deduction recognized for U.S. taxable income purposes.
Furthermore, in applying the two preceding paragraphs, a
property and casualty insurance company is required to report in
Parts II and III, column (a), the amount of any item specifically
listed on Schedule M-3 that is included in the property and
casualty insurance company's annual statement or exists in the
property and casualty insurance company's books and records,
regardless of the nomenclature associated with that item in the
annual statement or books and records. Accurate completion of
Schedule M-3 requires reporting amounts according to the
substantive nature of the specific line items included in
Schedule M-3 and consistent reporting of all transactions of like
substantive nature that occurred during the tax year. For
example, all expense amounts that are included in the annual
statement or exist in the books and records that represent some
form of “Bad debt expense,” except write-offs of premium
receivables, must be reported on Part III, line 32, in column (a),
regardless of whether the amounts are recorded or stated under
different nomenclature in the annual statement or the books and
records, such as “Provision for doubtful accounts” or “Expense
for uncollectible notes receivable.” Likewise, as stated in the
preceding paragraph, all fines and penalties must be included on
Part III, line 11, column (a), regardless of the terminology or
nomenclature attached to them by the property and casualty
insurance company in its books and records or annual
statement.
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 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 9
through 24, or Part III, lines 1 through 38, and the line does not
indicate to “attach statement” and the specific instructions for the
line do not call for an attachment of a statement, then the item is
considered separately stated and adequately disclosed if the
item is reported on the applicable line and the amount(s) of the
item(s) are reported in the applicable columns of the applicable
line. See the instructions for Part II, lines 1 through 8, later, for
specific additional information required to be provided for these
particular lines.
Note. A statement or explanation may be attached to any line
even if none is required.
With limited exceptions, Part II includes lines for specific items
of income, gain, or loss (income items). See Part II, lines 1
through 24. If an income item is described in Part II, lines 1
through 24, 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 does not have a
difference, and the item is not described in Part II, lines 1 through
24, report and describe the entire amount of the item on Part II,
line 25.
Except as otherwise provided, differences for the same item
must be combined or netted together and reported as one
amount on the applicable line of Schedule M-3. However,
differences for separate items must not be combined or netted
together. Each item (and corresponding amount attributable to
that item) must be separately stated and adequately disclosed
on the applicable line of Schedule M-3, or any statement
required to be attached, even if the amounts are below a certain
dollar amount.
Required statements for Part II, line 25, and Part III, line 39.
A separate statement must be attached to Schedule M-3 (Form
1120-PC) that includes a detailed description of each item and
adjustment entered on Part II, line 25, and Part III, line 39.
With limited exceptions, Part III includes lines for specific
items of expense or deduction (expense items). See Part III,
lines 1 through 38. If an expense item is described on Part III,
lines 1 through 38, report the amount of the item on the
applicable line, regardless of whether there is a difference for the
item. If there is a difference for the expense item, or only a
portion of the expense item has a difference and a portion of the
item does not have a difference and the item is not described in
Part III, lines 1 through 38, report and describe the entire amount
of the item in Part III, line 39.
The description for each amount entered in column (a) must
be readily identifiable to the name of the account in the financial
statements or books and records of the taxpayer, under which
the amount in column (a) was recorded in the accounting
records. Also, the description for each amount entered in column
(a) must include detailed information supporting each
adjustment reported in columns (b) and (c), including how the
adjustment is identified in the accounting records. The entire
description is considered the tax description for the amount
reported in column (d) for each item reported on Part II, line 25,
or Part III, line 39.
If there is no difference between the annual statement amount
and the taxable amount of an entire item of income, loss,
expense, or deduction and the item is not described or included
in Part II, lines 1 through 25, or Part III, lines 1 through 39, report
the entire amount of the item in Part II, line 28, columns (a) and
(d).
Each description should adequately describe all four columns
of Part II, line 25, or Part III, line 39. If additional information is
required to provide an acceptable description, attach a
supporting statement.
Special instructions for Part II, lines 25 and 28, and Part III,
line 39. Whether an income (loss) item is reported on Part II,
line 25, or on Part II, line 28, or an expense/deduction item on
Part III, line 39, or on Part II, line 28, is determined separately by
each member of the U.S. consolidated tax group and not at the
U.S. consolidated tax group level. For example, U.S. corporation
P has two subsidiaries, A and B, that are included in P's
consolidated financial statements and in P's consolidated U.S.
income tax return. For financial statement purposes, P, A, and B
recognize real estate tax expense when accrued. For U.S.
income tax purposes, P and A recognize such expense
Example 8. Property and casualty insurance company C is a
calendar year taxpayer that is required to file Schedule M-3 for
its current tax year. C placed in service ten depreciable assets in
prior years. C's total depreciation expense for its current tax year
for five of the assets is $50,000 for income statement purposes
and $70,000 for 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 income statement purposes and $30,000
for U.S. income tax purposes. In its annual statement, C treats
the differences between annual statement and U.S. income tax
depreciation expense as giving rise to temporary differences that
consistent with the method used for financial statement
purposes, whereas B recognizes such deduction based on a
method different from that used for financial statement purposes.
13
Instructions for Schedule M-3 (Form 1120-PC)
will reverse in future years. C must combine all of its depreciation
adjustments. Accordingly, C must report on Part III, line 31, 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).
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 or includible with
respect to foreign corporations on Part II, lines 2 through 5, as
applicable.
Line 2. Gross Foreign Dividends Not Previously
Taxed
Example 9. Property and casualty insurance company D is a
calendar year taxpayer that is required to file Schedule M-3 for
its current tax year. On December 31, of the current year, D
establishes two reserve accounts in the amount of $100,000 for
each account. One reserve account is an allowance for agency
balances that are estimated to be uncollectible. The second
reserve is an estimate of future office closure expenses. In its
annual statement, D treats the two reserve accounts as giving
rise to temporary differences that will reverse in future years. The
two reserves are expenses in D's current annual statement but
are not deductions for U.S. income tax purposes in the current
year. D must not combine the Schedule M-3 differences for the
two reserve accounts. D must report the amounts attributable to
the allowance for bad debts on Part III, line 32, and must
separately state and adequately disclose the amount attributable
to the other reserve, future office closure expenses, on a
required, attached statement that supports the amounts on Part
III, line 39.
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 the subtotal on Form 1120-PC,
Schedule A, line 35 (or Schedule B, line 19, if applicable), and
report on line 2, column (a), the amount of dividends from any
foreign corporation included in Part I, line 11. Do not report on
Part II, line 2, any amounts that must be reported on Part II, line 3
or 4, or dividends that were previously taxed and must be
reported on Part II, line 5. See the instructions for Part II, lines 3,
4, and 5, later. Report amounts in columns (b) and (c), as
applicable.
For any dividends reported on Part II, line 2, that are received
on a class of voting stock of which the property and casualty
insurance company 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 2:
D must also provide a description for each reserve that meets
the requirements for Part III, line 39, discussed earlier under
this example, an acceptable description would be “Future Office
Closure Expense Reserve.”
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,
Note. There is no need to add the title of the reserve account to
the description if the account name for the amount in column (a)
is already part of the adjustment description.
and
5. The item amounts for columns (a) through (d).
Example 10. Insurance company F had $100 of meal
expenses, $100 of entertainment expenses, and therefore
deducted $200 on its income statement. For federal income tax
purposes, the entire $100 of meal expenses are subject to the
50% limitation under section 274(n). The $100 of entertainment
expenses are nondeductible under section 274(a). F must report
on Part III, line 10, $200 in column (a), $150 in column (c), and
$50 in column (d). F must report all its meals and entertainment
expenses only on this line whether there is a difference or not
because meals and entertainment expenses are specifically
described.
Line 3. Subpart F, QEF, and Similar Income
Inclusions
Report on line 3, column (d), the amount included in taxable
income under section 951, relating to Subpart F; 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 taxable income
pursuant to section 1293 (relating to qualified electing funds).
The amount included under section 951 corresponds to the total
of the amounts reported by the property and casualty insurance
company on line 6, Schedule I, of all Forms 5471, Information
Return of U.S. Persons With Respect To Certain Foreign
Corporations. The amount of qualified electing fund (QEF)
income corresponds to the total of the amounts reported by the
property and casualty insurance company on all Forms 8621,
Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund.
Part II. Reconciliation of Net Income
(Loss) per Income Statement of
Includible Corporations With Taxable
Income per Return
Lines 1 Through 8. Additional Information for
Each Property and Casualty Insurance
Company
Also include on line 3 passive foreign investment company
mark-to-market gains and losses under section 1296. Do not
report such gains and losses on Schedule M-3, Part II, line 15.
For any item reported on Part II, lines 1, 3 through 6, or 8, attach
a supporting statement that provides the name of the entity for
which the item is reported, the type of entity (corporation,
partnership, etc.), the entity's EIN (if applicable), and the item
amounts for columns (a) through (d). See the instructions for Part
II, lines 2 and 7, for the specific information required for those
particular lines.
Line 4. Gross-Up for Foreign Taxes Deemed Paid
Report on line 4, column (d), the amount of any gross-up for
foreign taxes deemed paid not included on Part II, column (d) of
lines 9, 10, and 11, Income (loss) from U.S. partnerships, foreign
partnerships, and other pass-through entities. The gross-up
amount on line 4 must correspond to the total gross-up amounts
for foreign taxes deemed paid reported by the property and
casualty insurance company on all Forms 1118, Foreign Tax
Credit—Corporations, excluding the amounts reported on
Schedule M-3, Part II, lines 9, 10, and 11, column (d).
Line 1. Income (Loss) From Equity Method
Foreign Corporations
Report on line 1, column (a), the financial income (loss) included
in Part I, line 11, for any foreign corporation accounted for on the
14
Instructions for Schedule M-3 (Form 1120-PC)
4. The percentage of the class directly or indirectly owned,
and
Line 5. Gross Foreign Distributions Previously
Taxed
5. The amounts for columns (a) through (d).
Report on line 5, column (a), any distributions received from
foreign corporations that correspond to amounts 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 taxable 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.
Since previously taxed foreign distributions are not currently
taxable, line 5, column (d), is shaded. Also, see the instructions
for Part II, line 2, earlier.
Line 8. Minority Interest for Includible
Corporations
Report on line 8, column (a), the minority interest included in the
income statement income (loss) on Part I, line 11, for any
member of the U.S. consolidated tax group that is less than
100% owned.
Example 11. Property and casualty insurance company G is
a calendar year taxpayer that is required to file Schedule M-3 for
its current tax year. G owns 90% of the stock of U.S. corporation
DS1. G files a consolidated U.S. income tax return with DS1 as
the GDS1 U.S. consolidated group. G prepares certified SAP/
GAAP financial statements for the consolidated financial
statement group consisting of G and DS1. G has no net income
of its own, and G does not report its equity interest in the income
of DS1 on its separate financial statements. DS1 has financial
statement net income (before minority interests) and taxable
income of $1,000 ($2,500 of revenue less $1,500 cost of goods
sold).
On the consolidated Schedule M-3, Part I, line 4a, Worldwide
consolidated net income (loss) per income statement, and on
line 11, Net income (loss) per income statement of includible
corporations, the U.S. consolidated tax group GDS1 must report
$900 of financial statement net income ($1,000 net income less
$100 minority interest).
The GDS1 group must prepare one consolidated
Schedule M-3, Parts II and III, and three additional Schedules
M-3, Parts II and III: one for G, one for DS1, and one for
consolidation eliminations.
On the Schedule M-3, Parts II and III, for DS1, $1,000 is
reported on Part II, line 28 and line 30, in both columns (a) and
(d). On G's Schedule M-3, Parts II and III, zero is reported on
Part II, line 30, in both columns (a) and (d). On the consolidation
eliminations Schedule M-3, Parts II and III, on Part II, line 8 and
line 30, the minority interest elimination for the U.S. consolidated
tax group is reported as ($100) in column (a), $100 in column
(c), and $0 in column (d).
Line 6. Income (Loss) From Equity Method U.S.
Corporations
Report on line 6, 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 7, dividends received from any
U.S. corporation accounted for on the equity method.
Line 7. U.S. Dividends Not Eliminated in Tax
Consolidation
Report on line 7, column (a), the amount of dividends included in
Part I, line 11 that were received from any U.S. corporation.
Report on line 7, column (d), the amount of any U.S. dividends
included in the subtotal on Form 1120-PC, Schedule A, line 35
(or Schedule B, line 19, if applicable).
Usually, the amounts included on line 7, columns (a) and (d),
include only dividends received from U.S. corporations that are
not included in the U.S. consolidated tax group because
intercompany dividends (dividends received from includible
corporations listed on Form 851) are eliminated or excluded for
financial accounting purposes and eliminated for the calculation
of U.S. taxable income. In the case of an insurance company
included in the consolidated U.S. income tax return required to
report intercompany dividends as part of statutory accounting
net income, include such intercompany dividends on Part II,
line 7, column (a), and the taxable amount of those dividends on
Part II, line 7, column (d). For insurance companies included in
the consolidated U.S. income tax return, see the instructions for
Part I, lines 10a, 10b, 10c, and 11.
On the Schedule M-3, Parts II and III for the U.S. consolidated
tax group, on Part II, line 8, Minority interest for includible
corporations, ($100) is reported in column (a), $100 in column
(c), and $0 in column (d). On Part II, line 28, the U.S.
For any intercompany dividends (dividends received from
includible corporations listed on Form 851) included on Part II,
line 7, report on an attached supporting statement for Part II,
line 7:
consolidated tax group reports $1,000 in both columns (a) and
(d). As a result, financial statement net income on Part II, line 30,
column (a), will total $900; net permanent differences on Part II,
line 30, column (c), will total $100; and taxable income on
line 30, column (d), will total $1,000.
1. The name of the dividend payer,
2. The payer's EIN,
3. The class of stock or security on which the dividends
Line 9. Income (Loss) From U.S. Partnerships
and Line 10. Income (Loss) From Foreign
Partnerships
were paid,
4. The amount of any net adjustment included on Part I,
line 10a, for such dividends, and
For any interest owned by the corporation or a member of the
U.S. consolidated tax group 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 9 or 10, 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;
5. The amounts for columns (a) through (d).
For any dividends included on Part II, line 7, that are not
intercompany dividends (dividends received from includible
corporations listed on Form 851) 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 7:
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; and
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,
3. In column (d), the sum of all amounts of income, gain,
loss, or deduction attributable to the corporation's distributive
15
Instructions for Schedule M-3 (Form 1120-PC)
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
(for example, limitations on utilization of charitable contributions,
capital losses, and interest expense).
Part II, line 12, regardless of whether the difference, or
differences, would otherwise be reported elsewhere in Part II or
Part III. Thus, if a taxpayer files Form 8886 for any reportable
transaction described in Regulations section 1.6011-4, the
amounts attributable to that reportable transaction must be
reported on Part II, line 12. In addition, all income and expense
amounts attributable to a reportable transaction must be
reported on Part II, line 12, columns (a) and (d) even if there is no
difference between the annual statement amounts and the
taxable amounts.
For each partnership reported on line 9 or 10, attach a
supporting 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 line 9 or 10, as applicable.
Each difference attributable to a reportable transaction must
be separately stated and adequately disclosed. A property and
casualty insurance company will be considered to have
separately stated and adequately disclosed a reportable
transaction on line 12 if the property and casualty insurance
company sequentially numbers each Form 8886 and lists by
identifying number on the supporting statement for Part II,
line 12, each sequentially numbered reportable transaction and
the amounts required for Part II, line 12, columns (a) through (d).
Example 12. U.S. property and casualty insurance company
H is a calendar year taxpayer that is required to file
Schedule M-3. H has an investment in a U.S. partnership, USP.
H prepares annual statements in accordance with SAP. In its
annual statement, H treats the difference between annual
statement net income and taxable income from its investment in
USP as a permanent difference. For its current tax year, H's
annual 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 contributions, and
$200 of section 179 expense. H must report on Part II, line 9,
$10,000 in column (a), a permanent difference of ($2,200) in
column (c), and $7,800 in column (d).
Instead of the requirements of the preceding paragraph, a
property and casualty insurance company will be considered to
have separately stated and adequately disclosed a reportable
transaction if the property and casualty insurance company
attaches a supporting statement that provides the following for
each reportable transaction.
Example 13. Assume the same facts as Example 12, except
that corporation H's charitable contribution deduction is wholly
attributable to its partnership interest in USP and is limited to $90
pursuant to section 170(b)(2) due to other investment losses
incurred by H. In its financial statements, H treated this limitation
as a temporary difference. H must not report the charitable
contribution limitation of $3,910 ($4,000 - $90) on Part II, line 9.
H must report the limitation on Part III, line 20, and report the
disallowed charitable contributions of ($3,910) in columns (b)
and (d).
1. A description of the reportable transaction disclosed on
Form 8886 for which amounts are reported on Part II, line 12;
2. The name and reportable transaction or tax shelter
registration number, if applicable, as reported on Form 8886; and
3. The type of reportable transaction (for example, listed
transaction, confidential transaction, transaction with contractual
protection, etc.) as reported on Form 8886.
If a transaction is a listed transaction described in Regulations
section 1.6011-4(b)(2), the description must also include the
description provided on 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 Form 8886.
Example 14. Property and casualty insurance company J is
a calendar year taxpayer that is required to file 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
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 are
not reportable transactions. J discloses the reportable
Line 11. 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 9 or 10, as applicable)
owned by a member of the U.S. consolidated tax group (other
than an interest in a disregarded entity), report the following on
line 11.
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, except for amounts
described in item 4 below, the sum of all differences, if any,
attributable to the pass-through entity; and
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 12.
The $12 million loss and the $5 million loss will be adequately
disclosed if J attaches a supporting statement for line 12 that
lists each of the sequentially numbered forms, Form 8886-X1
and Form 8886-X2, and with respect to each reportable
transaction reports the appropriate amounts required for Part II,
line 12, 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
transaction for the loss, and reports the appropriate amounts
required for Part II, line 12, columns (a) through (d). J must report
the losses attributable to the other five abandonment losses on
Part II, line 23e, regardless of whether a difference exists for any
or all of those abandonment losses.
3. In column (d), except for amounts described in item 4
below, 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).
For each pass-through entity reported on line 11, attach a
supporting statement that provides that entity's name, EIN (if
applicable), the property and casualty insurance company's end
of year profit-sharing percentage (if applicable), the property and
casualty insurance company's end of year loss-sharing
percentage (if applicable), and the amounts reported by the
property and casualty insurance company on line 11, column (a),
(b), (c), or (d), as applicable.
Line 12. Items Relating to Reportable
Transactions
Any amounts attributable to any reportable transactions (as
described in Regulations section 1.6011-4) must be included on
16
Instructions for Schedule M-3 (Form 1120-PC)
Example 15. Property and casualty insurance company K is
a calendar year taxpayer that is required to file Schedule M-3 for
its current tax year. K enters into a transaction with contractual
protection that is a reportable transaction described in
and 475(e)(2), such as certain contracts to which section
1256(a) applies.
Report hedging gains and losses computed under the
mark-to-market method of accounting on Part II, line 14, and not
on line 15.
Regulations section 1.6011-4(b)(4). This reportable transaction
is the only reportable transaction for K's current tax year and
results in a $7 million capital loss for both statutory accounting
purposes and U.S. income tax purposes. Although the
Traders in securities or commodities. For a trader in
securities or commodities that made a valid election under
section 475(f) to use the mark-to-market method to account for
securities or commodities held in connection with a trading
business that files Form 4797, Sales of Business Property, any
Schedule M-3 entries required as a result of 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 Part II, line 15, of Schedule M-3 (Form 1120-PC),
and (b) any other Schedule M-3 entries required based on other
results (non-mark-to-market gains and losses) included in the
total reported on Form 4797, line 17, should be reported on Part
II, line 23d, of Schedule M-3 (Form 1120-PC), unless the
instructions for Schedule M-3 require the amounts to be reported
on another line.
transaction does not result in a difference, K is required to report
on Part II, line 12, 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 12 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 12, columns (a) through (d). Alternatively, the transaction will
be adequately disclosed if the supporting statement for line 12
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.
Line 13. Interest Income
Line 16. Premium Income
Report on Part II, line 13, column (a), the total amount of interest
income included on Part I, line 11. Report on Part II, line 13,
column (d), the total amount of interest income included on Form
1120-PC, Schedule A, line 35 (or Schedule B, line 19, if
applicable), that is not required to be reported elsewhere on
Schedule M-3. In column (b) or (c), as applicable, adjust for any
amounts treated for U.S. income tax purposes as interest income
that are treated as some other form of income for statutory
accounting purposes, or vice versa. For example, adjustments to
interest income resulting from adjustments made in accordance
with instructions for Part II, line 17, should be made in columns
(b) and (c) of this line 13.
Report on line 16, column (a), the amount of earned premiums
included in Part I, line 11. Include on line 16, column (d), the
amount of earned premiums included on Form 1120-PC,
Schedule A, line 35 (or Schedule B, line 19, if applicable).
Complete columns (b) and (c), as appropriate. Attach a detailed
statement separately stating amounts included on line 16
attributable to the change in:
1. Advanced premiums,
2. Earned but unbilled premiums,
3. Retrospective premium accruals,
4. Unearned premiums, and
5. Other premium accounts.
Complete Part II of Form 8916-A. Enter the amounts from
Form 8916-A, Part II, line 6, columns (a) through (d), on
Schedule M-3, Part II, line 13, columns (a) through (d), as
applicable. Attach Form 8916-A.
Do not report on line 13 or include on Form 8916-A amounts
reported in accordance with the instructions for Part II, lines 9,
10, 11, 12, and 21.
Line 17. Sale Versus Lease (for Sellers and/or
Lessors)
Asset transfer transactions with periodic payments
Line 14. Hedging Transactions
characterized for statutory accounting purposes as either a sale
or a lease may, under some circumstances, be characterized as
the opposite for tax purposes. If the transaction is treated as a
lease, the seller/lessor reports the periodic payments as gross
rental income and also reports depreciation expense or
deduction. If the transaction is treated as a sale, the seller/lessor
reports gross profit (sale price less cost of goods sold) from the
sale of assets and reports the periodic payments as payments of
principal and interest income.
Report on line 14, column (a), the net gain or loss from hedging
transactions included on Part I, line 11. Report in column (d) the
amount of taxable income from hedging transactions, as defined
in section 1221(b)(2). Use columns (b) and (c) to report all
differences caused by treating hedging transactions differently
for statutory accounting purposes and for U.S. income tax
purposes. For example, if a portion of a hedge is considered
ineffective under SAP but still is a valid hedge under section
1221(b)(2), the difference must be reported on line 14. The
hedge of a capital asset, which is not a valid hedge for U.S.
income tax purposes but may be considered a hedge for SAP
purposes, must also be reported here.
On Part II, line 17, in column (a), report the gross profit or
gross rental income for statutory accounting purposes for all sale
or lease transactions that must be given the opposite
characterization for U.S. income tax purposes. In column (d),
report the gross profit or gross rental income for U.S. income tax
purposes. Interest income amounts for such transactions must
be reported on Part II, line 13, in column (a) or (d), as applicable.
Depreciation expense for such transactions must be reported on
Part III, line 31, in column (a) or (d), as applicable. Use columns
(b) and (c) of Part II, lines 13 and 17, and Part III, line 31, as
applicable, to report the differences between columns (a) and
(d).
Example 16. Property and casualty insurance company M
sells and leases property to customers. M is a calendar year
taxpayer that is required to file Schedule M-3 for its current tax
year. For statutory accounting purposes, M accounts for each
transaction as a sale. For U.S. income tax purposes, each of M's
Report hedging gains and losses computed under the
mark-to-market method of accounting on line 14 and not on Part
II, line 15.
Line 15. Mark-to-Market Income (Loss)
Report on line 15 any amount representing the mark-to-market
income or loss for any securities held by a dealer in securities, a
dealer in commodities having made a valid election under
section 475(e), or a trader in securities or commodities having
made a valid election under section 475(f). “Securities” for these
purposes are securities described in section 475(c)(2) and
commodities described in section 475(e)(2). “Securities” do not
include any items specifically excluded from sections 475(c)(2)
17
Instructions for Schedule M-3 (Form 1120-PC)
transactions must be treated as a lease. In its annual statement,
M treats the difference in the statutory accounting and the U.S.
income tax treatment of these transactions as temporary. During
its current year, M reports in its annual statement $1,000 of sales
and $700 of cost of goods sold with respect to current-year lease
transactions. M receives periodic payments of $500 in its current
year with respect to these current year transactions and similar
transactions from prior years and treats $400 as principal and
$100 as interest income. For statutory 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 payments)
and (based on other facts) $200 of depreciation deduction on
the property. On Schedule M-3, M must report on Part II, line 13,
$100 in column (a), ($100) in column (b), and zero in column (d).
In addition, M must report on Part II, line 17, $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 31,
$200 in columns (b) and (d).
3. Amounts treated as interest or OID under the stripped
bond rules under section 1286; and
4. Amounts treated as OID under the below-market interest
rate rules under section 7872.
Line 22. Reserved for Future Use
This line is reserved for future use. Do not include any amounts
on this line.
Line 23a. Income Statement Gain/Loss on Sale,
Exchange, Abandonment, Worthlessness, or
Other Disposition of Assets Other Than
Pass-Through Entities
Report on line 23a, column (a), all gains and losses on the
disposition of assets. An exception to this reporting is for 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) per income statement of includible corporations
reported on Part I, line 11. Reverse the amount reported in
column (a) in column (b) or (c), as applicable. The
Line 18. Section 481(a) Adjustments
With the exception of a section 481(a) adjustment that is
required to be reported on Part II, line 12, for reportable
transactions, any difference between an income or expense item
attributable to an authorized (or unauthorized) change in method
of accounting made for U.S. income tax purposes that results in
a section 481(a) adjustment must be reported on Part II, line 18,
regardless of whether a separate line for that income or expense
item exists in Part II or Part III.
corresponding gains and losses for U.S. income tax purposes
are reported on Part II, lines 23b through 23g, as applicable.
Line 23b. Gross Capital Gains From Schedule D,
Excluding Amounts From Pass-Through Entities
Report on line 23b gross capital gains reported on Schedule D,
Capital Gains and Losses, excluding capital gains from
pass-through entities, which must be reported on Part II, line 9,
10, or 11, as applicable.
Example 17. Property and casualty insurance company N is
a calendar year taxpayer that is required to file 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 spread over 4 tax years, beginning with the current tax
year. In its annual statement, N treats the section 481(a)
adjustment as a temporary difference. N must report on Part II,
line 18, $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 section 481(a)
adjustment earlier). N must not report the section 481(a)
adjustment on Part III, line 31.
Line 23c. Gross Capital Losses From
Schedule D, Excluding Amounts From
Pass-Through Entities, Abandonment Losses,
and Worthless Stock Losses
Report on line 23c gross capital losses reported on Schedule D,
excluding capital losses from (a) pass-through entities, which
must be reported on Part II, line 9, 10, or 11, as applicable; (b)
abandonment losses, which must be reported on Part II,
line 23e; and (c) worthless stock losses, which must be reported
on Part II, line 23f. Do not report on line 23c capital losses
carried over from a prior tax year and utilized in the current tax
year. See the instructions for Part II, line 24, regarding the
reporting requirements for capital loss carryovers utilized in the
current tax year.
Line 19. Reserved for Future Use
This line is reserved for future use. Do not include any amounts
on this line.
Line 23d. Net Gain/Loss Reported on Form
4797, Line 17, Excluding Amounts From
Pass-Through Entities, Abandonment Losses,
and Worthless Stock Losses
Line 20. Income Recognition From Long-Term
Contracts
Report on line 23d the net gain or loss reported on line 17 of
Form 4797, excluding amounts from (a) pass-through entities,
which must be reported on Part II, line 9, 10, or 11, as applicable;
(b) abandonment losses, which must be reported on Part II,
line 23e; and (c) worthless stock losses, which must be reported
on Part II, line 23f.
Report on line 20 the amount of net income or loss for financial
statement purposes (or books and records, if applicable) or U.S.
income tax purposes for any contract accounted for under a
long-term contract method of accounting.
Line 21. Original Issue Discount and Other
Imputed Interest
Note. Traders in securities or commodities that have made a
valid election under section 475(f) to use the mark-to-market
method to account for securities or commodities, see the
instructions for Part II, line 15, earlier.
Report on line 21 any amounts of original issue discount (OID)
and other imputed interest. The term “original issue discount and
other imputed interest” includes, but is not limited to:
1. The excess of a debt instrument's stated redemption price
at maturity over its issue price, as determined under section
1273;
Line 23e. Abandonment Losses
Report on line 23e any abandonment losses, regardless of
whether the loss is characterized as an ordinary loss or a capital
loss.
2. Amounts that are imputed interest on a deferred sales
contract under section 483;
18
Instructions for Schedule M-3 (Form 1120-PC)
detailed descriptions include “foreign currency translation
adjustments — comprehensive income” and “gains and losses
on available-for-sale securities — comprehensive income.”
Line 23f. Worthless Stock Losses
Report on line 23f 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.
Whether an item of income (loss) is reported on line 25, or is
reported on Part II, line 28, is determined separately by each
member of the U.S. consolidated tax group and not at the U.S.
consolidated tax group level.
Line 23g. Other Gain/Loss on Disposition of
Assets
Example 18. U.S. corporation P has two subsidiaries,
corporations A and B, that are included in P's consolidated
financial statements and in P's consolidated U.S. income tax
return. For financial statement purposes, P, A, and B recognize
revenue from the sale of inventory upon delivery to the customer.
For U.S. income tax purposes, P and A recognize such revenue
consistent with the method used for financial statement
purposes, whereas B recognizes such revenue based upon
customer acceptance. P and A must report this revenue in
columns (a) and (d) on Part II, line 28. B must report the following
on Part II, line 25: in column (a), B's revenue recognized in the
financial statements based upon delivery to the customer; in
column (d), B's revenue recognized for U.S. income tax
purposes based upon customer acceptance; and in column (b)
or (c), as applicable, the difference between B's revenue
recognized in its financial statements and in its U.S. taxable
income.
Report on line 23g any gains or losses from the sale or exchange
of property that are not reported on lines 23b through 23f.
Line 24. Capital Loss Limitation and
Carryforward Used
Report as a positive amount on line 24, column (b) or (c), as
applicable, and column (d) the excess of the net capital losses
over the net capital gains reported on Schedule D, by the
corporation. For a U.S. consolidated tax group, the
Schedule M-3 adjustment for the amount of the consolidated net
capital loss that is disallowed should not be made on the
separate consolidating Schedules M-3 of the includible
corporations, but on the separate Schedule M-3 for consolidated
eliminations (or on Form 8916 in the case of a mixed group) as
described under Completion of Schedule M-3 and Certain
Allocations, Limitations, and Carryovers, earlier.
Note. In this example, the first column of the attached statement
for Part II, line 25, discussed earlier, must include an adequate
description, such as, “Inventory Sales Revenue recognized upon
acceptance, not delivery.”
If the corporation utilizes a capital loss carryforward on
Schedule D in the current tax year, report the carryforward
utilized as a negative amount on Part II, line 24, column (b) or (c),
as applicable, and column (d). For a U.S. consolidated tax group,
the Schedule M-3 adjustment for the amount of the consolidated
capital loss carryforward should not be made on the separate
consolidating Schedules M-3 of the includible corporations, but
on the separate Schedule M-3 for consolidation eliminations (or
on Form 8916 in the case of a mixed group) as described under
Line 27. Total Expense/Deduction Items
Report on Part II, line 27, columns (a) through (d), as applicable,
the negative of the amounts reported on Part III, line 40, columns
(a) through (d). For example, if Part III, line 40, column (a),
reflects an amount of $1 million, then report on Part II, line 27,
column (a), ($1 million). Similarly, if Part III, line 40, column (b),
reflects an amount of ($50,000), then report on Part II, line 27,
column (b), $50,000.
Limitations, and Carryovers, earlier.
Line 25. Other Income (Loss) Items With
Differences
Line 28. Other Items With No Differences
If there is no difference between the statutory accounting amount
and the taxable amount of an entire item of income, gain, loss,
expense, or deduction and the item is not described or included
in Part II, lines 1 through 25, or Part III, lines 1 through 39, report
the entire amount of the item in columns (a) and (d) of line 28. If
a portion of an item of income, loss, expense, or deduction has a
difference and a portion of the item does not have a difference,
do not report any portion of the item on line 28. Instead, report
the entire amount of the item (for example, both the portion with
a difference and the portion without a difference) on the
applicable line of Part II, lines 1 through 25, or Part III, lines 1
Separately state and adequately disclose on Part II, line 25, all
items of income (loss) with differences that are not otherwise
listed on Part II, lines 1 through 24. Attach a statement that
describes and itemizes the type of income (loss) and the amount
of each item and provides a description that states the income
(loss) name for book purposes for the amount recorded in
column (a) and describes the adjustment being recorded in
column (b) or (c). The entire description completes the tax
description for the amount included in column (d) for each item
separately stated on this line.
The attached statement should have five columns. The first
column has the description for the next four columns. The
second column is column (a), income (loss) per income
statement; the third column is column (b), temporary difference;
the fourth column is column (c), permanent difference; and the
fifth column is column (d), income (loss) per tax return. Every
item listed on the attached statement for line 25 always must
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 Part II, line 25.
Line 29a. PC Insurance Subgroup Reconciliation
Totals
For filers other than a mixed group, combine lines 26 through 28
and skip lines 29b and 29c. On the sub-consolidated
Schedule M-3 for a mixed group, combine lines 26 through 28
and skip lines 29b and 29c. For the consolidated Schedule M-3
of a mixed group, complete only lines 29a through 29c and
line 30 of Part II. Part III is not required for the consolidated
Schedule M-3 of a mixed group.
For insurance companies included in the consolidated U.S.
income tax return, see instructions for Part I, lines 10a, 10b, 10c,
and 11, and Part II, line 7, for guidance on the treatment of
intercompany dividends and statutory accounting.
Line 29b. 1120 Subgroup Reconciliation Totals
Line 29b is used only by mixed groups. See Schedule M-3
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
19
Instructions for Schedule M-3 (Form 1120-PC)
reportable on line 9 include payments attributable to employee
stock purchase plans (ESPPs), phantom stock options, phantom
stock units, stock warrants, stock appreciation rights, and
restricted stock, regardless of whether such payments are made
to employees or non-employees, or as payment for property or
compensation for services.
Line 29c. Life Insurance Subgroup
Reconciliation Totals
Line 29c is used only by mixed groups. See Schedule M-3
Part III. Reconciliation of Net Income
(Loss) per Income Statement of
Includible Corporations With Taxable
Income per Return—Expense/
Deduction Items
Line 10. Meals and Entertainment
Report on line 10, column (a), any amounts paid or accrued by
the property and casualty insurance company during the tax year
for meals, beverages, and entertainment that are accounted for
in the company's statutory income statement or the income and
expense accounts maintained in the property and casualty
insurance company's books and records. Report only amounts
not otherwise reportable elsewhere on Schedule M-3, Parts II
and III.
Note. Expense amounts that reduce financial accounting
income must be reported on Part III, column (a), as positive
amounts. Deduction amounts that reduce taxable income must
be reported on Part III, column (d), as positive amounts.
Amounts reported on Part II, line 27, must be the negative of the
amounts reported on Part III, line 40.
Line 11. Fines and Penalties
Report on line 11 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 statutory accounting income (paid or accrued) must
be included on line 11, column (a), regardless of the government
or other authority that imposed the fines or penalties; regardless
of whether the fines and penalties are civil or criminal; regardless
of the classification, nomenclature, or terminology used for the
fines or penalties by the imposing authority in its actions or
documents; and regardless of how or where the fines or
penalties are classified in the property and casualty insurance
company's statutory income statement or the income and
expense accounts maintained in the property and casualty
insurance company's books and records. Also report on line 11,
column (a), the reversal of any overaccrual of any amount
described in this paragraph. See section 162(f) for additional
guidance.
Lines 1 Through 6. Income Tax Expense
If the property and casualty insurance company does not
distinguish between current and deferred income tax expense in
its annual statement (or its books and records, if applicable),
report income tax expense as current income tax expense using
lines 1, 3, and 5, as applicable.
A U.S. consolidated tax group must complete lines 1 through
6 in accordance with the allocation of tax expense among the
members of the U.S. consolidated tax group in the financial
statements (or its books and records, if applicable). If the current
and deferred U.S., state, and foreign income tax expense for the
U.S. consolidated tax group (income tax expense) is allocated
among the members of the U.S. consolidated tax group in the
group's financial statements (or its books and records, if
applicable), then each member must report its allocated income
tax expense on Part III, lines 1 through 6, of that member's
separate Schedule M-3. However, if the income tax expense is
not shared or allocated among members of the U.S.
Report on line 11, 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.
consolidated tax group but is retained in the parent corporation's
financial statements (or books and records, if applicable), then
amounts are reported only on Part III, lines 1 through 6, of the
parent's separate Schedule M-3.
Do not report on Part III, line 11, amounts required to be
reported in accordance with instructions for Part III, line 12.
Do not report on Part III, line 11, amounts recovered from
insurers or any other indemnitors for any fines and penalties
described above.
Line 7. Foreign Withholding Taxes
Report on line 7, column (a), the amount of foreign withholding
taxes included in financial accounting income on Part I, line 11. If
the property and casualty insurance company is deducting
foreign tax, use column (b) or (c), as applicable, to correct for
any difference between foreign withholding tax included in
statutory accounting net income and the amount of foreign
withholding taxes being deducted in the return. If the property
and casualty insurance company is crediting foreign withholding
taxes against the U.S. income tax liability, use column (b) or (c),
as applicable, to negate the amount reported in column (a).
Line 12. Judgments, Damages, Awards, and
Similar Costs
Report on line 12, column (a), the amount of any estimated or
actual judgments, damages, awards, settlements, and similar
costs, however named or classified, included in financial
accounting income, regardless of whether the amount deducted
was attributable to an estimate of future anticipated payments or
actual payments. Also report on line 12, column (a), the reversal
of any overaccrual of any amount described in this paragraph.
Line 8. Stock Option Expense
Report on line 12, column (d), any such amounts as are
described in the preceding paragraph that are includible in
taxable income, regardless of the statutory accounting period in
which such amounts were or are included in statutory accounting
net income. Complete columns (b) and (c), as appropriate.
Report on line 8, column (a), amounts expensed on Part I,
line 11, that are attributable to all stock options. Report on line 8,
column (d), deduction amounts attributable to all stock options.
Line 9. Other Equity-Based Compensation
Report on line 9 any amounts for equity-based compensation or
consideration that are reflected as expenses for statutory
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 (for example, on Part
III, line 8, for stock options expense). Examples of amounts
Do not report on Part III, line 12, amounts required to be
reported in accordance with instructions for Part III, line 11.
Do not report on Part III, line 12, amounts recovered from
insurers or any other indemnitors for any judgments, damages,
awards, or similar costs described above.
20
Instructions for Schedule M-3 (Form 1120-PC)
Line 13. Parachute Payments
Line 20. Charitable Contribution Limitation/
Carryforward
Report on line 13, column (a), the total expense included in
statutory accounting net income on Part I, line 11, that is subject
to section 280G. Report in column (b) or (c), as applicable, the
amount of nondeductible parachute payments pursuant to
section 280G, and report in column (d) the deductible amount of
compensation after any excess parachute payment limitations
under section 280G. If a payment is subject to limitation under
both sections 162(m) and 280G, report the total payment on
line 13.
Report as a negative amount on line 20, columns (b), (c), and
(d), as applicable, the excess of charitable contributions made
during the tax year over the amount of the charitable contribution
limitation amount.
If the corporation utilizes a contribution carryforward in the
current tax year, report the carryforward utilized as a positive
amount in columns (b), (c), and (d), as applicable.
When a consolidated income tax return is being filed,
Schedule M-3 adjustments for the amount of charitable
contributions in excess of the limitation, or for charitable
contribution carryforward utilized, should not be made on the
separate consolidating Schedules M-3 of the includible
corporations, but on the separate consolidating Schedule M-3
for consolidation eliminations (or on Form 8916 in the case of a
mixed group). See Completion of Schedule M-3 and Certain
Allocations, Limitations, and Carryovers, earlier.
Line 14. Compensation With Section 162(m)
Limitation
Report on line 14, column (a), the total amount of
non-performance-based current compensation expense for the
corporate officers to whom section 162 (m) applies. Report in
column (b) or (c), as applicable, the nondeductible amount of
current compensation in excess of $1 million ($500,000 if the
corporation receives or has received financial assistance under
the Treasury Asset Relief Program (TARP)). Report the
deductible compensation in column (d). If a payment is subject
to limitation under both sections 162(m) and 280G, report the
total payment on Part III, line 13, Parachute payments. See
Regulations section 1.162-27(g) for the interaction between
sections 162(m) and 280G.
Line 21. Write-Off of Premium Receivables
Report on line 21 the amount of premium receivables written off
rather than on line 32.
Line 22. Guarantee Fund Assessments
Report on line 22 all special purpose and guaranty fund
assessments accrued or deducted for the tax year.
Line 15. Pension and Profit-Sharing
Report on line 15 any amounts attributable to the property and
casualty insurance company's pension plans, profit-sharing
plans, and any other retirement plans.
Line 23. Current-Year Acquisition or
Reorganization Investment Banking Fees
Report on line 23 any investment banking 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. Report on
this line any investment banking fees incurred at any stage of the
acquisition or reorganization process including, for example, fees
paid or incurred to evaluate whether to investigate an acquisition,
fees to conduct an actual investigation, and fees to consummate
the acquisition. Also include on line 23 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 16. Other Post-Retirement Benefits
Report on line 16 any amounts attributable to other
post-retirement benefits not otherwise includible on Part III,
line 15 (for example, retiree health and life insurance coverage,
dental coverage, etc.).
Line 17. Deferred Compensation
Report on line 17, column (a), any compensation expense
included in the net income (loss) amount reported in Part I,
line 11, that is not deductible for U.S. income tax purposes in the
current tax year and that was not reported elsewhere on
Schedule M-3. Report on line 17, column (d), any compensation
deductible in the current tax year that was not included in the net
income (loss) amount reported in Part I, line 11, for the current
tax year and that is not reportable elsewhere on Schedule M-3.
For example, report originations and reversals of deferred
compensation subject to section 409A on line 17.
Line 24. Current-Year Acquisition or
Reorganization Legal and Accounting Fees
Report on line 24 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 reorganization. Report
on this line any legal and accounting fees incurred at any stage
of the acquisition or reorganization process including, for
example, fees paid or incurred to evaluate whether to investigate
an acquisition, fees to conduct an actual investigation, and fees
to consummate the acquisition. 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.
Line 19. Charitable Contribution of Intangible
Property
Report on line 19 any charitable contribution of intangible
property, for example, contributions of:
Intellectual property, patents (including any amounts of
•
additional contributions allowable by virtue of income earned by
donees subsequent to the year of donation), copyrights, and
trademarks;
Line 25. Current-Year Acquisition/
Reorganization Other Costs
Securities (including stocks and their derivatives, stock
•
Report on line 25 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 23 or 24).
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 investigate an acquisition,
fees to conduct an actual investigation, and fees to consummate
the acquisition. Also include on this line 25 other acquisition/
reorganization costs incurred in connection with the liquidation of
options, and bonds);
Conservation easements (including scenic easements or air
•
rights);
Railroad rights of way;
•
•
•
Mineral rights; and
Other intangible property.
21
Instructions for Schedule M-3 (Form 1120-PC)
a subsidiary, a spin-off of a subsidiary, or an initial public stock
offering.
Line 34. Corporate Owned Life Insurance
Premiums
Report on line 34 all amounts of insurance premiums attributable
to any life insurance policy if the insurance company 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.
Line 26. Amortization of Acquisition,
Reorganization, and Start-Up Costs
Report on line 26 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.
Line 35. Purchase Versus Lease (for Purchasers
and/or Lessees)
Line 27. Amortization/ Impairment of Goodwill,
Insurance in Force, and Ceding Commissions
Note. Also see the instructions for sellers and/or lessors in the
instructions for Part II, line 17.
Report on line 27 amortization of goodwill, insurance in force,
and ceding commissions or amounts attributable to the
impairment of goodwill, insurance in force, and ceding
commissions. Attach a statement separately stating the amounts
for each item.
Asset transfer transactions with periodic payments
characterized for statutory accounting purposes as either a
purchase or a lease may, under some circumstances, be
characterized as the opposite for tax purposes.
If a transaction is treated as a lease, the purchaser/lessee
reports the periodic payments as gross rental expense. If the
transaction is treated as a purchase, the purchaser/lessee
reports the periodic payments as payments of principal and
interest and also reports depreciation expense or deduction with
respect to the purchased asset.
Line 28. Other Amortization or Impairment
Write-Offs
Report on line 28 any amortization or impairment write-offs not
otherwise includible on Schedule M-3.
Line 29. Discounting of Unpaid Losses (Section
846)
Report in column (a) gross rent expense for a transaction
treated as a lease for statutory 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 statutory accounting
purposes. Report interest expense for such transactions on Part
III, line 36, in column (a) or (d), as applicable. Report
Report on line 29, column (a), the change in liability for unpaid
losses and loss adjustment expense net of reinsurance as
included in Part I, line 11. Report in column (d) the amount of
change in the same liability valued for tax purposes included in
the subtotal on Form 1120-PC, Schedule A, line 35 (or
Schedule B, line 19, if applicable). Do not include paid losses on
line 29. Indicate amounts in columns (b) and (c), as appropriate.
Attach a statement supporting columns (b) and (c) that identifies
the beginning and end of the taxable year amounts of
depreciation expense or deductions for such transactions on
Part III, line 31, in column (a) or (d), as applicable. Use columns
(b) and (c) of Part III, lines 31, 35, and 36, as applicable, to report
the differences between columns (a) and (d) for such
recharacterized transactions.
discounting, as required by section 846. Include any other
differences between columns (a) and (d) by separate title as well
as beginning and end of tax year amounts.
Example 19. U.S. property and casualty insurance company
X acquired property in a transaction that, for statutory accounting
purposes, X treats as a lease. X is a calendar year taxpayer that
is required to file Schedule M-3 for its current tax year. Because
of its terms, the 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 annual statement, X treats the
difference between the statutory accounting and U.S. income tax
treatment of this transaction as a temporary difference. During its
current tax year, X reports in its annual statement $1,000 of
gross rental expense that, for U.S. income tax purposes, is
recharacterized as a $700 payment of principal and a $300
payment of interest, accompanied by a depreciation deduction of
$1,200 (based on other facts). On Schedule M-3, X must report
the following on Part III, line 35: column (a), $1,000, its statutory
accounting gross rental expense; column (b), ($1,000); and
column (d), zero. On Part III, line 36, X reports zero in column (a)
and $300 in columns (b) and (d) for the interest deduction. On
Part III, line 31, X reports zero in column (a) and $1,200 in
columns (b) and (d) for the depreciation deduction.
Line 30. Reduction of Loss Deduction (Section
832(b)(5)(B))
Report the proration adjustment required by section 832(b)(5)(B)
as a negative amount on line 30, column (d). Report amounts in
columns (b) and (c), as appropriate. Do not enter an amount on
line 30, column (a).
Line 31. Depreciation
Report on line 31 any depreciation expense that is not required
to be reported elsewhere on Schedule M-3 (for example, on Part
II, line 9, 10, or 11).
Line 32. Bad Debt Expense and Agency
Balances Written Off
Report on line 32, column (a), any amounts attributable to an
allowance for uncollectible accounts receivable or actual
write-offs of accounts receivable included in Part I, line 11. Also
report on this line agency balances written off per the annual
statement. Report in column (d) the amount of bad debt expense
deductible for federal income tax purposes in accordance with
section 166.
Line 36. Interest Expense
Report on Part III, line 36, column (a), the total amount of interest
expense included on Part I, line 11, and report on Part III, line 36,
column (d), the total amount of interest expense included on
Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if
applicable), that is not reported elsewhere on Schedule M-3. In
column (b) or (c), as applicable, adjust for any amounts treated
for U.S. income tax purposes as interest expense that are
treated as some other form of expense for statutory accounting
purposes, or vice versa. For example, adjustments to interest
expense resulting from adjustments made in accordance with
Line 33. Reserved for Future Use
No entry is made on line 33.
22
Instructions for Schedule M-3 (Form 1120-PC)
the instructions for Part III, line 35, Purchase versus lease (for
purchasers and/or lessees), should be made on line 36, columns
(b) and (c), as applicable.
Example 22. Corporation X is a calendar year taxpayer that
is required to file Schedule M-3 for its current tax year. During its
current tax year, X paid $75,000 to acquire or in-license
intangible assets under a collaborative arrangement with another
company that X recognized as a research and development
expense in its financial statements. X amortizes 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 28, Other amortization or impairment write-offs.
Complete Part III of Form 8916-A. Enter the amounts from
Form 8916-A, Part III, line 5, columns (a) through (d), on
Schedule M-3, Part III, line 36, columns (a) through (d), as
applicable. Attach Form 8916-A.
Do not report on Form 8916-A and line 36 amounts reported
in accordance with the instructions for Part II, lines 9, 10, 11, and
12.
Line 37. Research and Development Costs
For U.S. income tax purposes, research and experimental
expenditures paid or incurred by a taxpayer in connection with
the taxpayer's trade or business must be amortized. The
expenditures must be amortized ratably over the 5-year period
(15-year period for specified expenditures attributable to foreign
research), beginning with the midpoint of the tax year in which
the expenses are paid or incurred. See section 174.
Line 38. Section 118 Exclusion
Report on line 38 any inducements received in the current year
that are treated as contributions to the capital of a corporation by
a non-shareholder. Report in column (a) any income amount as
a negative number and any expense amount as a positive
number.
Under the general rule, any contribution in aid of construction
or any contribution by a government entity to the capital of a
corporation is not eligible for exclusion from income under
section 118. The following nonshareholder contributions to
capital are not eligible for exclusion under section 118.
Report in column (a) the amount of research and
development expenditures reported as a deduction on the
corporation’s financial statements (or books and records, if
applicable). Report in column (d) the amount of amortization
deductions of specified research or experimental expenditures
and research or experimental expenditures included on Form
4562, Part VI, line 44, or in total deductions on Form 1120-PC,
Schedule A, line 32. If properly adopted or elected under section
174(b) and section 174(f) (prior to amendment by P.L. 115-97)
and section 59(e), any amortization otherwise allowable related
to such costs is reported in column (b).
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.
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 does not specify
otherwise, column (b) adjustments include adjustments for
timing differences between financial and tax accounting for:
Contributions in aid of construction for regulated water
and sewerage disposal utility companies. Under a special
rule, any amount of money or property received after December
31, 2020, as a contribution in aid of construction or a contribution
to the capital of a regulated public utility which provides water or
sewerage disposal services is eligible for exclusion from income
under section 118. Include amounts treated as contribution in aid
of construction under this provision on line 36. For more
information, see section 118.
1. Deferral and amortization of research expenditures,
2. Section 59(e) election,
Corporations must identify on an accompanying statement
referencing line 38 the fair market value of land or other property
(including cash) provided to the corporation by any
3. Reduction of section 174 expenditures under section
280C or section 482,
4. Costs attributable to obtaining a patent, and
5. Research in social sciences.
non-shareholder, including a governmental unit, or civic group,
as an inducement, or for any other purpose. Include
inducements for the corporation to locate its business in a
particular state, municipality, community, or locality for the
purpose of enabling the corporation to expand its existing
operating facilities including corporate headquarters, distribution
center(s), factory(ies), etc. (“inducements”).
Example 20. Corporation X is a calendar year taxpayer that
is required to file Schedule M-3 for its current tax year. During its
current tax year, X incurred $100,000 of research and
development costs that X recognized as an expense in its
financial statements. In compliance with section 174, X
amortizes research and experimental expenditures for U.S.
income tax purposes. Accordingly, X must report $100,000 in
column (a), ($90,000) in column (b), and $10,000 (($100,000/5
years) x 1/2) in column (d).
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 38.
Example 21. Corporation X is a calendar year taxpayer that
is required to file 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 expense in its financial statements. X amortizes research
and experimental expenditures for U.S. income tax purposes.
Because such costs are not 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 item of expense on Part III, line 39, Other expense/
deduction items with differences.
Line 39. Other Expense/Deduction Items With
Differences
Separately state and adequately disclose on Part III, line 39, all
items of expense/deduction that are not otherwise listed on Part
III, lines 1 through 38.
Attach a statement that describes and itemizes the type of
expense/deduction and the amount of each item and provides a
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Instructions for Schedule M-3 (Form 1120-PC)
description that states the expense/deduction name for book
purposes for the amount recorded in column (a) and describes
the adjustment being recorded in column (b) or (c). The entire
description completes the tax description for the amount
included in column (d) for each item separately stated on this
line.
liability that is not required to be reported elsewhere on
Schedule M-3. For example, (1) amounts relating to changes in
reserves for litigation must be reported on Part III, line 12,
Judgments, damages, awards, and similar costs; and (2)
amounts relating to changes in reserves for uncollectible
accounts receivable must be reported on Part III, line 32, Bad
debt expense and/or agency balances written off. (See
The statement of details attached to the Schedule M-3 for
line 39 must separately state and adequately disclose the nature
and amount of the expense related to each reserve and/or
contingent liability. The appropriate level of disclosure depends
upon each taxpayer’s operational activity and the nature of its
accounting records. For example, if a corporation’s net income
amount reported in the income statement includes anticipated
expenses for a discontinued operation as a single amount, and
its general ledger or other books, records, and workpapers
provide details for the anticipated expenses under more
explanatory and defined categories such as employee
termination costs, lease cancellation costs, loss on sale of
equipment, etc., a supporting statement that lists those
categories of expenses and their details will satisfy the
requirement to separately state and adequately disclose. In
order to separately state and adequately disclose the employee
termination costs, it is not required that an anticipated
termination cost amount be listed for each employee, or that
each asset (or category of asset) be listed along with the
anticipated loss on disposition.
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 39 always must 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 Part III,
line 39.
Report on Part III, line 39, the amortization of various items of
prepaid expense, such as prepaid subscriptions and license
fees, prepaid insurance, etc.
Report on line 39, column (a), expenses included in net
income reported on Part I, line 11, that are related to reserves
and contingent liabilities. Report on line 39, column (d), amounts
related to liabilities for reserves and contingent liabilities that are
deductible in the current tax year for U.S. income tax purposes.
Examples of items that must be reported on line 39 include
restructuring reserves, reserves for discontinued operations, and
reserves for acquisitions and dispositions. Only report on line 39
items that are not required to be reported elsewhere on
Schedule M-3, Parts II and III.
Example 23. Property and casualty insurance company Q is
a calendar year taxpayer that is required to file 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 historically prepays 12 months of
advertising expense on July 1. On July 1, Q prepays its
insurance premium of $500,000 and advertising expenses of
$800,000. For statutory accounting purposes, Q 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 annual statement, Q treats the differences
attributable to the financial accounting treatment and U.S.
income tax treatment of the prepaid insurance and advertising
as temporary differences.
Comprehensive income. If any “comprehensive income” as
defined by SFAS No. 130 is reported on this line, describe the
item(s) in detail as, for example, “foreign currency translation
adjustments—comprehensive income” and “gains and losses on
available-for-sale securities—comprehensive income.”
Q also has a legal 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 39, must be separately stated and adequately disclosed as
follows:
Reserves and contingent liabilities. Report on line 39
amounts related to the change in each reserve or contingent
Column (a) Expense per Income
Column (d) Deduction per Tax
Description
Statement
Column (b) Temporary Difference
Column (c) Permanent Difference
Return
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 39
III, line 40, column (a), reflects an amount of $1 million, then
report on Part II, line 27, column (a), ($1 million). Similarly, if Part
III, line 40, column (b), reflects an amount of ($50,000), then
report on Part II, line 27, column (b), $50,000.
Line 40. Total Expense/ Deduction Items
Report on Part II, line 27, columns (a) through (d), as applicable,
the negative of the amounts reported on Part III, line 40, columns
(a) through (d), as applicable. Report positive amounts as
negative and negative amounts as positive. For example, if Part
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Instructions for Schedule M-3 (Form 1120-PC)