Form 1120 Instruksi untuk Jadwal M-3
Instruksi untuk Jadwal M-3 (Form 1120), Pendapatan Bersih (Los) Rekonsiliasi untuk Perusahaan Dengan Total Aset $10 Juta atau Lebih
Rev. Oktober 2022
Formulir Terkait
- Form 1120 Jadwal M-3 - Pendapatan Bersih (Loss) Rekonsiliasi untuk Perusahaan Dengan Aset Total $10 Juta atau Lebih
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1120)
(Rev. November 2022)
(For use with the December 2019 revision of Schedule M-3 (Form 1120))
Net Income (Loss) Reconciliation for Corporations With Total Assets of
$10 Million or More
Section references are to the Internal Revenue
Code unless otherwise noted.
million must file Schedule M-3 (Form
1120).
Where To File
If the corporation is required to file (or
voluntarily files) Schedule M-3 (Form
1120), the corporation must file Form
1120 (or Form 1120-C, if applicable)
and all attachments and schedules,
including Schedule M-3 (Form 1120) at
the following address.
A corporation filing Form 1120 (or
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Future Developments
Form 1120-C) that is not required to file
Schedule M-3 may voluntarily file
Schedule M-3.
For the latest information about
developments related to Schedule M-3
(Form 1120) and its instructions, such
as legislation enacted after they were
If a corporation was required to file
•
Schedule M-3 for the preceding tax
year, but reports on Form 1120, page 1,
item D, and on Form 1120, Schedule L,
total consolidated assets at the end of
the current tax year of less than $10
million, the corporation is not required to
file Schedule M-3 for the current tax
year.
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012
What’s New
Contributions in aid of construction
for regulated water and sewerage
disposal utility companies. For
contributions made after December 31,
2020, a special rule applies to
Who Must File
Generally, the following apply.
See Completing Schedule M-3, later.
A domestic corporation or group of
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corporations required to file Form 1120,
U.S. Corporation Income Tax Return,
that reports on Form 1120, Schedule L,
Balance Sheets per Books, total assets
at the end of the corporation's tax year
that equal or exceed $10 million must
file Schedule M-3 instead of
contributions to the capital of water and
sewerage disposal utilities. See the
additional information, see section 118.
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 year-end assets of all includible
corporations listed on Form 851, net of
eliminations for intercompany
Amortization of research and devel-
opment costs. Specified research or
experimental expenditures paid or
incurred in tax years beginning in 2022
must be capitalized and amortized
ratably over a 5-year period (15-year
period for any expenditures related to
foreign research). See the instructions
Costs, later.
transactions and balances between the
includible corporations. In addition, for
purposes of determining 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 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
Schedule M-1, Reconciliation of Income
(Loss) per Books With Income per
Return.
A corporation filing a
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non-consolidated Form 1120 that
reports on Schedule L total assets that
equal or exceed $10 million must
complete and file Schedule M-3 and
must check box (1) Non-consolidated
return, at the top of page 1 of
Schedule M-3.
General Instructions
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.
Any U.S. consolidated tax group
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Purpose of Schedule
consisting of a U.S. parent corporation
and additional includible corporations
listed on Form 851, Affiliations
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 Part I, line 4a, to net
income (loss) of the corporation for U.S.
taxable income purposes, as reported
on Part I, line 11.
consolidated tax group prepares or is
included in financial statements
Schedule, required to file Form 1120,
that reports on Schedule L total
prepared on an accrual basis.
consolidated assets at the end of the tax
year that equal or exceed $10 million
must file Schedule M-3 and must check
box (2) Consolidated return (Form 1120
only), or box (3) Mixed 1120/L/PC
group, as applicable, at the top of
page 1 of Schedule M-3.
Special Filing Requirements for
Certain Groups
Mixed groups. If the parent
corporation of a U.S. consolidated tax
group files Form 1120 and files and
completes Schedule M-3, Parts II and
III, then Schedule M-3, Parts II and III,
must be completed for each member of
the group. However, if the parent
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 taxable income on Form
1120, page 1, line 28.
Cooperatives filing Form 1120-C,
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U.S. Income Tax Return for Cooperative
Associations, that report total assets at
tax year end that equal or exceed $10
corporation of a U.S. consolidated tax
group files Form 1120 and any member
Nov 30, 2022
Cat. No. 38103Y
of the group files Form 1120-PC, U.S.
Property and Casualty Insurance
Company Income Tax Return, or Form
1120-L, U.S. Life Insurance Company
Income Tax Return, that member must
complete Parts II and III of
intercompany dividends and statutory
accounting adjustments.
by Schedule M-3 must be provided. Any
statement required to support a line item
on Schedule M-3 must be attached at
the time Schedule M-3 is filed and must
provide the information required for that
line item.
No Schedule M-3 is required for
taxpayers filing Form 1120-REIT, U.S.
Income Tax Return for Real Estate
Investment Trusts; Form 1120-RIC, U.S.
Income Tax Return for Regulated
Investment Companies; Form 1120-H,
U.S. Income Tax Return for
Schedule M-3 (Form 1120-PC) or
Schedule M-3 (Form 1120-L),
All detailed statements for Part II and
Part III of Schedule M-3 must be
respectively, and the group must
comply with the mixed group
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.
Homeowners Associations; and Form
1120-SF, U.S. Income Tax Return for
Settlement Funds.
consolidated Schedule M-3 instructions
under Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), 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, Supplemental
Attachment to Schedule M-3.
Completing Schedule M-3
A corporation (or any member of a U.S.
consolidated tax group) that is required
to file Schedule M-3 and has at least
$50 million total assets at the end of the
tax year must complete the schedule in
its entirety. In particular, a corporation
filing a non-consolidated return that has
at least $50 million total assets at the
end of the tax year 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
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
If the parent company of a U.S.
consolidated tax group files Form 1120
and any member of the group files Form
1120-PC or Form 1120-L and the
consolidated Schedule L reported in the
return includes the assets of all of the
companies (the 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 for the current tax year.
corporation. Parts II and III must be
completed by the parent corporation,
each includible corporation, and a
consolidating eliminations entity.
2. U.S. corporation C owns U.S.
subsidiary D. For its current tax year, C
prepares consolidated financial
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 and any member
of the group files Form 1120-PC 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, 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-PC and 1120-L that are included
in the consolidated return but not
included on the consolidated
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.
Form 1120 and Form 1120-C filers
that (a) are required to file
Schedule M-3 (Form 1120) and have
less than $50 million total assets at the
end of the tax year, or (b) are not
required to file Schedule M-3 (Form
1120) and voluntarily file Schedule M-3
(Form 1120), must either (i) complete
Schedule M-3 (Form 1120) entirely, or
(ii) complete Schedule M-3 (Form 1120)
through Part I, and complete
Schedule M-1 of Form 1120 (or Form
1120-C, if applicable) instead of
completing Parts II and III of
3. Foreign corporation A owns
100% of both U.S. corporation B and
U.S. corporation C. C owns 100% of
U.S. corporation D. For its current tax
year, A prepares a consolidated
Schedule M-3 (Form 1120). If the filer
chooses to complete Schedule M-1
instead of completing Parts II and III of
Schedule M-3, line 1 of the applicable
Schedule M-1 must equal line 11 of Part
I of Schedule M-3.
Schedule L.
Other entities. There are unique
separate Schedules M-3 for taxpayers
required to file Form 1065, U.S. Return
of Partnership Income; Form 1120-S,
U.S. Income Tax Return for an S
worldwide financial statement for the
ABCD consolidated group. The ABCD
consolidated financial statement reports
total year-end assets of $65 million. A is
not required to file a U.S. income tax
return. B files a separate U.S. income
tax return and reports separate
Note. In the case of an 1120 mixed
group, Parts II and III of Schedule M-3
(Form 1120) must be completed for all
members of the mixed group whether
Schedule M-3 (Form 1120) is required
or voluntarily filed.
Corporation; Form 1120-F, U.S. Income
Tax Return of a Foreign Corporation;
and for Forms 1120-PC or 1120-L. For
more information, see the instructions
for the applicable Schedule M-3.
company total year-end assets on its
Schedule L of $52 million. C files a
consolidated U.S. income tax return
with D and, after eliminating
For insurance companies included in
the consolidated U.S. income tax return,
see the instructions for Part I, lines 10
and 11, and Part II, line 7, for guidance
on Schedule M-3 reporting of
For any part of Schedule M-3 (Form
1120) that is completed, all applicable
questions must be answered on Part I,
intercompany transactions between C
and D, reports consolidated total
year-end assets on Schedule L of $8
all columns must be completed on Parts million. B is required to file
II and III, and all numerical data required Schedule M-3 because its total
Instructions for Schedule M-3 (Form 1120)
-2-
year-end assets reported on Schedule L and (3) no amounts to report on Part II
exceed $50 million. The CD U.S. and Part III of Schedule M-3 for the tax
the tax year, and must be the same total
assets reported by the corporation (or
by each member of the U.S.
consolidated tax group is not required to year, the parent corporation of the U.S.
file Schedule M-3 because its total
year-end assets do not exceed $10
million.
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 in lieu of filing
a blank Part II and Part III of
consolidated tax group) in the non-tax
basis financial statements, if any, used
for Schedule M-3. If the corporation
prepares non-tax-basis financial
statements, Schedule L must equal the
sum of the financial statement total
assets for each corporation listed on
Form 851 and included in the
Example 2. At the end of
Corporation A's current tax year, A's
total assets were less than $10 million.
A is not required to file Schedule M-3 for
any reason. A may elect to file
Schedule M-3 for the entity. On Part I,
check box (4) Dormant subsidiaries
schedule attached.
consolidated U.S. income tax return
(includible corporation) net of
Schedule M-3 instead of completing
Schedule M-1 of Form 1120. If A elects
to file Schedule M-3, A must either (i)
complete Schedule M-3 entirely, or (ii)
complete Schedule M-3 through Part I
and complete Schedule M-1 instead of
completing Parts II and III of
eliminations for intercompany
Other Form 1120
Schedules Affected by
Schedule M-3
transactions between includible
corporations. If the corporation does not
prepare non-tax-basis financial
Requirements
statements, Schedule L must be based
on the corporation's books and records.
The Schedule L balance sheet can
show tax-basis balance sheet amounts
if the corporation is allowed to use
books and records for Schedule M-3
and the corporation's books and records
reflect only tax-basis amounts.
Schedule M-3. If A elects to complete
Schedule M-3 entirely, A must complete
all columns of Parts II and III.
Schedule B
Generally, a corporation or group of
corporations that files a Form 1120 and
is required to file Schedule M-3, must
also file Schedule B (Form 1120),
Additional Information for Schedule M-3
Filers. In the case of a consolidated
group, a parent corporation files one
Schedule B (Form 1120) for the entire
consolidated group.
Certain Allocations,
Limitations, and Carryovers
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
Generally, total assets at the
beginning of the year (Schedule L,
line 15, column (b)) must equal total
assets at the close of the prior year
(Schedule L, line 15, column (d)). For
each Schedule L balance sheet item
reported for which there is a difference
between the current opening balance
sheet amount and the prior closing
balance sheet amount, attach a
statement that reports the balance sheet
item, the prior closing amount, the
current opening amount, and a short
explanation of the change. Reasons for
these differences include mergers and
acquisitions.
corporation's financial statements (or
books and records, if applicable), then
the item must be reported by the parent
corporation in its separate
Certain corporations or groups of
corporations filing Form 1120 that (a)
are required to file Schedule M-3 and
have less than $50 million in total assets
at the end of the tax year, or (b) are not
required to file Schedule M-3 and
voluntarily file Schedule M-3, are not
required to file Schedule B (Form 1120).
See the instructions for Schedule B
(Form 1120).
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
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
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.
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
Any adjustments made at the
instructions for 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
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
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
carryovers, and limitation of contribution
deductions) must not be reported on the
separate consolidating parent or
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.
non-tax-basis balance sheet amounts
that must be used for Schedule L.
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).
Total assets shown on Schedule L,
line 15, column (d) (or, for some
consolidated mixed groups with a Form
1120 parent and an insurance
subsidiary, the assets reported on Form
If an includible corporation has (1) no 1120, page 1, item D), must equal the
activity for the tax year (for example,
because the corporation is dormant or
inactive); (2) no amount for the
total assets of the corporation (or, for 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
corporation to include in Part I, line 11;
Instructions for Schedule M-3 (Form 1120)
-3-
tax return or return of income filed prior
to that day.
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.
9. Any change in that interest as of
the date with respect to which it is
reporting.
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.
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.
Schedule M-2 must reflect activity only
of corporations included in the
consolidated U.S. income tax return.
Consolidated Return
(Form 1120, Page 1)
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.
Report on Form 1120, page 1, 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, Schedule C, any amounts
received from an includible corporation.
In general, dividends received from an
includible corporation must be
Example 3.
1. A, limited liability company (LLC)
filing a Form 1065 for 2022, is owned
50% by U.S. corporation Z. A owns 50%
of B, C, D, and E, which are also LLCs
filing a Form 1065 for calendar year
2022. Z was first required to file
eliminated in consolidation rather than
offset by the dividends-received
deduction.
Schedule M-3 (Form 1120) for its
corporate tax year ending December
31, 2021, and filed its Form 1120 with
Schedule M-3 for 2021 on October 15,
2022. As of October 16, 2022, 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 2022, each of A, B, C,
D, and E is required to file Schedule M-3
(Form 1065) for 2022, regardless of
whether they would otherwise be
required to file Schedule M-3 for that
year.
Entity Considerations for
Schedule M-3
For purposes of Schedule M-3,
references to the classification of an
entity (for example, as a corporation, a
partnership, or a trust) are references to
the treatment of the entity for U.S.
income tax purposes. An entity that is
generally disregarded as separate from
its owner for U.S. income tax purposes
(disregarded entity) must not be
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.
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,
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
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
from a separate partnership or other
pass-through entity. The financial
statement income or loss of a
2. P, a U.S. corporation, is the
parent of a financial consolidation group
with 50 domestic subsidiaries, DS1
through DS50, and 50 foreign
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.
disregarded entity is included on Part I,
line 7a or 7b, only if its financial
subsidiaries, FS1 through FS50, all
100% owned on October 16, 2022. On
October 15, 2022, P filed a consolidated
tax return on Form 1120 and was
required to file Schedule M-3 for the tax
year ending December 31, 2021. On
October 16, 2022, DS1, DS2, DS3, FS1,
and FS2 each acquire a 10%
statement income or loss is included on
Part I, line 11, but not on Part I, line 4a.
1. Name.
2. Mailing address.
Reportable Entity Partner
Reporting Responsibilities
A reportable entity partner with respect
to a partnership filing Form 1065 is an
entity that:
3. Taxpayer identification number
(TIN) or EIN, if applicable.
partnership interest in partnership K,
which files Form 1065 for the tax year
ending December 31, 2022. P is
4. Entity or organization type.
Owns or is deemed to own, directly or
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5. State or country in which it is
indirectly, under these instructions a
50% or greater interest in the income,
loss, or capital of the partnership on any
day of the tax year; and
organized.
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
6. Date on which it first became a
reportable entity partner.
7. Date with respect to which it is
reporting a change in its ownership
interest in the partnership, if applicable.
Was required to file Schedule M-3
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consolidation group and is therefore
deemed to own 30% of K on October
with its most recently filed U.S. income
Instructions for Schedule M-3 (Form 1120)
-4-
16, 2022. 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 is
therefore deemed to own 20% of K on
September 16, 2022. P is therefore
deemed to own 50% of K on October
16, 2022. Since P owns or is deemed to
own, directly or indirectly (under these
instructions), 50% or more of K on
Parts II and III of a separate
sub-consolidations, there will generally
be a total of six additional Schedules
M-3, Part II, and six additional
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Schedule M-3 for each of the four
includible corporations to reflect the
activity of each includible corporation.
Schedules M-3, Part III, for the
Parts II and III of a separate
subgroup sub-consolidations.
•
Schedule M-3 to eliminate
Specifically, there must be one Part II
and one Part III for each subgroup's
sub-consolidated amounts and one Part
II and one Part III for each subgroup's
sub-consolidation eliminations amounts.
intercompany transactions between
includible corporations and to include
limitations on deductions (charitable
contribution limitations and capital loss
limitations) and carryover amounts
(charitable contribution carryovers and
capital loss carryovers).
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
October 16, 2022, and was required to
file Schedule M-3 on its most recently
filed U.S. income tax return filed prior to
See Completing Schedule M-3 and
that date, P is a reportable entity partner Certain Allocations, Limitations, and
of K as of October 16, 2022. On
Carryovers, earlier.
eliminations. At the consolidated level,
there must also be a consolidated
Schedule M-3, Part I, and a
November 5, 2022, P reports to K, as it
is required to do, that P is a reportable
entity partner as of October 16, 2022,
deemed to own (under these
Note. Complete only one
Schedule M-3, Part I, for each
consolidated Form 8916. For a mixed
group, there is no Schedule M-3, Part III,
at the consolidated level.
consolidated group. A subsidiary of a
consolidated group does not complete
Schedule M-3, Part I. Enter on
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, 2022.
Schedule M-3, Part I, the name and EIN
of the common parent of the
The corporation must check the
applicable mixed group checkboxes on
all Schedules M-3, Parts I, II, and III, as
discussed below.
consolidated group. Indicate on
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 (1) consolidated
group, (2) parent corporation, (3)
consolidation eliminations, or (4)
subsidiary corporation, by checking the
appropriate box. If Schedule M-3, Parts
II and III, are for a subsidiary in a
consolidated return, also enter the name
and EIN of the subsidiary.
Consolidated
Schedule M-3 Versus
Consolidating Schedules
M-3 for Form 1120 Groups
Subgroup Sub-Consolidation:
1120 Subgroup, 1120-PC
Subgroup, and 1120-L Subgroup
A consolidated tax return group with a
parent corporation that files a Form
1120 is a mixed group if any member is
a life insurance company (files using
Form 1120-L) or a property and casualty
insurance company (files using Form
1120-PC). See Schedule M-3
A subgroup Schedule M-3, Parts II and
III, sub-consolidation must be prepared
with all necessary eliminations within
the subgroup for each of the three
possible subgroups that are in fact
present: one subgroup for those
Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC)
Consolidation for Mixed Groups
(1120/L/PC), later.
A U.S. consolidated tax group must
file a consolidated Schedule M-3. Parts
I, II, and III of the consolidated
corporations reporting on Form 1120,
one subgroup for those corporations
reporting on Form 1120-PC, and one
subgroup for those reporting on Form
1120-L. The parent corporation is
included in the subgroup that
Special Schedule M-3 consolidation
rules apply to a mixed group, that is, a
consolidated tax group that includes (a)
both a corporation that is an insurance
company and a corporation that is not
an insurance company; or (b) both a life
insurance company and a property and
casualty insurance company; or (c) a life
insurance company, a property and
casualty insurance company, and a
corporation that is not an insurance
company.
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
corresponds to the form on which it
reports and the entire consolidated
group files. For example, in the case of
a Form 1120 parent and Form 1120
consolidated group, the parent is
included in the Form 1120 subgroup
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.
corporation to reflect the activity of that
includible corporation. Lastly, it will
generally be necessary to complete
Parts II and III of a separate
Mixed group consolidation for
Schedule M-3, Parts II and III, requires
(a) 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 (b) consolidation of
the subgroup sub-consolidation totals
on a consolidated Schedule M-3, Part II,
that ties to a consolidated
Schedule M-3 for consolidation
eliminations.
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,
the U.S. consolidated tax group must
complete six Schedules M-3 as follows.
The three subgroup
sub-consolidation taxable income
calculations on Schedule M-3 must
follow the separate return requirements
of the regulation under section 1502 and
all other applicable regulations, taking
into account the amounts separately
Schedule M-3, Part I, and a
consolidated Form 8916.
One consolidated Schedule M-3 with
•
Parts I, II, and III completed to reflect the
activity of the entire U.S. consolidated
tax group.
In addition to one Schedule M-3, Part reported on Form 8916. Capital loss
II, and one Schedule M-3, Part III, for
each corporation in the three subgroup
limitation and carryforward used and
charitable deduction limitation and
Instructions for Schedule M-3 (Form 1120)
-5-
carryforward used are not taken into
For mixed groups, the consolidated
eliminations for the eliminations. The
1120-L subgroup sub-consolidation
Schedule M-3 (Form 1120-L), Parts II
and III, must be indicated by checking
box (5) Mixed 1120/L/PC group, and
box (6) 1120-L group for the
account in the determination of the three Part II, line 30, column (a), must equal
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.
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 8916, line 1. Form
8916, line 8, must equal taxable income
reported on the tax return.
sub-consolidation, and by checking box
(5) Mixed 1120/L/PC group, and box (7)
1120-L eliminations for the eliminations.
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,
A mixed group with a Form 1120
parent corporation completes a
consolidated level Schedule M-3 (Form
1120), Parts I and II, and a consolidated
Form 8916. The mixed group
Completion of Mixed Group
Checkboxes for Schedule M-3,
Part II and Part III
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
Note. The following discussion of
checkboxes will assume that the 1120
subgroup includes the corporate parent
of the 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.
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.)
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.
Note. A sub-consolidation is required
for every subgroup, even if the
subgroup consists of only one
Life/Non-Life Loss Limitation and
Carryforward Used Calculations
corporation. In addition, Form 8916-A, if
applicable, is required at the
For example, an 1120 parent
The applicable life/non-life loss
corporation included in the 1120
limitation and all carryforward used
calculations are made using the
amounts determined for taxable income
in the three subgroup
sub-consolidated level and the
sub-consolidated elimination level.
subgroup must check Schedule M-3
(Form 1120), Parts II and III, box (2)
Parent corporation, and box (5) Mixed
1120/L/PC group. An 1120 subsidiary
corporation within the 1120 subgroup
must check Schedule M-3 (Form 1120),
Parts II and III, box (4) Subsidiary
corporation, and box (5) Mixed
Reconciliation of Mixed Group
Subgroup Sub-Consolidation
Amounts to Schedule M-3, Part I,
Line 11, and to Tax Return Taxable
Income
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.
1120/L/PC group. An 1120-PC
subsidiary corporation within the
1120-PC subgroup must check
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, on the
consolidated Schedule M-3, Part II,
lines 29a, 29b, and 29c, report the
applicable amounts from the three
subgroup sub-consolidation Part II,
line 29a, amounts. (If a consolidated
level Part II for consolidation
Schedule M-3 (Form 1120-PC), 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
Specific Instructions
for Part I
Schedule M-3 (Form 1120-L), Parts II
and III, box (4) Subsidiary corporation,
and box (5) Mixed 1120/L/PC group.
Part I. Financial
Information and Net
Income (Loss)
The 1120 subgroup
Reconciliation
sub-consolidation Schedule M-3 (Form
1120), 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
When To Complete Part I
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 sum 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.
Part I must be completed for any tax
year for which the corporation files
Schedule M-3. Check either box (1)
Non-consolidated return, (2)
Consolidated return (Form 1120 only),
or (3) Mixed 1120/L/PC group, as
applicable. In addition, check box (4)
Dormant subsidiaries schedule
attached, if applicable.
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
Instructions for Schedule M-3 (Form 1120)
-6-
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
U.S. corporation (or U.S. consolidated
tax group) on Part I, line 4a.
Line 1. Questions Regarding
the Type of Income Statement
Prepared
If no non-tax-basis financial
For Part I, lines 1 through 12, use only
the financial statements of the U.S.
corporation filing the U.S. income tax
return (or the consolidated financial
statements for the U.S. parent
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
statements are prepared for a U.S.
corporation (or, in the case of a U.S.
consolidated tax group, for the U.S.
parent corporation's consolidated
group) filing Schedule M-3 (Form 1120)
and the U.S. corporation is owned by a
foreign corporation that prepares
financial statements that includes 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.
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 but an
unaudited non-tax-basis income
statement is prepared for the period
ending with or within the tax year, the
corporation must check “Yes” for Part I,
line 1c, and use that income statement
for Schedule M-3.
corporation of a U.S. consolidated tax
group). If the U.S. corporation 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
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
Line 2. Questions Regarding
Income Statement Period and
Restatements
Enter the beginning and ending dates
on line 2a for the corporation's annual
income statement period ending with or
within the current tax year.
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.
corporation.
If a non-publicly traded U.S. parent
corporation 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
corporation are the appropriate financial
statements for purposes of completing
Part I. Do not use any separate
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
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
3. Any other International
Accounting Standards (IAS).
4. Statutory accounting for
insurance companies.
company financial statements that might
be prepared for publicly traded
5. Other regulatory accrual
corporation of a U.S. consolidated tax
group) and used to prepare
subsidiaries.
accounting.
6. Any other accrual accounting
standard.
Schedule M-3. Answer “Yes” on lines 2b
and/or 2c if the corporation's annual
income statement has been restated for
any reason. Attach a short explanation
of the reasons for the restatement in net
income for each annual income
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
Non-Tax-Basis Financial
Statements and Tax-Basis
Financial Statements
7. Any fair market value standard.
8. Any cash basis standard.
A tax-basis income statement is allowed
for Schedule M-3, and a tax-basis
balance sheet for Schedule L, only if no
non-tax-basis income statement and no
non-tax-basis balance sheet 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
If no non-tax-basis income statement
is certified and two or more
non-tax-basis income statements are
prepared, the income statement
prepared according to the first listed of
the accounting standards listed above
must be used.
entity-by-entity basis.
If no non-tax-basis financial
Line 3. Questions Regarding
Publicly Traded Voting
Common Stock
statements are prepared for a U.S.
corporation (or, in the case of a U.S.
consolidated tax group, for the U.S.
parent corporation's consolidated
group) filing Schedule M-3 (Form 1120),
the U.S. corporation (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
Schedule M-3 and Schedule L if such
non-tax-basis financial statements were
prepared for and presented to
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
corporation. If the corporation has more
than one class of publicly traded voting
common stock, attach a list of the
management, creditors, shareholders,
government regulators, or any other
third parties for a period ending with or
within the tax year.
classes of publicly traded voting
If a Form 10-K is filed with the SEC
for the period ending with or within the
common stock and the trading symbol
Instructions for Schedule M-3 (Form 1120)
-7-
and the nine-digit CUSIP number of
each class.
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.
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 line 4a using the
equity method.
Line 4a. Worldwide
Consolidated Net Income
(Loss) per Income Statement
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
Report on Part I, line 4a, the worldwide
consolidated net income (loss) per the
income statement (or books and
records, if applicable) of the
Attach a supporting statement that
provides the name, EIN (if applicable),
and net income (loss) included on
line 4a that is removed on this line 5 for
each separate nonincludible foreign
entity. Also state the total assets and
total liabilities for each such separate
nonincludible foreign entity and include
those assets and liabilities amounts in
the total assets and total liabilities
reported on Part I, line 12b. The
corporation. A corporation filing a
non-consolidated Form 1120 for itself
must report its worldwide income on
Part I, line 4a.
worldwide consolidated income (loss)
amount reported on Part I, line 4a.
If a U.S. corporation (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
In completing Schedule M-3, the
corporation 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
Schedule M-3; (b) files its own Form
1120 (separate or consolidated); (c)
does not have a separate non-tax-basis
financial statement (certified or
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
otherwise) of its own; and (d) reports on
Schedule L of its own Form 1120 total
consolidated assets that equal or
exceed $10 million at the end of the
corporation's tax year, the corporation
must answer questions 1a, 1b, and 1c
of Part I as appropriate for its own Form
1120 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
consolidation or elimination entries
relating to nonincludible foreign entities
whose income (loss) is reported on the
attached statement that are not
corporation's Form 10-K (the Form 10-K
for the security identified on Part I,
line 3b, if applicable).
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
If a corporation prepares
non-tax-basis financial statements, the
amount on line 4a must equal the
financial statement net income (loss) for
the income statement period ending
with or within the tax year as indicated
on Part I, line 2a.
statement, so that the separate financial
accounting income (loss) of each
nonincludible foreign entity remains
separately stated.
circumstances described immediately
above, the corporation does have
separate non-tax-basis financial
For example, if the net income (after
consolidation and elimination entries) of
a nonincludible foreign
If the corporation prepares
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.
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.
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
corporation, the corporation must
answer questions 1a, 1b, and 1c of Part
I, as appropriate, for its own Form 1120,
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.
If the corporation 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.
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).
If line 4a includes net income (loss)
for a corporation that files Form
1120-PC or Form 1120-L, see the
instructions for Part I, line 10, for
adjustments that may be necessary to
reconcile financial statement income to
statutory income.
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.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
Line 5. Net Income (Loss) of
Nonincludible Foreign Entities
Remove the financial net income
Line 6. Net Income (Loss) of
Nonincludible U.S. Entities
Remove the financial net income
2. International Financial Reporting
Standards (IFRS).
3. Statutory.
4. Tax-basis.
5. Other (specify).
(line 5a) or loss (line 5b) of each foreign
entity that is included on 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
(line 6a) or loss (line 6b) of each U.S.
entity that is included on line 4a and is
not an includible corporation in the U.S.
consolidated tax group (nonincludible
U.S. entity). In addition, on Part I, line 8,
adjust for consolidation eliminations and
correct for minority interest and
Report on Part I, lines 5a through 10,
as instructed below, all adjustment
amounts required to adjust worldwide
eliminations and correct for minority
net income (loss) reported on this Part I, interest and intercompany dividends
Instructions for Schedule M-3 (Form 1120)
-8-
intercompany dividends between any
nonincludible U.S. entity and any
income reported on Part I, line 4a.
Include on line 7a or 7b financial income
of any disregarded entity that is not
included in the income reported on Part
I, line 4a, but is included in Part I, line 11
(other disregarded entities). Include on
line 7c the financial income of any entity
not a disregarded entity that is not
included in the income reported on
line 4a, but is included on line 11 (other
includible entities). In addition, on Part I,
line 8, adjust for consolidation
Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities and
Nonincludible Entities
includible corporation. Do not remove in
Part I the financial net income (loss) of
any nonincludible U.S. entity accounted
for on line 4a using the equity method.
Adjustments on Part I, line 8, to reverse
certain financial accounting
Attach a supporting statement that
provides the name, EIN, and net income
(loss) included on line 4a that is
consolidation or elimination entries are
necessary to ensure that transactions
between includible entities and
removed on this line 6 for each separate
nonincludible U.S. entity. Also state the
total assets and total liabilities for each
such separate nonincludible U.S. entity
and include those assets and liabilities
amounts in the total assets and total
liabilities reported on Part I, line 12c.
The amounts of income (loss) detailed
on the supporting statement should be
reported for each separate
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
eliminations and correct for minority
interest and intercompany dividends for
any other disregarded entity or other
includible entities.
necessary on Part I, line 8, related to
transactions between includible entities
that are in the consolidated financial
group and other disregarded entities
and other includible entities that are not
in the consolidated financial group but
that are reported on Part I, line 7a, 7b, or
7c, in order to report the correct total
amount on Part I, line 11.
Attach a supporting statement that
provides the name, EIN, and net income
(loss) per the financial statement or
books and records on lines 7a, 7b, and
7c, for each separate other U.S.
nonincludible U.S. entity without regard
to the effect of consolidation or
disregarded entity or other includible
entity. Also, state the total assets and
total liabilities for each such separate
includible entity and include those asset
and liability 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
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
Include on Part I, line 8, the total of
the following: (a) amounts of any
adjustments to consolidation entries
and elimination entries that are
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
contained in the amount reported on
Part I, line 4a, required as a result of
removing amounts on Part I, line 5 or 6;
and (b) amounts of any additional
consolidation entries and elimination
entries that are required as a result of
including amounts on Part I, line 7a, 7b,
or 7c. This is necessary in order that the
consolidation entries and intercompany
elimination entries included in the
amount reported on Part I, line 11, are
only those applicable to the financial net
income (loss) of includible entities for
the financial statement period. For
example, adjustments must be reported
statement, so that the separate financial
accounting income (loss) of each
nonincludible U.S. entity remains
separately stated. 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
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
disregarded entity or other includible
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
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
statement, so that the separate financial on line 8 to remove minority interest and
accounting income (loss) of each other
disregarded entity or other includible
entity remains separately stated. For
example, if the net income (after
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 entities whose income is
included on Part I, line 7a, 7b, or 7c, and
other entities included in the
consolidation and elimination entries) of
a sub-consolidated group of other U.S.
disregarded entities is being reported
on line 7b, the attached supporting
statement should report the income
(loss) of each separate other U.S.
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
separate net income (loss).
Line 7. Net Income (Loss) of
Other Includible Foreign
Disregarded Entities, Other
Includible U.S. Disregarded
Entities, and 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 entity that is not
attached supporting statement as a net
amount on a line separate and apart
from lines that report each other
consolidated U.S. income tax return.
See Examples 4, 5, and 6 in the
instructions for line 11.
included in the consolidated financial
group and therefore not included in the
includible corporation's or entity's
separate net income (loss).
Instructions for Schedule M-3 (Form 1120)
-9-
If a corporate owner of an interest in
another entity (a) accounts for the
interest in the entity in the owner
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
Line 10a. Intercompany
Dividend Adjustments To
Reconcile to Line 11,
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
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 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.
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), the type, and the amount
of each adjustment included in the net
adjustment.
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 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
Line 11. Net Income (Loss) per
Income Statement of Includible
Corporations
consolidated financial statement
purposes and therefore will have no
elimination of equity income to reverse.
Report on line 11 the net income (loss)
per the income statement (or books and
records, if applicable) of the
Normally, all intercompany dividends
will have been eliminated or excluded
from the financial accounting
The attached supporting statement
for Part I, line 8, must identify the type
(for example, minority interest,
corporation. 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 net income (loss) reported
on Part I, line 4a. However, an
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.
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
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 statutory
accounting. If an insurance company is
included in a consolidated Form 1120,
the amount of net income reported on
Part I, line 11, will include the statutory
accounting net income for the insurance
corporation and the GAAP net income
for the non-insurance corporations
included in the U.S. consolidated tax
group. (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.)
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.
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.)
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,
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,
Do not, in any event, report on this
line 11 the net income of entities not
listed on Form 851 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
adjustments to income because of the
differences in accounting period.
adjustments to income because of such
differences in accounting period.
For any adjustments reported on Part nonincludible entities on lines 5 and/or
I, lines 10a, 10b, and 10c, attach a
supporting statement that provides, for
each corporation to which an
6, discussed earlier, then add back such
income on lines 7 through 10, such that
the amount reported on line 11 includes
adjustment relates, the name and EIN of the net income of entities not includible
the corporation; the amount of net
income included in Part I before any
adjustments on line 10; the amount of
in the consolidated U.S. income tax
return. A principal purpose of
Schedule M-3 is to report on this Part I,
Instructions for Schedule M-3 (Form 1120)
-10-
line 11, only the financial accounting net includible corporations. Intercompany
2. U.S. corporation C owns 60% of
the capital and profits interests in U.S.
income of only the corporations
included in the consolidated U.S.
income tax return.
transactions between the includible
corporations that had been eliminated in LLC N. C does not account for N in C's
the net income amount on line 4a
remain eliminated in the net income
amount on line 11. Transactions
separate general ledger on the equity
method. N has net income of $100
(before minority interests) and makes no
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
between the includible corporations and distributions during the tax year. C
the nonincludible entities that are
eliminated in the net income amount on
line 4a are included in the net income
amount on line 11 since the elimination
of those transactions was reversed on
line 8.
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.
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
2. Foreign corporation F owns 100%
of the stock of U.S. corporation P. P
owns 100% of the stock of DS1, 60% of
C must remove the $100 net income
of N on Part I, line 6a. C must reverse on
nonincludible corporations.
the stock of DS2, and 100% of the stock Part I, line 8, the elimination of the $40
Example 4.
of FS1. F prepares certified audited
minority interest net income of N. The
financial statements. P does not prepare result is that C includes no income for N
1. U.S. corporation 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
any financial statements. P files a
consolidated U.S. income tax return
with DS1.
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).
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
3. U.S. corporation P owns 60% of
corporation DS1, which is fully
consolidated in P's financial statements.
P accounts for DS1 in P's separate
I; and enter worldwide net income (loss) general ledger on the equity method.
per the books and records of the
includible corporations (P and DS1) on
Part I, line 4a. P must enter any
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
ownership, if any, of DS1 through
DS100 in financial statement
necessary adjustments on lines 5a
through 10 in order for Part I, line 11, to
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
report the net income (loss) of includible separate general ledger where P
corporations P and DS1, net of
eliminations for transactions between P
and DS1.
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.
consolidated U.S. income tax return
with DS1 through DS75.
Example 5.
1. U.S. corporation P owns 60% of
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 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 in Part II, line 8.
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
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 on 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).
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).
4. U.S. corporation 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
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the
ledger, C includes its 60% equity share
Instructions for Schedule M-3 (Form 1120)
-11-
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.
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
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.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse on on Part I, line 7c. Then, in order to
Specific Instructions for
Parts II and III
Part I, line 8, the elimination of the $40
reflect the full consolidation of the
minority interest net income of N and the financial accounting net income of P
For consolidated U.S. income tax
returns, attach supporting statements
for each includible corporation. See the
instructions for consolidated returns in
the Instructions for Form 1120.
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).
and DS1 on Part I, line 11, 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 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 line 4a,
$100 from line 7c, 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
General Format of Parts II
and III
5. U.S. corporation 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
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:
1. Consolidated group,
2. Parent corporation,
3. Consolidated eliminations,
4. Subsidiary corporation, or
5. Mixed 1120/L/PC group.
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
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
Also check the applicable box to
indicate whether the Schedule M-3 is for
a sub-consolidated (6) 1120 group, or
(7) 1120 eliminations. See Consolidated
Schedule M-3 Versus Consolidating
Schedules M-3 for Form 1120 Groups
and Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.
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.
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
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 taxable income on Form
1120, page 1, line 28.
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).
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
intercompany elimination of interest
income and interest expense (though it
is permitted to do so).
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).
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
Example 6. U.S. corporation P
owns 80% of the stock of corporation
DS1. DS1 is included in P's
consolidated 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
Note. A statement or explanation may
be attached to any line item even if none
is required.
corporation's share) of assets and
liabilities of entities included or removed
on Part I, lines 4, 5, 6, and 7. All assets
and liabilities reported for
If financial statements are prepared
by the corporation in accordance with
generally accepted accounting
Schedule M-3, Part I, lines 12a, 12b,
12c, and 12d, must be entered as
positive amounts.
principles (GAAP), differences that are
treated as temporary for GAAP must be
reported in column (b) and differences
that are permanent (that is, not
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, page 1, of the PDS
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
temporary for GAAP) must be reported
in column (c). Generally, pursuant to
GAAP, a temporary difference affects
Instructions for Schedule M-3 (Form 1120)
-12-
(creates, increases, or decreases) a
deferred tax asset or liability.
regardless of the classification,
Reporting Requirements
for Parts II and III
nomenclature, or terminology attached
to the fines or penalties by the imposing
authority in its actions or documents.
If the corporation does not prepare
financial statements, or the financial
statements are not prepared in
Except for mixed group consolidation,
the number of Parts II must equal the
number of Parts III filed by the
If a corporation 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
corporation has capitalized the item of
income or expense and reports the
amount in its financial statement
accordance with GAAP, report in
column (b) any difference that the
corporation 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
corporation. Mixed groups should see
Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC), earlier.
General Reporting
Requirements
If an amount is attributable to a
balance sheet or in asset and liability
accounts maintained in the
reportable transaction described in
Regulations section 1.6011-4(b), the
amount must be reported in columns
(a), (b), (c), and (d), as applicable, of
Part II, line 12, regardless of whether the
amount would otherwise be reported on
Part II or Part III of Schedule M-3. Thus,
if a taxpayer files Form 8886,
purposes) or is the reversal of such a
difference that arose in a prior tax year.
Report in column (c) any difference that
the corporation believes will not reverse
in a future tax year (and is not the
reversal of such a difference that arose
in a prior tax year).
corporation's books and records, the
corporation must report the proper tax
treatment of the item in columns (b), (c),
and (d), as applicable.
Furthermore, in applying the two
preceding paragraphs, a corporation 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 corporation's financial
statements or exists in the corporation's
books and records, regardless of the
nomenclature associated with that item
in the financial statements or books and
records. Accurate completion of
If the corporation is unable to
Reportable Transaction Disclosure
Statement, the amounts attributable to
that reportable transaction must be
entered on Part II, line 12.
A corporation is required to report in
column (a) of Parts II and III the amount
of any item specifically listed on
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 7. Corporation B is a U.S.
publicly traded corporation that files a
consolidated U.S. income tax return and
prepares consolidated 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
Schedule M-3 that is in any manner
included in the corporation's current
year financial statement net income
(loss) or in an income or expense
account maintained in the corporation's
books and records, 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
Schedule M-3 requires reporting
amounts according to the substantive
nature of the specific line items included
in Schedule M-3 and consistent
reporting of all transactions of like
substantive nature that occurred during
the tax year. For example, all expense
amounts that are included in the
financial statements or exist in the
books and records that represent some
form of “Bad debt expense” must be
reported in Part III, line 32, column (a),
regardless of whether the amounts are
recorded or stated under different
nomenclature in the financial
attributable to a reportable transaction
described in Regulations section
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
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 $5,000. In its
financial statements, B treats the
corporation as a result of the
statements or the books and records
such as “Provision for doubtful
corporation's investment in a
partnership or other pass-through entity,
all interest income, included on Part I,
line 11, whether from unconsolidated
affiliated companies, third parties,
banks, or other entities; whether from
foreign or domestic sources; whether
taxable or exempt from tax; and whether
classified as some other type of income
for U.S. income tax purposes (such as
dividends), must be included on Part II,
line 13, column (a). Likewise, all fines
and penalties included in Part I, line 11,
paid to a government or other authority
for the violation of any law for which
fines or penalties are assessed must be
included on Part III, line 12, column (a),
regardless of the government authority
that imposed the fines or penalties;
regardless of whether the fines or
penalties are civil or criminal; and
accounts,” “Expense for uncollectible
notes receivable,” or “Impairment of
trade accounts receivable.” Likewise, as
stated in the preceding paragraph, all
fines and penalties must be included on
Part III, line 12, column (a), regardless
of the terminology or nomenclature
attached to them by the corporation in
its books and records or financial
statements.
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 26, and
report $5,000 in column (a), a
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
permanent difference of ($5,000) in
column (c), and $0 in column (d).
Instructions for Schedule M-3 (Form 1120)
-13-
income item, or only a portion of the
income item has a difference and a
portion of the item does not have a
real estate tax expense in its financial
statements and its real estate tax
deduction recognized for U.S. taxable
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 38.
Each description should adequately
describe all four columns of Part II,
line 25, or Part III, line 38. If additional
information is required to provide an
acceptable description, provide a
supporting statement.
Example 8. Corporation C is a
calendar year taxpayer that placed in
service 10 depreciable fixed assets in a
previous tax year. C files and entirely
completes Schedule M-3 for its current
tax year. 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
difference, and the item is not described income purposes.
in Part II, lines 1 through 24, report and
Separately stated and adequately
describe the entire amount of the item
on Part II, line 25.
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. 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 entered on the applicable line
and the amount(s) of the item(s) is
entered in the applicable columns of the
applicable line. See the instructions for
Part II, lines 1 through 8, for specific
additional information required to be
provided for these particular lines.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
See Part III, lines 1 through 37. If an
expense item is described on Part III,
lines 1 through 37, 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 37,
report and describe the entire amount of
the item on Part III, line 38.
depreciation expense for its current tax
year for the other five assets is $40,000
for income statement purposes and
$30,000 for U.S. income tax purposes.
In its financial statements, C treats the
differences between financial statement
and U.S. income tax depreciation
expense as giving rise to temporary
differences that will reverse in future
years. C must combine all of its
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, loss, expense, or deduction
and the item is not described or
included in Part II, lines 1 through 25, or
Part III, lines 1 through 38, report the
entire amount of the item in columns (a)
and (d) of Part II, line 28.
Note. A statement or explanation may
be attached to any line even if none is
required.
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 38. A
separate statement must be attached to
Schedule M-3 (Form 1120) that includes
a detailed description of each item and
adjustment entered on Part II, line 25,
and Part III, line 38.
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).
Special instructions for Part II, lines
25 and 28, and Part III, line 38.
Whether a given income (loss) item is
reported on Part II, line 25, or on Part II,
line 28, or a given expense/deduction
item on Part III, line 38, 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.
Example 9. Corporation D is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On December 31, D
establishes three reserve accounts in
the amount of $100,000 for each
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
account. One reserve account is an
allowance for accounts receivable that
are estimated to be uncollectible. The
second reserve is an estimate of
purposes, P, A, and B recognize real
estate tax expense when accrued. For
U.S. income tax purposes, P and A
recognize such expense 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. P and A must report this
expense/deduction in columns (a) and
(d) on Part II, line 28. B must report the
following on Part III, line 38: 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
coupons outstanding that may have to
be paid. The third reserve is an estimate
of future warranty expenses. In its
financial statements, D treats the three
reserve accounts as giving rise to
temporary differences that will reverse
in future years. The three reserves are
expenses in D's current financial
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
statements 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 three
reserve accounts. D must report the
amounts attributable to the allowance
description for each amount entered in
column (a) must include detailed
purposes; and in column (b) or (c), as
applicable, the difference between B's
information supporting each adjustment
Instructions for Schedule M-3 (Form 1120)
-14-
for uncollectible accounts receivable on
Part III, line 32, Bad debt expense, and
must separately state and adequately
disclose the amounts attributable to
expenses that F deducts in computing
net income per the income statement.
All of the $200 of meal expenses are
subject to the 50% limitation under
the amount (before any withholding tax)
of any foreign dividends included in
current year taxable income on Form
1120, page 1, line 28, 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 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 below for Part II,
lines 3, 4, and 5.
each of the other two reserves, coupons section 274(n). The $100 of
outstanding, and warranty costs, on a
required, attached statement that
entertainment expenses are
nondeductible under section 274(a). In
supports the amounts on Part III, line 38. its financial statements, F treats the
D must also provide a description for
each reserve that meets the
limitation on deductions for meals and
entertainment as a permanent
requirements for Part III, line 38,
discussed earlier under Required
III, line 38. In this example, an
acceptable description would be
“Coupon Issue Reserves—Rewards
Expense” and “Future Warranty
Expense Reserve.”
difference. Because meals and
entertainment expenses are specifically
described in Part III, line 11, F must
report all of its meals and entertainment
expenses on this line, regardless of
whether there is a difference.
For any dividends reported on Part II,
line 2, that are received on a class of
voting stock of which the corporation
directly or indirectly owned 10% or more
of the outstanding shares of that class at
any time during the tax year, report on
an attached supporting statement (1)
the name of the dividend payer, (2) the
payer's EIN (if applicable), (3) the class
of voting stock on which the dividend
was paid, (4) the percentage of the
class directly or indirectly owned, and
(5) the amounts for columns (a) through
(d).
Accordingly, F must report $300 in
column (a), $200 in column (c), and
$100 in column (d). All meals and
entertainment expenses, whether
allowed fully or subject to limitations,
must be reported on Part III, line 11. No
amounts should be reported on Part II,
line 28.
Note. There is no need to add the title
of the reserve account to the description
if the account name for the amount in
column (a) is already part of the
adjustment description.
Example 10. Corporation E is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On January 2 of the
current tax year, E establishes an
allowance for uncollectible accounts
receivable (bad debt reserve) of
Part II. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return
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
amounts included 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 a
qualified electing fund (QEF). The
amount included under section 951
corresponds to the total of the amounts
reported on Form 1120, Schedule C,
lines 16a, 16b, and 16c (or the
$100,000. During the current tax year, E
increased the reserve by $250,000 for
additional accounts receivable that may
become uncollectible. Additionally,
during the current tax year, E decreases
the reserve by $75,000 for accounts
receivable that were discharged in
bankruptcy during the current tax year.
The balance in the reserve account on
December 31 of the current tax year is
$275,000. The $100,000 amount to
establish the reserve account and the
$250,000 to increase the reserve
account are expenses on E's current
year financial statements but are not
deductible for U.S. income tax purposes
in the current tax year. However, the
$75,000 decrease to the reserve is
deductible for U.S. income tax purposes
in the current tax year. In its financial
statements, E treats the reserve
Attach supporting statements for Parts
II, lines 1 through 12. For any item
reported on lines 1, 3 through 6, or 8,
include in the supporting statement the
name of the entity for which the item is
reported, the entity's EIN (if applicable),
the type of entity (corporation,
partnership, etc.), and the item amounts
for columns (a) through (d). See the
instructions for Part II, lines 2, 7, and 9
through 12, for the specific information
required for those particular lines.
corresponding line on Form 1120-C,
Schedule C, if applicable). The amount
of GILTI corresponds to the amount
reported on Form 1120, Schedule C,
line 17 (or the corresponding line on
Form 1120-C, Schedule C, if
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 equity method and
remove such amount in column (b) or
(c), as applicable. Report the amount of
dividends received and other taxable
amounts received from or includible with
respect to foreign corporations on Part
II, lines 2 through 5, as applicable.
applicable). The amount of QEF income
corresponds to the total of the amounts
of income from a QEF reported by the
corporation on all Forms 8621,
account as giving rise to a temporary
difference that will reverse in future tax
years. E must report on Part III, line 32,
for its current tax year income
Information Return by a Shareholder of
a Passive Foreign Investment Company
or Qualified Electing Fund. See Form
8621 and the Instructions for Form
8621.
statement, bad debt expense of
$350,000 in column (a), a temporary
difference of ($275,000) in column (b),
and U.S. income tax bad debt expense
of $75,000 in column (d).
Line 2. Gross Foreign
Dividends Not Previously
Taxed
Except as otherwise provided in this
paragraph, report on line 2, column (d),
Example 11. Corporation F is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. F incurs $200 of meal
expenses and $100 of entertainment
Also include on line 3 passive foreign
investment company (PFIC)
mark-to-market gains and losses under
section 1296. Do not report such gains
and losses on Part II, line 16.
Instructions for Schedule M-3 (Form 1120)
-15-
listed on Form 851) are eliminated or
excluded for financial accounting
purposes and eliminated for the
report its equity interest in the income of
DS1 on its separate financial
Line 4. Gross-up for Foreign
Taxes Deemed Paid
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).
Report on line 4, column (d), the amount
of any foreign taxes deemed paid not
included in column (d) of Part II, lines 9,
10, and 11, Income (loss) from U.S.
partnerships, foreign partnerships, and
other pass-through entities. The foreign
taxes deemed paid amount on this
line 4 must correspond to the total
foreign taxes deemed paid amounts
reported by the corporation on all Forms
1118, Foreign Tax
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
On the consolidated Schedule M-3,
Part I, line 4, 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
Credit—Corporations, excluding the
amounts reported in column (d) of Part
II, lines 9, 10, and 11.
financial statement net income ($1,000
net income less $100 minority interest).
instructions for Part I, lines 10 and 11.)
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,
lines 28 and 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
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 (1) the
name of the dividend payer; (2) the
payer's EIN; (3) the class of stock or
security on which the dividends were
paid; (4) the amount of any net
Line 5. Gross Foreign
Distributions Previously Taxed
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.
Because previously taxed foreign
distributions are not currently taxable,
line 5, column (d), is shaded. Also, see
the instructions for Part II, line 2, earlier.
adjustment included on Part I, line 10a,
for such dividends; and (5) the item
amounts for columns (a) through (d).
Schedule M-3, Parts II and III, on Part II,
lines 8 and 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).
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, (1) the name of the
On the Schedule M-3, Parts II and III,
for the U.S. consolidated tax group, on
Part II, line 8, Minority interest for
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.
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. 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
dividend payer, (2) the payer's EIN (if
applicable), (3) the class of voting stock
on which the dividend was paid, (4) the
percentage of the class directly or
indirectly owned, and (5) the item
amounts for columns (a) through (d).
differences on Part II, line 30, column
(c), will total $100; and taxable income
on line 30, column (d), will total $1,000.
Line 8. Minority Interest for
Includible Corporations
Report on line 8, column (a), the
Line 7. U.S. Dividends Not
Eliminated in Tax Consolidation
Line 9. Income (Loss) From
U.S. Partnerships, and
minority interest included in the financial
income (loss) on Part I, line 11, for any
member of the U.S. consolidated tax
group that is less than 100% owned.
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 taxable income on Form
1120, page 1, line 28.
Line 10. Income (Loss) From
Foreign Partnerships
For any interest owned by the
Example 12. Corporation G is a
calendar year taxpayer that files and
entirely completes 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.
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.
Usually, the amounts included on
line 7, columns (a) and (d), include only
dividends received from U.S.
consolidated group. G prepares certified
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
corporations that are not included in the
U.S. consolidated tax group because
intercompany dividends (dividends
received from includible corporations
1. In column (a), report the sum of
the corporation's distributive share of
income or loss from a U.S. or foreign
Instructions for Schedule M-3 (Form 1120)
-16-
partnership that is included in Part I,
line 11.
$3,910 ($4,000–$900) on Part II, line 9.
H must report the limitation on Part III,
line 21, and report the disallowed
charitable contributions of ($3,910) in
columns (b) and (d).
disclosed. A corporation will be
considered to have separately stated
and adequately disclosed a reportable
transaction on line 12 if the corporation
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).
2. In column (b) or (c), as
applicable, report the sum of all
differences, if any, attributable to the
corporation's distributive share of
income or loss from a U.S. or foreign
partnership.
3. In column (d), report the sum of
all amounts of income, gain, loss, or
deduction attributable to the
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.
corporation's distributive share of
income or loss from a U.S. or foreign
partnership (that is, the sum of all
amounts reportable on the corporation's
Schedule(s) K-1 received from the
partnership (if applicable)), without
regard to any limitations computed at
the partner level (for example,
In lieu of the requirements of the
preceding paragraph, a corporation will
be considered to have separately stated
and adequately disclosed a reportable
transaction if the corporation attaches a
supporting statement that provides the
following for each reportable
1. In column (a), report 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, report the sum of all
differences, if any, attributable to the
pass-through entity.
3. In column (d), report the sum of
all taxable amounts of income, gain,
loss, or deduction reportable on the
corporation's Schedule(s) K-1 received
from the pass-through entity (if
applicable).
transaction.
limitations on utilization of charitable
contributions, capital losses, and
interest expense).
1. A description of the reportable
transaction disclosed on Form 8886 for
which amounts are reported on Part II,
line 12.
For each partnership reported on
line 9 or 10, attach a supporting
statement that provides the name and
EIN (if applicable); end of year
2. The name and tax shelter
registration number, if applicable, as
reported on lines 1a and 1c,
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.
respectively, of Form 8886.
3. The type of reportable transaction
(that is, listed transaction, confidential
transaction, transaction with contractual
protection, etc.) as reported on line 2 of
Form 8886.
For each pass-through entity
reported on line 11, attach a supporting
statement that provides that entity's
name and EIN (if applicable); the
corporation's end of year profit-sharing
percentage (if applicable; the
Example 13. U.S. corporation H is a
calendar year taxpayer that files and
entirely completes Schedule M-3. H has
an investment in a U.S. partnership,
USP. H prepares financial statements in
accordance with GAAP. In its financial
statements, H treats the difference
between financial statement net income
and taxable income from its investment
in USP as a permanent difference. For
its current tax year, H's financial
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
line 3 of Form 8886. In addition, if the
reportable transaction involves an
investment in the transaction through
another entity such as a partnership, the
description must include the name and
EIN (if applicable) of that entity as
reported on line 5 of Form 8886.
corporation's end of year loss-sharing
percentage (if applicable); and the
amounts reported by the corporation in
column (a), (b), (c), or (d) of line 11, as
applicable.
Line 12. Items Relating to
Reportable Transactions
Any amounts attributable to any
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
reportable transactions (as described in
Regulations section 1.6011-4) must be
included on 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
Example 15. Corporation J is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. J incurred seven
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).
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
attributable to that reportable
Example 14. The facts are the same
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 financial amounts and the taxable
amounts.
transaction described in Regulations
section 1.6011-4(b)(4), and the
as in Example 13, 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
remaining five abandonment losses are
not reportable transactions. J discloses
the reportable transactions giving rise to
the $12 million and $5 million losses on
separate Forms 8886 and sequentially
numbers them X1 and X2, respectively.
J must separately state and adequately
disclose the $12 million and $5 million
losses on Part II, line 12. The $12 million
statements, H treated this limitation as a
temporary difference. H must not report
the charitable contribution limitation of
Each difference attributable to a
reportable transaction must be
separately stated and adequately
Instructions for Schedule M-3 (Form 1120)
-17-
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
Schedule M-3. In column (b) or (c), as
applicable, adjust for any amounts
treated for U.S. income tax purposes as
current tax year. L prepares financial
statements in accordance with GAAP
using an overall accrual method of
interest income that are treated as some accounting. L uses an overall cash
other form of income for financial
accounting purposes, or vice versa. For
example, adjustments to interest
method of accounting for U.S. income
tax purposes. L's financial statements
for the year ending December 31 report
accounts receivable of $35,000, an
allowance for bad debts of $10,000, and
8886-X2, and with respect to each
reportable transaction reports the
appropriate amounts required for Part II, income resulting from adjustments
line 12, columns (a) through (d).
made in accordance with the
Alternatively, J's disclosures will be
adequate if the description provided for
each loss on the supporting statement
includes the names and 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
instructions for Part II, line 18, should be accounts payable of $17,000 related to
made in columns (b) and (c) of this
line 13.
current year acquisition and
reorganization legal and accounting
fees. In addition, for L's year ending
December 31, L reported financial
statement depreciation expense of
$15,000 and depreciation for U.S.
income tax purposes of $25,000. For L's
current tax year using an overall cash
method of accounting, L does not
recognize the $35,000 of revenue
attributable to the accounts receivable,
cannot deduct the $10,000 allowance
for bad debt, and cannot deduct the
$17,000 of accounts payable. In its
financial statements, L treats both the
difference in overall accounting
Complete Part II of Form 8916-A.
Enter the amounts from line 6, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 13, columns
(a) through (d), as applicable. Attach
Form 8916-A.
Do not report on this line 13 or
include on Form 8916-A amounts
reported in accordance with the
instructions for Part II, lines 9, 10, 11,
12, and 22.
abandonment losses.
Example 16. Corporation K is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. K enters into a
Note. Any corporation that files Form
1120 (or Form 1120-C) that (a) is
required to file Schedule M-3 (Form
1120) and has less than $50 million in
total assets at the end of the tax year, or
(b) is not required to file Schedule M-3
and voluntarily files Schedule M-3, is not
required to file Form 8916-A, but may
voluntarily do so.
methods used for financial statement
and U.S. income tax purposes and the
difference in depreciation expense as
temporary differences. L must combine
all adjustments attributable to the
differences related to the overall
transaction with contractual protection
that is a reportable transaction
described in Regulations section
1.6011-4(b)(4). This reportable
accounting methods on Part II, line 14.
As a result, L must report on Part II,
line 14, $8,000 in column (a) ($35,000 -
$10,000 - $17,000), ($8,000) in column
(b), and zero in column (d). L must not
report the accrual to cash adjustment
attributable to the legal and accounting
fees on Part III, line 24, Current year
acquisition or reorganization legal and
accounting fees. Because the difference
in depreciation expense does not relate
to the use of the cash or accrual method
of accounting, L must report the
transaction is the only reportable
transaction for K's current tax year and
results in a $7 million capital loss for
both financial accounting purposes and
U.S. income tax purposes. Although the
transaction does not result in a
Line 14. Total Accrual to Cash
Adjustment
This line is completed by a corporation
that prepares financial statements (or
books and records, if permitted) using
an overall accrual method of accounting
and uses an overall cash method of
accounting for U.S. income tax
difference, K is required to report on
Part II, line 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.
purposes, or vice versa. With the
exception of amounts required to be
reported on Part II, line 12, the
depreciation difference on Part III,
line 31, Depreciation, and report
corporation must report on Part II,
line 14, a single amount net of all
adjustments attributable solely to the
use of the different overall methods of
accounting (for example, adjustments
related to accounts receivable,
$15,000 in column (a), $10,000 in
column (b), and $25,000 in column (d).
Line 15. Hedging Transactions
Report on line 15, 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
accounts payable, compensation,
accrued liabilities, etc.), regardless of
whether a separate line on
Schedule M-3 corresponds to an item
within the accrual to cash reconciliation.
Differences not attributable to the use of
the different overall methods of
differences caused by treating hedging
transactions differently for financial
accounting purposes and for U.S.
income tax purposes. For example, if a
portion of a hedge is considered
Line 13. Interest Income
Report on Part II, line 13, column (a),
the total amount of interest income
included on Part I, line 11, and report on
Part II, line 13, column (d), the total
amount of interest income included on
Form 1120, page 1, line 28, that is not
required to be reported elsewhere on
accounting must be reported on the
appropriate lines of Schedule M-3 (for
example, a depreciation difference must
be reported on Part III, line 31).
ineffective under GAAP but is still a valid
hedge under section 1221(b)(2), the
difference must be reported on line 15.
Example 17. Corporation L is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
Instructions for Schedule M-3 (Form 1120)
-18-
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 GAAP purposes, must also be
reported here.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 15 and not
on Part II, line 16.
be reported elsewhere in Part II or Part
III.
current tax year for the other five assets
is $40,000 for financial accounting
purposes and $30,000 for U.S. income
tax purposes. In addition, C incurs $200
of meals expenses that C deducts in
computing net income for financial
accounting purposes. All $200 of the
meals expenses are subject to the 50%
limitation under section 274(n). In its
financial statements, C treats the
Examples of amounts that must be
included as cost of goods sold items are
amounts attributable to inventory
valuation, such as amounts attributable
to cost-flow assumptions, additional
costs required to be capitalized
(including depreciation) such as section
263A costs, inventory shrinkage
accruals, inventory obsolescence
reserves, and lower of cost or market
(LCM) write-downs.
Report any gain or loss from
inventory hedging transactions on
line 15 and not on Part II, line 17.
$50,000 depreciation and $100 of the
meals as other costs in computing cost
of goods sold. C must include on Form
8916-A and on Schedule M-3, Part II,
line 17, column (a), the $50,000 of
depreciation and $100 of meals. C must
also include a temporary difference of
$20,000 in column (b), a permanent
difference of ($50) in column (c), and
$70,050 in column (d) ($70,000
Line 16. Mark-to-Market Income
(Loss)
Report on line 16 any amount
Complete Part I of Form 8916-A.
Enter the amounts from line 8, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 17, columns
(a) through (d), as applicable. Attach
Form 8916-A, if applicable.
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) and 475(e)(2), such as certain
contracts to which section 1256(a)
applies.
depreciation and $50 meals expenses).
In addition, C must report on Part III,
line 31, for its current tax year income
statement, depreciation expense of
$40,000 in column (a), a temporary
difference of ($10,000) in column (b),
and $30,000 in column (d); and on Part
III, line 11, meals expenses of $100 in
column (a), a permanent difference of
($50) in column (c), and $50 in column
(d). All other cost of goods sold items
would be added to the amounts
Note. The entries in columns (a) and
(d) of Schedule M-3, line 17, are
negative amounts.
Do not report on line 17 or on Form
8916-A amounts such as:
Amounts reportable on Part II, line 12;
Any gain or loss from inventory
•
•
hedging transactions reportable on Part
II, line 15;
•
•
•
Amounts reportable on Part II, line 18;
Amounts reportable on Part II, line 21;
Mark-to-market income or (loss)
included on Part II, line 17, detailed in
this example and reported on Form
8916-A and on Part II, line 17, in the
appropriate columns.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line 15,
and not on line 16.
associated with the inventories of
dealers in securities under section 475,
reportable on Part II, line 16;
Line 18. Sale Versus Lease (for
Sellers and/or Lessors)
Section 481(a) adjustments related to
•
cost of goods sold or inventory
Traders in securities and commodi-
ties. For a trader in securities or
valuation, reportable on Part II, line 19;
Fines and penalties reportable on
•
Note. Also see the instructions for
purchasers and lessees in Part III,
line 34.
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a sale or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes. If the
commodities that made a valid election
under section 475(f) to use the
Part III, line 12;
Judgments, damages, awards, and
•
mark-to-market method to account for
securities or commodities held in
connection with a trading business that
files Form 4797, any Schedule M-3
entries required as a result of marking to
market these securities or commodities
are reported as follows: (a)
similar costs, reportable on Part III,
line 13; and
Amounts included on Part III, line 34.
•
Note. Any corporation that files Form
1120 (or Form 1120-C) that (a) is
required to file Schedule M-3 (Form
1120) and has less than $50 million in
total assets at the end of the tax year, or
(b) is not required to file Schedule M-3
and voluntarily files Schedule M-3, is not
required to file Form 8916-A, but may
voluntarily do so.
Example 18. Corporation C is a
calendar year taxpayer that placed in
service 10 depreciable fixed assets in a
prior tax year. C is required to file and
entirely complete Schedule M-3 for its
current tax year. C's total depreciation
expense for its current tax year for five
of the assets is $50,000 for financial
accounting purposes and $70,000 for
U.S. income tax purposes. C's total
annual depreciation expense for its
transaction is treated as a lease, the
seller/lessor reports the periodic
payments as gross rental income and
also reports depreciation expense. If the
transaction is treated as a sale, the
seller/lessor computes gain from the
sale of assets and reports the periodic
payments as payments of principal and
interest income.
mark-to-market gains and losses from
Form 4797, line 10, are included on Part
II, line 16, of Schedule M-3 (Form 1120);
(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), unless the instructions for
On Part II, line 18, column (a), report
the gross profit or gross rental income
for financial accounting purposes for all
sale or lease transactions that must be
given the opposite characterization for
U.S. income tax purposes. On Part II,
line 18, column (d), report the gross
profit or gross rental income for federal
Schedule M-3 require the amounts to be
reported on another line.
Line 17. Cost of Goods Sold
Report on line 17 any amounts
deducted as part of cost of goods sold
during the tax year, regardless of
whether the amounts would otherwise
Instructions for Schedule M-3 (Form 1120)
-19-
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 18,
and Part III, line 31, as applicable to
report the differences between columns
(a) and (d).
Example 19. Corporation M sells
and leases property to customers. M is
a calendar year taxpayer that files and
entirely completes Schedule M-3. For
financial accounting purposes, M
separate line for that income or expense issue discount and other imputed
item exists in Part II or Part III.
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;
2. Amounts that are imputed interest
on a deferred sales contract under
section 483;
3. Amounts treated as interest or
OID under the stripped bond rules under
section 1286; and
4. Amounts treated as OID under
the below-market interest rate rules
under section 7872.
Example 20. Corporation N is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. N was depreciating
certain fixed assets over an erroneous
recovery period and, effective for its
current tax year, N receives IRS consent
to change its method of accounting for
the depreciable fixed assets and begins
using the proper recovery period. The
change in method of accounting results
in a positive section 481(a) adjustment
of $100,000 that is required to be
spread over 4 tax years, beginning with
the current tax year. In its financial
accounts for each transaction as a sale.
For U.S. income tax purposes, each of
M's transactions must be treated as a
lease. In its financial statements, M
treats the difference in the financial
accounting and the U.S. income tax
treatment of these transactions as
Line 23a. Income Statement
Gain/Loss on Sale, Exchange,
Abandonment, Worthlessness,
or Other Disposition of Assets
Other Than Inventory and
Pass-Through Entities
statements, N treats the section 481(a)
adjustment as a temporary difference. N
must report on Part II, line 19, $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
temporary. During its current tax year, M recognize the remainder of the section
reports in its financial statements $1,000 481(a) adjustment earlier). N must not
Report on line 23a, column (a), all gains
and losses on the disposition of assets
except for (1) gains and losses on the
disposition of inventory, and (2) gains
and losses allocated to the corporation
from a pass-through entity (for example,
on Schedule K-1) that are included in
the net income (loss) of includible
corporations reported on Part I, line 11.
Reverse the amount reported in column
(a) in column (b) or (c), as applicable.
The corresponding gains and losses for
U.S. income tax purposes are reported
on Part II, lines 23b through 23g, as
applicable.
of sales and $700 of cost of goods sold
with respect to its current year lease
transactions. M receives periodic
payments of $500 in its current year with
respect to these current year
report the section 481(a) adjustment on
Part III, line 31.
Line 20. Unearned/Deferred
Revenue
transactions and similar transactions
from prior years and treats $400 as
principal and $100 as interest income.
For financial accounting purposes, M
reports gross profit of $300 ($1,000 -
$700) and interest income of $100 from
these transactions. For U.S. income tax
purposes, M reports $500 of gross
rental income (the periodic payments)
and (based on other facts) $200 of
depreciation deduction on the property.
On its current year 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 18, $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).
Report on line 20, column (a), amounts
of revenues included in Part I, line 11,
that were deferred from a prior financial
accounting year. Report on line 20,
column (d), amounts of revenues
recognizable for U.S. income tax
purposes in the current tax year that are
recognized for financial accounting
purposes in a different year. Also, report
on line 20, column (d), any amount of
revenues reported on line 20, column
(a), that are recognizable for U.S.
income tax purposes in the current tax
year. Use columns (b) and (c) of line 20,
as applicable, to report the differences
between columns (a) and (d).
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 (Form 1120),
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.
Line 20 must not be used to report
income recognized from long-term
contracts. Instead, use line 21.
Line 21. Income Recognition
From Long-Term Contracts
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 (Form 1120),
excluding capital losses from (a)
Line 19. Section 481(a)
Adjustments
A deduction for income attributable to
domestic production activities is
available for specified agricultural or
horticultural cooperatives (specified
cooperatives). See section 199A(g).
Also, see the Instructions for Form
8903.
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
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,
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 19, regardless of whether a
Line 22. Original Issue Discount
and Other Imputed Interest
Report on line 22 any amounts of
original issue discount (OID) and other
imputed interest. The term “original
Instructions for Schedule M-3 (Form 1120)
-20-
line 23f. Do not report on line 23c capital group, the Schedule M-3 adjustment for
Accounting Standards (SFAS) No. 130,
is reported on this line, describe the
losses carried over from a prior tax year
and utilized in the current tax year. See
the instructions for Part II, line 24,
the amount of the consolidated net
capital loss that is disallowed should not item(s) in detail. Examples of sufficiently
be made on the separate consolidating
detailed descriptions include “foreign
currency translation
regarding the reporting requirements for Schedules M-3 of the includible
capital loss carryovers utilized in the
current tax year.
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 Completing Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers, earlier.
adjustments—comprehensive income”
and “gains and losses on
available-for-sale
Line 23d. Net Gain/Loss
Reported on Form 4797,
Line 17, Excluding Amounts
From Pass-Through Entities,
Abandonment Losses, and
Worthless Stock Losses
securities—comprehensive income.”
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.
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
consolidated tax group and not at the
U.S. consolidated tax group level.
Report on line 23d the net gain or loss
reported on line 17 of Form 4797, Sales
of Business Property, excluding
Line 26. Total Income (Loss)
Items
Combine lines 1 through 25 and enter
the total on line 26.
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.
Note. Line 17, Cost of goods sold,
columns (a) and (d), if applicable, are
negative amounts which will affect the
totals entered on line 26.
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 Completing Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers, earlier.
Note. Traders in securities or
Line 27. Total Expense/
Deduction Items
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 16, earlier.
Report on Part II, line 27, columns (a)
through (d), as applicable, the negative
of the amounts reported on Part III,
line 39, columns (a) through (d), as
applicable. Report positive amounts as
negative and negative amounts as
positive. For example, if Part III, line 39,
column (a), reflects an amount of $1
million, then report on Part II, line 27,
column (a), ($1 million). Similarly, if Part
III, line 39, column (b), reflects an
Line 25. Other Income (Loss)
Items With Differences
Separately state and adequately
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.
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
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
Line 23f. Worthless Stock
Losses
amount of ($50,000), then report on Part
II, line 27, column (b), $50,000.
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 event that gives rise to a
worthless stock loss and the amount of
each loss.
Line 28. Other Items With No
Differences
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or
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.
deduction and the item is not described
or included in Part II, lines 1 through 25,
or Part III, lines 1 through 38, 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 (that is, 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
through 38. See Example 11, earlier.
The attached statement should have
five columns. The first column has the
description for the next four columns.
The second column is column (a)
Line 23g. Other Gain/Loss on
Disposition of Assets Other
Than Inventory
Report on line 23g any gains or losses
from the sale or exchange of property
other than inventory that are not
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 must
always have columns (a) + (b) + (c) =
(d). Each item with amounts in columns
(a), (b), (c), and (d) will be totaled and
included as one line on Part II, line 25.
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 (d)
the excess of the net capital losses over
the net capital gains reported on
Schedule D (Form 1120) by the
If any “comprehensive income,” as
defined by Statement of Financial
corporation. For a U.S. consolidated tax
Instructions for Schedule M-3 (Form 1120)
-21-
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.
columns (a) through (d), as applicable.
Attach Form 8916-A.
Line 29a. 1120 Subgroup
Reconciliation Totals
Do not report on Form 8916-A and
this line 8 amounts reported in
For filers other than a mixed group,
combine lines 26 through 28 and skip
lines 29b and 29c. On the
accordance with the instructions for Part
II, lines 9, 10, 11, and 12.
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. No Part III is
required to be completed for the
consolidated Schedule M-3 of a mixed
group.
Note. Any corporation that files Form
1120 (or Form 1120-C) that (a) is
required to file Schedule M-3 (Form
1120) and has less than $50 million in
total assets at the end of the tax year, or
(b) is not required to file Schedule M-3
and voluntarily files Schedule M-3, is not
required to file Form 8916-A, but may
voluntarily do so.
consolidated tax group but is retained in
the parent corporation's financial
Line 29b. PC Insurance
Subgroup Reconciliation Totals
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.
Line 9. Stock Option Expense
Line 29b is only used by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.
Report on line 9, column (a), amounts
expensed on Part I, line 11, net income
per the income statement, that are
attributable to all stock options. Report
on line 9, column (d), deduction
Line 29c. Life Insurance
Line 7. Foreign Withholding
Taxes
Subgroup Reconciliation Totals
amounts attributable to all stock options.
Line 29c is only used by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.
Report on line 7, column (a), the amount
of foreign withholding taxes included in
financial accounting net income on Part
I, line 11. If the corporation is deducting
foreign tax, use column (b) or (c), as
applicable, to correct for any difference
between foreign withholding tax
Line 10. Other Equity-Based
Compensation
Report on line 10 any amounts for
equity-based compensation or
Line 30. Reconciliation Totals
Mixed groups, see Schedule M-3
Consolidation for Mixed Groups
(1120/L/PC), earlier.
consideration that are reflected as
expense for financial accounting
included in financial accounting net
income and the amount of foreign
withholding taxes being deducted on
the return. If the corporation 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).
purposes (column (a)) or deducted in
the U.S. income tax return (column (d))
other than amounts reportable
Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return—Expense/
elsewhere on Schedule M-3, Parts II
and III (for example, on Part III, line 9,
for stock options expense). Examples of
amounts reportable on line 10 include
payments attributable to employee
stock purchase plans (ESPPs),
Line 8. Interest Expense
Report on Part III, line 8, column (a), the
total amount of interest expense
phantom stock options, phantom stock
units, stock warrants, stock appreciation
rights, qualified equity grants, and
restricted stock, regardless of whether
such payments are made to employees
or nonemployees, or as payment for
property or compensation for services.
Deduction Items
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 39.
included on Part I, line 11, and report on
Part III, line 8, column (d), the total
amount of interest deduction included
on Form 1120, page 1, line 28, that is
not required to be reported elsewhere
on Schedule M-3. In column (b) or (c),
as applicable, include any adjustments
for any amounts treated for U.S. income
tax purposes as interest deduction that
are treated as some other form of
expense for financial accounting
Line 11. Meals and
Entertainment
Report on line 11, column (a), any
amounts paid or accrued by the
Lines 1 Through 6. Income Tax
Expense
corporation during the tax year for
meals, beverages, and entertainment
that are accounted for in financial
accounting income, regardless of the
classification, nomenclature, or
purposes, or vice versa. For example,
adjustments to interest expense/
If the corporation does not distinguish
between current and deferred income
tax expense in its financial statements
(or its books and records, if applicable),
report income tax expense as current
income tax expense using lines 1, 3,
and 5, as applicable.
deduction resulting from adjustments
made in accordance with the
terminology used for such amounts, and
regardless of how or where such
amounts are classified in the
instructions for Part III, line 34, Purchase
versus lease (for purchasers and/or
lessees), should be made in columns
(b) and (c), as applicable, on this line 8.
corporation's financial income statement
or the income and expense accounts
maintained in the corporation's books
and records. Report only amounts not
otherwise reportable elsewhere on
A U.S. consolidated tax group must
complete lines 1 through 6 in
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 8,
accordance with the allocation of tax
expense among the members of the
U.S. consolidated tax group in the
Instructions for Schedule M-3 (Form 1120)
-22-
Schedule M-3, Parts II and III (for
example, Part II, line 17).
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.
and life insurance coverage, dental
coverage, etc.).
Line 12. Fines and Penalties
Line 18. Deferred
Compensation
Report on line 12 any fines or similar
penalties paid to a government or other
authority for the violation of any law for
which fines or penalties are assessed.
All fines and penalties expensed in
financial accounting income (paid or
accrued) must be included on this
line 12, column (a), regardless of the
government or other authority that
imposed the fines or penalties;
Report on line 18, 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, in column
(a). Report on line 18, 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
Do not report on line 13 amounts
required to be reported in accordance
with the instructions for Part III, line 12.
Do not report on line 13 amounts
recovered from insurers or any other
indemnitors for any judgments,
damages, awards, or similar costs
described above.
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 corporation's financial
income statement or the income and
expense accounts maintained in the
corporation's books and records. Also
report on line 12, column (a), the
reversal of any overaccrual of any
amount described in this paragraph.
See section 162(f) for additional
Line 14. Parachute Payments
Report on line 14, column (a), the total
expense included in financial
Schedule M-3. For example, report
originations and reversals of deferred
compensation subject to section 409A
on line 18.
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 this line 14.
Line 20. Charitable
Contribution of Intangible
Property
Report on line 20 any charitable
contribution of intangible property, for
example, contributions of:
guidance.
Intellectual property, patents
•
Report on line 12, 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.
Do not report on line 12 amounts
required to be reported in accordance
with the instructions for Part III, line 13.
Do not report on line 12 amounts
recovered from insurers or any other
indemnitors for any fines and penalties
described above.
(including any amounts of additional
contributions allowable by virtue of
income earned by donees subsequent
to the year of donation), copyrights, and
trademarks;
Line 15. Compensation With
Section 162(m) Limitation
Report on line 15, column (a), the total
amount of current compensation
Securities (including stocks and their
•
derivatives, stock options, and bonds);
Conservation easements (including
expense for the corporate officers to
whom section 162(m) applies. Report in
column (b) or (c), as applicable, the
nondeductible amount of current
•
scenic easements or air rights);
Railroad rights of way;
Mineral rights; and
•
•
•
compensation in excess of $1 million
($500,000 if the corporation receives or
has received financial assistance under
the Treasury Troubled Asset Relief
Program (TARP)). Report the deductible
compensation in column (d). If a
Other intangible property.
Line 21. Charitable
Contribution Limitation/
Carryforward
Report as a negative amount on line 21,
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.
payment is subject to limitation under
both sections 162(m) and 280G, report
the total payment on Part III, line 14,
Parachute payments. See Regulations
section 1.162-27(g) for the interaction
between sections 162(m) and 280G.
Line 13. Judgments, Damages,
Awards, and Similar Costs
Report on line 13, 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 13,
column (a), the reversal of any
overaccrual of any amount described in
this paragraph.
Line 16. Pension and
Profit-Sharing
Report on line 16 any amounts
attributable to the corporation's pension
plans, profit-sharing plans, and any
other retirement plans.
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
Line 17. Other Post-Retirement
Benefits
Report on line 17 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 16 (for example, retiree health
Report on line 13, column (d), any
such amounts as are described in the
preceding paragraph that are includible
carryforward utilized, should not be
made on the separate consolidating
Schedules M-3 of the includible
Instructions for Schedule M-3 (Form 1120)
-23-
corporations, but on the separate
consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group). See
Completing Schedule M-3 and Certain
Allocations, Limitations, and Carryovers,
earlier.
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.
actual write-offs of accounts receivable
included on Part I, line 11. Report in
column (d) the amount of bad debt
expense deductible for federal income
tax purposes under section 166.
Line 25. Current Year
Acquisition/Reorganization
Other Costs
Line 33. Corporate Owned Life
Insurance Premiums
Report on line 33 all amounts of
Line 22. Domestic Production
Activities Deduction
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
insurance premiums attributable to any
life insurance policy if the corporation is
directly or indirectly a beneficiary under
the policy or if the policy has a cash
value. Report in column (d) the amount
of the premiums that are deductible for
federal income tax purposes.
A deduction for income attributable to
domestic production activities is
available for specified agricultural or
horticultural cooperatives (specified
cooperatives). See section 199A(g).
Also, see the Instructions for Form
8903.
Line 34. Purchase Versus
Lease (for Purchasers and/or
Lessees)
Report on line 22, column (d), the
cooperative's section 199A(g)
deduction that is reported on Form
1120-C. Complete columns (b) and (c)
as appropriate. Do not report any
portion of the cooperative’s section
199A(g) deduction on any other line of
Schedule M-3.
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line other
Note. Also see the instructions for
sellers and/or lessors in the instructions
for Part II, line 18.
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a purchase or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes.
acquisition/reorganization costs
incurred in connection with the
liquidation of a subsidiary, a spin-off of a
subsidiary, or an initial public stock
offering.
Line 23. Current Year
Acquisition or Reorganization
Investment Banking Fees
Line 26. Amortization/
Impairment of Goodwill
Report on line 26 amortization of
goodwill or amounts attributable to the
impairment of goodwill.
Report on line 23 any investment
banking fees paid or incurred in
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.
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
Line 27. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
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
investment banking fees incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.
Report on line 27 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.
Report in column (a) gross rent
expense for a transaction treated as a
lease for financial accounting purposes
but as a sale for U.S. income tax
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.
purposes. Report in column (d) gross
rental deductions for a transaction
treated as a lease for U.S. income tax
purposes but as a purchase for financial
accounting purposes. Report interest
expense for such transactions on Part
III, line 8, column (a) or (d), as
Line 24. Current Year
Acquisition or Reorganization
Legal and Accounting Fees
Line 29. Reserved
When using this line to figure amounts
on other tax forms or worksheets, this
line should be considered to be zero.
Report on line 24 any legal and
applicable. Report depreciation
accounting fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (for example,
stock or assets) or tax-free
expense or deductions for such
transactions on Part III, line 31, column
(a) or (d), as applicable. Use columns
(b) and (c) of Part III, lines 8, 31, and 34,
as applicable, to report the differences
between columns (a) and (d) for such
recharacterized transactions.
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, 11, or
17).
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
Example 21. U.S. corporation X
acquired property in a transaction that,
for financial accounting purposes, X
treats as a lease. X is a calendar year
taxpayer that files and entirely
Line 32. Bad Debt Expense
Report on line 32, column (a), any
amounts attributable to an allowance for
uncollectible accounts receivable or
completes Schedule M-3 for its current
Instructions for Schedule M-3 (Form 1120)
-24-
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
financial statements, X treats the
difference between the financial
accounting and U.S. income tax
treatment of this transaction as a
temporary difference. For its current tax
year, X reports in its financial
attributable to obtaining a patent, and
(5) research in social sciences.
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
For tax years beginning after
December 31, 2021, for U.S. income tax
purposes, research and experimental
expenditures paid or incurred by a
taxpayer in connection with the
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.
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. 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
statements $1,000 of gross rental
expense that, for U.S. income tax
purposes, is recharacterized as a $700
payment of principal and a $300
payment of interest, accompanied by a
depreciation deduction of $1,200
(based on other facts). On its
Line 36. Section 118 Exclusion
Report on line 36 any inducements
received in the current year and treated
as contributions to the capital of a
corporation by a nonshareholder.
Report in column (a) any income
amount as a negative number and any
expense amount as a positive number.
Schedule M-3, X must report the
following on Part III, line 34: column (a)
$1,000, its financial accounting gross
rental expense; column (b), ($1,000);
and column (d), zero. On Part III, line 8,
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.
otherwise allowable related to such
costs is reported in column (b).
Example 22. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, X incurred $100,000 of research
and development costs that X
Under the general rule, any
contribution in aid of construction or any
contribution by a governmental 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.
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).
Any contribution in aid of construction
•
Line 35. Research and
Development Costs
Report in column (a) the amount of
research and development
or any other contribution as a customer
or potential customer.
Any contribution by any civic group.
Any contribution by any governmental
•
•
expenditures reported as a deduction in
your financial statements (or its books
and records, if applicable), on Part I,
line 11. Report in column (d) the amount
of amortization deductions of specified
research or experimental expenditures
and research or experimental
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.
Example 23. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, X incurred $10,000 of research
and development costs related to social
sciences that it recognized as an
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 38,
Other expense/deduction items with
differences.
Corporations must identify on an
accompanying statement referencing
line 36 the fair market value of land or
other property (including cash) provided
to the corporation by any
expenditures included on Form 4562,
Part VI, line 44, and in total deductions
on Form 1120, page 1, line 27. 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
nonshareholder, including a
governmental unit, 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), or
factory(ies) (“inducements”).
Example 24. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, X paid $75,000 to acquire or
in-license intangible assets under a
collaborative arrangement with another
company that X recognized as a
differences between financial and tax
accounting for (1) deferral and
On the accompanying statement,
also identify any inducements that
include refundable or transferable tax
credits, including transferable credits
that were sold.
amortization of research expenditures
that began in your 2022 tax year, (2) a
section 59(e) election that began before
your 2022 tax year, (3) reduction of
section 174 expenditures under section
280C or section 482, (4) costs
The statement must separately state,
adequately disclose, and identify all of
the dollar amounts summarized by this
line. An accompanying statement is
research and development expense in
its financial statements. X amortizes
Instructions for Schedule M-3 (Form 1120)
-25-
required even if there are no dollar
amounts reported on line 36.
the expense/deduction name for book
purposes for the amount recorded in
column (a) and describes the
Reserves and contingent liabilities.
Report on line 38 amounts related to the
change in each reserve or contingent
liability that is not required to be
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
adjustment being recorded in column
(b) or (c). The entire description
reported elsewhere on Schedule M-3.
For example, (1) amounts relating to
changes in reserves for litigation must
be reported on Part III, line 13,
completes the tax description for the
amount included in column (d) for each
item separately stated on this line.
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.
See Example 9, earlier.
Report on line 38 the amortization of
various items of prepaid expense, such
as prepaid subscriptions and license
fees, prepaid insurance, etc.
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.
The statement attached to the
Schedule M-3 for line 38 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
Line 37. Section 162(r)—FDIC
Premiums Paid by Certain
Large Financial Institutions
Report on line 38, column (a),
expenses included in net income
reported on Part I, line 11, that are
related to reserves and contingent
liabilities. Report on line 38, 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
reserves that are allowed for book
purposes, but not for tax purposes,
include warranty reserves, restructuring
reserves, reserves for discontinued
operations, and reserves for
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
Report on line 37, column (a), the total
amount paid or accrued as FDIC
premiums included on Part I, line 11.
Report on line 37, column (c), any
disallowed amounts, subject to the
applicable percentage, of any FDIC
premiums paid or included by the large
financial institution. For this purpose, the
large financial institution includes
members of its expanded affiliated
group, as defined in section 162(r)(6)
(B). The disallowance does not apply if
the institution’s (including members of
its expanded affiliated group’s) total
consolidated assets (determined as of
the close of the tax year) do not exceed
$10 billion.
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
acquisitions and dispositions. Only
report on line 38 items that are not
required to be reported elsewhere on
Schedule M-3, Parts II and III.
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.
Example 26. Corporation Q is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On July 1 of each year,
Q has a fixed liability for its annual
insurance premiums on its home office
building that provides a 12-month
coverage period beginning July 1
through June 30. In addition, Q
The applicable percentage is the
excess of the corporation’s total
consolidated assets over $10 billion,
divided by $40 billion. For taxpayers
with total consolidated assets of $50
billion or more, the applicable
The attached statement should have
five columns. The first column has the
description for the next four columns.
The second column is column (a)
percentage is 100%. See section 162(r).
historically prepays 12 months of
expense per income statement, the third
column is column (b) temporary
Example 25. Corporation X has
total consolidated assets of $20 billion.
Under section 162(r), no deduction is
allowed for 25% (($20,000,000,000 –
$10,000,000,000) / $40,000,000,000) of
FDIC premiums.
advertising expenses 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
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 38 must always have
columns (a) + (b) + (c) = (d). Each item
with amounts in columns (a), (b), (c),
and (d) will be totaled and included as
one line on Part III, line 38.
Line 38. Other Expense/
Deduction Items With
Differences
Separately state and adequately
disclose on Part III, line 38, all items of
expense/deduction that are not
otherwise listed on Part III, lines 1
through 37.
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
difference attributable to the annual
statement treatment and U.S. income
tax treatment of the prepaid insurance
as a temporary difference. As there is
no difference between the book and tax
treatment of advertising expense, it
should be included on Part II, line 28,
Other items with no differences.
Attach a statement that describes
and itemizes the type of expense/
deduction and the amount of each item,
and provides a description that states
available-for-sale
securities—comprehensive income.”
Instructions for Schedule M-3 (Form 1120)
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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 38, must be
separately stated and adequately
disclosed as follows.
Line 38—Example 26
Statement Concerning Other Expense/Deduction Items With Differences
Column (a) Expense Column (b) Temporary
Column (c)
Permanent Difference
Column (d) Deduction
per Tax Return
Description
per Income Statement
Difference
Prepaid insurance premium
expensed not capitalized
$250,000
$300,000
$550,000
$250,000
($100,000)
$150,000
-0-
-0-
-0-
$500,000
$200,000
$700,000
Legal expense reserve
Total line 38
line 39, columns (a) through (d), as
applicable. Report positive amounts as
negative and negative amounts as
positive. For example, if Part III, line 39,
column (a), reflects an amount of $1
million, then report on Part II, line 27,
column (a), ($1 million). Similarly, if Part
III, line 39, column (b), reflects an
amount of ($50,000), then report on Part
II, line 27, column (b), $50,000.
Line 39. 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,
Instructions for Schedule M-3 (Form 1120)
-27-
Index
Includible 9
Reorganization:
A
J
Amortization 24
Abandonment 20
Judgments 23
Equity method foreign
Legal and accounting
fees 24
Accounting standards,
corporations 15
L
Equity-based
Accrual to cash
compensation 22
Reserved 24
adjustment 18
Exchange 20
Acquisition:
Life insurance premiums,
Expense/deduction:
Expense/deduction items:
Reserves and contingent
Amortization 24
liabilities 26
Life insurance subgroup
Restatements 7
Legal and accounting
fees 24
Revenue, unearned/
Life/non-life loss limitation
deferred 20
F
Adequately disclosed,
Limitations 3
S
Adjustments 10
Schedule:
L 3
Financial information and
net income (loss)
Allocations, limitations, and
M
carryovers 3
reconciliation 6
Mark-to-market 19
Mixed group:
Awards 23
Financial statements:
Non-tax-basis 7
Tax-basis 7
M-2 4
Section 481(a)
adjustments 20
Foreign:
1120/L/PC 5
B
Separately stated and
Checkboxes 6
Corporations 15
Distributions 16
Dividends 15
Subgroup
Start-up costs:
sub-consolidation 6
Amortization 24
C
Statutory accounting
Partnerships 16
Carryovers 3
N
adjustments 10
Non-tax-basis financial
statements and tax-basis
Subgroup
Carryforward 23
sub-consolidation: 1120
subgroup, 1120-PC
subgroup, and 1120-L
subgroup 5
Nonincludible:
G
Limitation 23
Gain/loss on disposition of
Compensation with section
assets 21
Nonincludible entities:
Eliminations 9
Goodwill 24
T
Tax-basis financial
Consolidated vs.
statements 7
O
consolidating 5
Groups, consolidated vs.
consolidating 5
Consolidation 16
U
U.S.:
Consolidation for mixed
P
groups:
H
Dividends 16
1120/L/PC 5
Partnerships:
Partnerships 16
Contingent liabilities,
Foreign 16
I
Corporate owned life
U.S. 16
W
PC insurance subgroup
Includible entities:
Eliminations 9
Other 9
Worldwide consolidated net
D
Pension and
Worthlessness 20
profit-sharing 23
Damages 23
Inclusions 15
Income:
Depreciation 24
Publicly traded common
Statement 7
stock 7
Income (loss):
Differences 21
Interest:
Dividends 15
R
Reconciliation:
Domestic production
Expense 22
Mixed group subgroup
sub-consolidation 6
Imputed 20
E
Income 18
Totals 22
Entities:
Disregarded 9
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