Form 1120-S Instruksi untuk Jadwal M-3
Instruksi untuk Jadwal M-3 (Form 1120-S), Pendapatan Bersih (Loss) Rekonsiliasi untuk S Corporation Dengan Total Aset $10 Juta atau Lebih
Rev. Oktober 2019
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- Form 1120-S Jadwal M-3 - Pendapatan Bersih (Loss) Rekonsiliasi untuk S Corporation Dengan Total Aset dari $10 Juta atau Lebih
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1120-S)
(Rev. December 2019)
Net Income (Loss) Reconciliation for S Corporations With Total Assets of
$10 Million or More
Section references are to the Internal Revenue
Code unless otherwise noted.
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0013
separate U.S. income tax returns. The
consolidated accrual basis financial
statements for C and D report total
assets at the end of the tax year of $12
million after intercompany eliminations.
C reports separate company total
year-end assets on its Schedule L of $7
million. D reports separate company
total year-end assets on its Schedule L
of $6 million. Neither C nor D is required
to file Schedule M-3 for the current tax
year. C or D may voluntarily file
Future Developments
For the latest information about
developments related to Schedule M-3
(Form 1120-S) and its instructions, such
as legislation enacted after they were
published, go to
Who Must File
Any corporation required to file Form
1120-S, U.S. Income Tax Return for an
S Corporation, that reports on
Schedule L of Form 1120-S total assets
at the end of the corporation's tax year
that equal or exceed $10 million must
file Schedule M-3 (Form 1120-S). A
corporation or group of corporations that
completes Parts II and III of
General Instructions
Schedule M-3 for the current tax year. If
C or D doesn't file Schedule M-3, it must
file Schedule M-1. If C or D files
Applicable schedule and instruc-
tions. Due to the generally unchanging
nature of Schedule M-3 (Form 1120-S),
these instructions will no longer be
updated annually, unless necessary.
Schedule M-3, isn't required to
Schedule M-3, it must either: (i)
complete Form 1120-S, Schedule M-1,
Reconciliation of Income (Loss) per
Books With Income (Loss) per Return.
complete Schedule M-3 entirely; or (ii)
complete Schedule M-3 through Part I
and complete Schedule M-1 instead of
completing Parts II and III of
For previous tax years, see the
applicable Schedule M-3 (Form 1120-S)
and instructions. For example, use the
2018 Schedule M-3 (Form 1120-S) with
the 2018 Instructions for Schedule M-3
(Form 1120-S) for tax years ending
December 31, 2018, through December
30, 2019.
A U.S. corporation filing Form 1120-S
that isn't required to file Schedule M-3
may voluntarily file Schedule M-3
instead of Schedule M-1.
Schedule M-3.
Completing Schedule M-3
(Form 1120-S)
Any corporation filing Schedule M-3
must check the box on Form 1120-S,
item C, indicating that Schedule M-3 is
attached (whether required or
voluntary).
A corporation that is required to file
Schedule M-3 (Form 1120-S) and has at
least $50 million total assets at the end
of the tax year must complete
Purpose of Schedule
Schedule M-3, Part I, asks certain
questions about the corporation's
financial statements and reconciles
financial statement worldwide net
income (loss) for the corporation (or
consolidated financial statement group,
if applicable), as reported on Part I,
line 4a, to income (loss) per the income
statement of the corporation for U.S.
income tax purposes, as reported on
Part I, line 11.
Schedule M-3 (Form 1120-S) entirely.
Example 1.
A corporation that (a) is required to
file Schedule M-3 (Form 1120-S) and
has less than $50 million total assets at
the end of the tax year or (b) isn't
required to file Schedule M-3 (Form
1120-S) and voluntarily files
1. U.S. corporation A owns U.S.
subsidiary B and foreign subsidiary F.
For its current tax year, A prepares
consolidated financial statements with B
and F that report total assets of $12
million. A files a U.S. income tax return
with B (a corporation that has made a
qualified subchapter S subsidiary
election) and reports total assets on
Schedule L of $8 million. A's U.S. tax
group isn't required to file Schedule M-3
for the current tax year. A may
Schedule M-3 (Form 1120-S) must
either (i) complete Schedule M-3 (Form
1065) entirely or (ii) complete
Schedule M-3 (Form 1120-S) through
Part I and complete Form 1120-S,
Schedule M-1 instead of completing
Parts II and III of Schedule M-3 (Form
1120-S). If the corporation chooses to
complete Form 1120-S, Schedule M-1
instead of completing Parts II and III of
Schedule M-3 (Form 1120-S), line 1 of
Form 1120-S, Schedule M-1 must equal
line 11 of Part I of Schedule M-3 (Form
1120-S).
Schedule M-3, Parts II and III,
reconcile financial statement net income
(loss) for the U.S. tax return (per
Schedule M-3, Part I, line 11) to total
income (loss) on Form 1120-S,
Schedule K, line 18.
voluntarily file Schedule M-3 for the
current tax year. If A doesn't file
Schedule M-3, it must file
Schedule M-1. If A files Schedule M-3, it
must either: (i) complete Schedule M-3
entirely; or (ii) complete Schedule M-3
through Part I and complete
Where To File
If the corporation is required to file (or
voluntarily files) Schedule M-3 (Form
1120-S), the corporation must file Form
1120-S and all attachments, schedules,
including Schedule M-3 (Form 1120-S),
and statements at the following
address.
Schedule M-1 instead of completing
Parts II and III of Schedule M-3.
For any part of Schedule M-3 (Form
1120-S) that is completed, all columns
must be completed, all applicable
questions must be answered, all
numerical data asked for must be
2. U.S. corporation C owns U.S.
subsidiary D. For its current tax year, C
prepares consolidated financial
statements with D, but C and D file
Nov 21, 2019
Cat. No. 48245B
provided, any statement required to
support a line item must be attached
and provide the information required for
that line item.
Total assets shown on Schedule L,
line 15, column (d), must equal the total
assets of the corporation as of the last
day of the tax year, and must be the
same total assets reported by the
corporation in the non-tax-basis
Entity Considerations for
Schedule M-3
For purposes of Schedule M-3,
references to the classification of an
entity (for example, as a corporation, a
partnership, or a trust) are references to
the treatment of the entity for U.S.
income tax purposes. An entity that
generally is disregarded as separate
from its owner for U.S. income tax
purposes (disregarded entity) mustn't
be separately reported on Schedule M-3
except, if required, on Part I, line 7a, 7b,
or 7c. On Schedule M-3, Parts II and III,
any item of income, gain, loss,
Any corporation filing Schedule M-3
must check the box on Form 1120-S,
item C, indicating that Schedule M-3 is
attached (whether required or
voluntary).
financial statements, if any, used for
Schedule M-3. If the corporation doesn't
prepare non-tax-basis financial
statements, Schedule L must be based
on the corporation's books and records.
The Schedule L balance sheet can
show tax-basis balance sheet amounts
if the corporation is allowed to use
books and records for Schedule M-3
and the corporation's books and records
reflect only tax-basis amounts.
Other Issues Affecting
Schedule M-3 Filing
Requirements
If a corporation was required to file
Schedule M-3 for the preceding tax
year, but reports on Form 1120-S,
Schedule L, total assets at the end of
the current tax year of less than $10
million, the corporation isn't required to
file Schedule M-3 for the current tax
year.
deduction, or credit of a disregarded
entity must be reported as an item of its
owner. In particular, the income or loss
of a disregarded entity mustn't be
reported on Part II, line 7, 8, or 9 as from
a separate partnership or other
Generally, total assets at the
beginning of the year (Schedule L,
line 15, column (b)) must equal total
assets at the close of the prior year
(Schedule L, line 15, column (d)). For
each Schedule L balance sheet item
reported for which there is a difference
between the current opening balance
sheet amount and the prior closing
balance sheet amount, attach a
statement that reports the balance sheet
item, the prior closing amount, the
current opening amount, and a short
explanation of the difference. In
particular, indicate if the differences
occurred because of acquisitions or
mergers.
pass-through. The financial statement
income or loss of a disregarded entity
other than a qualified subchapter S
subsidiary (QSub) is included on Part I,
line 7b, if and only if its financial
For purposes of determining whether
the corporation has total assets at the
end of the current tax year of $10 million
or more, the corporation's total assets
must be determined on an overall
accrual method of accounting unless
both of the following apply: (a) the tax
return of the corporation is prepared
using an overall cash method of
statement income or loss is included on
Part I, line 11, but not on Part I, line 4a.
The financial statement income or loss
of a QSub is included on Part I, line 7c, if
and only if its financial statement
income or loss is included on Part I,
line 11, but not on Part I, line 4a.
accounting, and (b) no includible entity
in the U.S. tax return prepares or is
included in financial statements
Qualified Subchapter S Subsidiaries
(QSubs). Because a QSub is a
prepared on an accrual basis.
For purposes of measuring total
assets at the end of the year, the
corporation's assets may not be netted
or reduced by the corporation's
disregarded entity, for purposes of
Schedule M-3, Schedule L, and the tax
return in general, the subsidiary is
deemed to have liquidated into the
parent S corporation. As such, all
QSubs are treated as divisions of the S
corporation parent and they mustn't be
separately reported on Schedule M-3
except, if required, on Part I, line 7c.
See the instructions for Part I,
line 1, for a discussion of
non-tax-basis income
TIP
statements and related non-tax-basis
balance sheets to be used in the
preparation of Schedule M-3 and of
Form 1120-S, Schedule L.
liabilities. In addition, total assets may
not be reported as a negative amount. If
Schedule L is prepared on a
non-tax-basis method, an investment in
a partnership may be shown as
appropriate under the corporation's
non-tax-basis method of accounting,
including, if required by the
Other Form 1120-S
Schedules Affected by
Schedule M-3
Reportable Entity Partner
Reporting Responsibilities
A reportable entity partner to a
partnership filing Form 1065, U.S.
Return of Partnership Income, is an
entity that:
corporation's reporting methodology,
the equity method of accounting for
investments. If Schedule L is prepared
on a tax-basis method, an investment
by the corporation in a partnership must
be shown as an asset and measured by
the corporation's adjusted basis in its
partnership interest. Any liabilities
contributing to such adjusted basis must
be shown on Schedule L as corporate
liabilities. In any event, any investments
or other assets reported on Schedule L
can never be reported as negative
amounts.
Requirements
Schedule L
If a non-tax-basis income statement and
related non-tax-basis balance sheet is
prepared for any purpose for a period
ending with or within the tax year,
Schedule L must be prepared showing
non-tax-basis amounts. See the
Owns or is deemed to own, directly or
•
indirectly, under these instructions, a
50% or greater interest in the income,
loss, or capital of the partnership on any
day of the tax year; and
Was required to file Schedule M-3 on
•
instructions for Part I, line 1, for a
discussion of non-tax-basis income
statements and related non-tax-basis
balance sheets prepared for any
purpose and the impact on the selection
of the income statement used for
Schedule M-3 and the related
its most recently filed U.S. federal
income tax return or return of income
filed prior to that day.
For the purposes of these
Schedule M-1
A corporation that completes Parts II
and III of Schedule M-3 isn't required to
complete Form 1120-S, Schedule M-1.
instructions:
1. The parent corporation of a
consolidated tax group is deemed to
own all corporate and partnership
non-tax-basis balance sheet amounts
that must be used for Schedule L.
Instructions for Schedule M-3 (Form 1120-S)
-2-
interests owned or deemed to be owned
The reportable entity partner must
is deemed to have non-tax-basis
under these instructions by any member keep copies of required reports it makes income statements and the related
of the tax consolidated group;
to partnerships under these instructions. non-tax-basis balance sheets for the
Each partnership must keep copies of
the required reports it receives under
these instructions from reportable entity
partners.
current tax year for purposes of
Schedule M-3 and Schedule L if such
non-tax-basis financial statements were
prepared for and presented to
2. The owner of a disregarded entity
is deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions by
the disregarded entity;
3. The owner of 50% or more of a
corporation by vote on any day of the
corporation tax year is deemed to own
all corporate and partnership interests
owned or deemed to be owned under
these instructions by the corporation
during the corporation tax year;
4. The owner of 50% or more of
partnership income, loss, or capital on
any day of the partnership tax year is
deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions by
the partnership during the partnership
tax year; and
5. The beneficial owner of 50% or
more of the beneficial interest of a trust
or nominee arrangement on any day of
the trust or nominee arrangement tax
year is deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions by
the trust or nominee arrangement.
management, creditors, shareholders,
government regulators, or any other
third parties for a period ending with or
within the tax year.
Example 2. A, a limited liability
company (LLC) filing a Form 1065 for its
current tax year is owned 50% by U.S.
corporation Z which files Form 1120-S.
A owns 50% of each of B, C, D, and E,
each also an LLC filing a Form 1065 for
its current tax year. Z was first required
to file Schedule M-3 (Form 1120-S) for
its prior corporate tax year ended
If a non-tax-basis income statement
is prepared that is a certified
non-tax-basis income statement for the
period ending with or within the tax year,
the corporation must check “Yes” for
Part I, line 1a, and use that income
statement for Schedule M-3. If no
certified non-tax-basis income
December 31 and filed its Form 1120-S
with Schedule M-3 on September 15.
As of September 16, Z was a reportable
entity partner regarding A and, through
A, regarding B, C, D, and E. On October
5, Z reports to A, B, C, D, and E, as it is
required to do within 30 days of
statement is prepared but an unaudited
non-tax-basis income statement is
prepared for the period ending with or
within the tax year, the corporation must
check “Yes” for Part I, line 1b, and use
that income statement for
September 16, that Z is a reportable
entity partner directly owning (regarding
A) or deemed to own indirectly
Schedule M-3.
(regarding B, C, D, and E) a 50%
interest. So, because Z was a
Order of priority in accounting
standards. If two or more
reportable entity partner for its current
tax year, each of A, B, C, D, and E is
required to file Schedule M-3 (Form
non-tax-basis income statements are
both certified non-tax-basis income
1065) for its current tax year, regardless statements for the period, the income
of whether they would otherwise be
required to file Schedule M-3 for that
year.
statement prepared according to the
following order of priority in accounting
standards must be used.
A reportable entity partner to a
partnership (as defined above) must
report the following to the partnership
within 30 days of first becoming a
reportable entity partner and, after first
reporting to the partnership under these
instructions, after that within 30 days of
the date of any change in the interest it
owns or is deemed to own, directly or
indirectly, under these instructions, in
the partnership.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
Specific Instructions
for Part I
2. International Financial Reporting
Standards (IFRS).
3. Any other International
Part I. Financial
Information and Net
Income (Loss)
Accounting Standards (IAS).
4. Other regulatory accrual
accounting.
1. Name.
2. Mailing address.
Reconciliation
5. Any other accrual accounting
standard.
Line 1. Questions Regarding
the Type of Income Statement
Prepared
For Part I, lines 1 through 12, use only
the financial statements of the U.S.
corporation filing the U.S. income tax
return.
3. Taxpayer identification number
6. Any fair market value standard.
7. Any cash basis standard.
(TIN or EIN), if applicable.
4. Entity or organization type.
If no non-tax-basis income statement
is certified and two or more
5. State or country in which it is
organized.
non-tax-basis income statements are
prepared, the income statement
prepared according to the first listed of
the accounting standards listed above
must be used.
6. Date on which it first became a
reportable entity partner.
7. Date for which it is reporting a
change in its ownership interest in the
partnership, if applicable.
8. The interest in the partnership it
owns or is deemed to own in the
partnership, directly or indirectly (as
defined under these instructions) as of
the date for which it is reporting.
Non-Tax-Basis Financial
Statements and Tax-Basis
Financial Statements
If no non-tax-basis financial
A tax-basis income statement is allowed
statements are prepared for a U.S.
corporation filing Schedule M-3 (Form
1120-S), the U.S. corporation must
check “No” on questions 1a and 1b, skip
Part I, lines 2, 3a, and 3b, and enter the
net income (loss) per the books and
records of the U.S. corporation on Part I,
line 4a.
for Schedule M-3 and a tax-basis
balance sheet for Schedule L only if no
non-tax-basis income statement and no
non-tax-basis balance sheet was
9. Any change in that interest as of
prepared for any purpose and the books
and records of the corporation reflect
only tax-basis amounts. The corporation
the date for which it is reporting.
Instructions for Schedule M-3 (Form 1120-S)
-3-
2. International Financial Reporting
Standards (IFRS).
For example, if the net income (after
consolidation and elimination entries) of
a nonincludible foreign
Lines 2 and 3. Questions
Regarding Income Statement
Period and Restatements
Enter the beginning and ending dates
on line 2 for the corporation's annual
income statement period ending with or
within the current tax year.
3. Tax basis.
4. Other (Specify).
sub-consolidated group is being
reported on line 5a, the attached
supporting statement should report the
income (loss) of each separate
nonincludible foreign legal entity from
each such entity's own financial
accounting net income statement or
books and records, and any
Report on Part I, lines 5a through 10,
as instructed below, all adjustment
amounts required to adjust worldwide
net income (loss) reported on this Part I,
line 4a (whether from financial
The questions on Part I, lines 3a and
3b, regarding income statement
statements or books and records), to
net income (loss) of the corporation that
must be reported on Part I, line 11.
Report on line 12a the worldwide
consolidated total assets and total
liabilities amounts for the corporation
using the same financial statements (or
book and records) used for the
restatements refer to the worldwide
consolidated income statement issued
by the corporation filing the U.S. income
tax return and used to prepare
consolidation or elimination entries (for
intercompany dividends, minority
interests, etc.) not reportable on Part I,
line 8, should be reported on the
attached supporting statement as a net
amount on a line separate and apart
from lines that report each nonincludible
foreign entity's separate net income
(loss).
Schedule M-3. Answer “Yes” on lines 3a
and/or 3b if the corporation's annual
income statement has been restated for
any reason. Attach a short explanation
of the reasons for the restatement in net
income for each annual income
worldwide consolidated income (loss)
amount reported on line 4a.
statement period that is restated,
including the original amount and
restated amount of each annual
Line 6. Net Income (Loss) of
Nonincludible U.S. Entities
Line 5. Net Income (Loss) of
Nonincludible Foreign Entities
Remove the financial net income
(line 6a) or loss (line 6b) of each U.S.
entity that is included on line 4a and isn't
an includible entity in the U.S. tax return
(nonincludible U.S. entity). In addition,
on Part I, line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends
between any nonincludible U.S. entity
and any includible entity. Don't remove
in Part I the financial net income (loss)
of any nonincludible U.S. entity
Remove the financial net income
statement period's net income.
(line 5a) or loss (line 5b) of each foreign
entity that is included on line 4a and isn't
an includible entity in the U.S. tax return
(nonincludible foreign entity). In
Line 4. Worldwide Consolidated
Net Income (Loss) per Income
Statement
Report on Part I, line 4a, the worldwide
consolidated net income (loss) per the
income statement (or books and
records, if applicable) of the
corporation.
addition, on Part I, line 8, adjust for
consolidation eliminations and correct
for minority interest and intercompany
dividends between any nonincludible
foreign entity and the entity filing Form
1120-S. Don't remove in Part I the
financial net income (loss) of any
In completing Schedule M-3, the
corporation must use financial
accounted for on line 4a using the
equity method.
nonincludible foreign entity accounted
for on line 4a using the equity method.
statement amounts from the financial
statement type checked “Yes” on Part I,
line 1, or from its books and records if
Part I, line 1b, is checked “No.”
Attach a supporting statement that
provides the name, EIN (if applicable),
and net income (loss) included on
line 4a that is removed on this line 5 for
each separate nonincludible foreign
entity. Also state the total assets and
total liabilities for each such separate
nonincludible foreign entity and include
those assets and liabilities amounts in
the total assets and total liabilities
reported on Part I, line 12b. The
Attach a supporting statement that
provides the name, EIN, and net income
(loss) included on line 4a that is
If a corporation prepares
removed on this line 6 for each separate
nonincludible U.S. entity. Also state the
total assets and total liabilities for each
such separate nonincludible U.S. entity
and include those assets and liabilities
amounts in the total assets and total
liabilities reported on Part I, line 12c.
The amounts of income (loss) detailed
on the supporting statement should be
reported for each separate
non-tax-basis financial statements, the
amount on line 4a must equal the
financial statement net income (loss) for
the income statement period ending
with or within the tax year as indicated
on Part I, line 2.
If the corporation prepares
non-tax-basis financial statements and
the income statement period differs
from the corporation's tax year, the
income statement period indicated on
Part I, line 2, applies for purposes of
Part I, lines 4 through 8.
amounts of income (loss) detailed on
the supporting statement should be
reported for each separate
nonincludible U.S. entity without regard
to the effect of consolidation or
nonincludible foreign entity without
regard to the effect of consolidation or
elimination entries. If there are
elimination entries. If there are
consolidation or elimination entries
relating to nonincludible U.S. entities
whose income (loss) is reported on the
attached statement that aren't
consolidation or elimination entries
relating to nonincludible foreign entities
whose income (loss) is reported on the
attached statement that aren't
If the corporation doesn't prepare
non-tax-basis financial statements and
has checked “No” on Part I, line 1b,
enter the net income (loss) per the
books and records of the U.S.
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
corporation on Part I, line 4a.
Indicate on Part I, line 4b, which of
the following accounting standards were
used for line 4a.
statement, so that the separate financial
statement, so that the separate financial accounting income (loss) of each
accounting income (loss) of each
nonincludible foreign entity remains
separately stated.
nonincludible U.S. entity remains
separately stated. For example, if the
net income (after consolidation and
1. U.S. Generally Accepted
Accounting Principles (GAAP).
Instructions for Schedule M-3 (Form 1120-S)
-4-
elimination entries) of a nonincludible
U.S. sub-consolidated group is being
reported on line 6a, the attached
supporting statement should report the
income (loss) of each separate
the total assets and total liabilities
reported on Part I, line 12d. The
amounts of income (loss) detailed on
the supporting statement should be
reported for each separate other
Include on Part I, line 8, the total of
the following: (a) amounts of any
adjustments to consolidation entries
and elimination entries that are
contained in the amount reported on
Part I, line 4a, required as a result of
removing amounts on Part I, line 5 or 6;
and (b) amounts of any additional
consolidation entries and elimination
entries that are required as a result of
including amounts on Part I, line 7a, 7b,
or 7c. This is necessary in order that the
consolidation entries and intercompany
elimination entries included in the
amount reported on Part I, line 11, are
only those applicable to the financial net
income (loss) of includible entities for
the financial statement period. For
nonincludible U.S. legal entity from each disregarded entity or other QSub
such entity's own financial accounting
net income statement or books and
records, and any consolidation or
elimination entries (for intercompany
dividends, minority interests, etc.) not
reportable on Part I, line 8, should be
reported on the attached supporting
statement as a net amount on a line
without regard to the effect of
consolidation or elimination entries
solely between or among the entities
listed. If there are consolidation or
elimination entries relating to such other
disregarded entities or other QSub
whose income (loss) is reported on the
attached statement that aren't
separate and apart from lines that report reportable on Part I, line 8, the net
each nonincludible U.S. entity's
separate net income (loss).
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
Lines 7a, 7b, and 7c. Net
Income (Loss) of Other Foreign
Disregarded Entities, Net
Income (Loss) of Other
Disregarded Entities (Except
Qualified Subchapter S
Subsidiaries), and Net Income
(Loss) of Other Qualified
Subchapter S Subsidiaries
(QSubs)
Include on line 7a the financial income
of any foreign disregarded entity that
isn't included on Part I, line 4a, but is
included in Part I, line 11 (other foreign
disregarded entities). Include on line 7b
or 7c the financial net income or (loss)
of each disregarded entity in the U.S.
tax return that isn't included in the
consolidated financial group and
statement, so that the separate financial example, adjustments must be reported
accounting income (loss) of each other
disregarded entity or other QSub
on line 8 to remove minority interest and
to reverse the elimination of
remains separately stated. For example, intercompany dividends included on
if the net income (after consolidation
and elimination entries) of a
Part I, line 4a, that relate to the net
income of entities removed on Part I,
line 5 or 6, because the income to which
the consolidation or elimination entries
relate has been removed. Also, for
example, consolidation or elimination
entries must be reported on line 8 to
eliminate any intercompany dividends
between entities whose income is
included on Part I, line 7a, 7b, or 7c, and
other entities included in the U.S.
sub-consolidated group of other
disregarded entities is being reported
on line 7b, the attached supporting
statement should report the income
(loss) of each separate other
disregarded entity from each entity's
own financial accounting net income
statement or books and records, and
any consolidation or elimination entries
(for intercompany dividends, minority
interests, etc.) not reportable on Part I,
line 8, should be reported on the
attached supporting statement as a net
amount on a line separate and apart
from lines that report each other
disregarded entity's separate net
income (loss).
If a corporate owner of an interest in
another entity: (a) accounts for the
interest in entity in the owner
corporation's separate general ledger
on the equity method, and (b) fully
consolidates entity in the owner
therefore not included in the income
reported on Part I, line 4a. Include on
line 7b the financial income of any U.S.
disregarded entity that isn't a qualified
subchapter S subsidiary (QSub) or a
foreign disregarded entity and that isn't
included in the income reported on Part
I, line 4a, but is included in Part I, line 11
(other disregarded entities). Include on
line 7c the financial income of any QSub
that isn't included in the income
corporation's consolidated financial
statements, but entity isn't includible in
the owner corporation's U.S. income tax
return, then, as part of reversing all
consolidation and elimination entries for
the nonincludible entity, the corporate
owner must reverse on Schedule M-3,
Part I, line 8, the elimination of the equity
income inclusion from entity. If the
owner corporation doesn't account for
entity on the equity method on its own
general ledger, it won't have eliminated
the equity income for consolidated
financial statement purposes, so it will
have no elimination of equity income to
reverse.
Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities and
Nonincludible Entities
Adjustments on Part I, line 8, to reverse
certain financial accounting
consolidation or elimination entries are
necessary to ensure that transactions
between includible entities and
reported on line 4a, but is included on
line 11 (other QSub). In addition, on Part
I, line 8, adjust for consolidation
nonincludible U.S. or foreign entities
aren't eliminated, in order to report the
correct total amount on Part I, line 11.
Also, additional consolidation entries
and elimination entries may be
eliminations and correct for minority
interest and intercompany dividends for
any other disregarded entity or other
QSub.
necessary on Part I, line 8, related to
transactions between includible entities
that are in the consolidated financial
group and other disregarded entities
and QSubs that aren't in the
Attach a supporting statement that
provides the name, EIN, and net income
(loss) per the financial statement or
books and records on this line 7 for
each separate other disregarded entity
or other QSub. Also state the total
assets and total liabilities for each such
separate included entity and include
those assets and liabilities amounts in
The attached supporting statement
for Part I, line 8, must identify the type
(for example, minority interest,
intercompany dividends, etc.) and
amount of consolidation or elimination
entries reported, as well as the names
of the entities to which they pertain. It
isn't necessary, but it is permitted, to
report intercompany eliminations that
consolidated financial group but that are
reported on Part I, line 7a, 7b, or 7c, in
order to report the correct total amount
on Part I, line 11.
Instructions for Schedule M-3 (Form 1120-S)
-5-
net to zero on Part I, line 8, such as
intercompany interest income and
expense.
entries (including workpaper
in the net income amount on line 4a
remain eliminated in the net income
amount on line 11. Transactions
adjustments) and dividend income or
other income received from
nonincludible entities. If the corporation
prepares unconsolidated financial
statements using the same accounting
method used to determine worldwide
between the corporation and the
Line 9. Adjustment To
Reconcile Income Statement
Period to Tax Year
Include on line 9 any adjustments
necessary to the income (loss) of
includible entities to reconcile
differences between the corporation's
income statement period reported on
line 2 and the corporation's tax year.
Attach a statement describing the
adjustment.
nonincludible entities that are eliminated
in the net income amount on line 4a are
included in the net income amount on
consolidated net income (loss) for Part I, line 11 since the elimination of those
line 4a, and if it uses the equity method
for investments, the amount reported on
Part I, line 11, will equal the amount of
the unconsolidated net income (loss)
reported on the unconsolidated financial
statements. See items 3 and 4 under
Example 3B, later.
transactions were reversed on line 8.
Example 3B.
1. U.S. corporation P owns 60% of
corporation DS1 which is fully
consolidated in P's financial statements.
P doesn't account for DS1 in P's
separate general ledger on the equity
method. DS1 has net income of $100
(before minority interests) and pays
dividends of $50, of which P receives
$30. The dividend is eliminated in the
consolidated financial statements. In its
financial statements, P consolidates
DS1 and includes $60 of net income
($100 less the minority interest of $40)
on Part I, line 4a.
Example 3A. U.S. corporation P
files a Form 1120-S U.S. tax return and
prepares certified audited income
statements for GAAP. P owns 100% of
the stock of U.S. corporations DS1
through DS75, between 51% and 99%
of the stock of U.S. corporations DS76
through DS100, and 100% of the stock
of foreign entities FS1 through FS50. P
eliminates all dividend income from DS1
through DS100 and FS1 through FS50
in financial statement consolidation
entries. Furthermore, P eliminates the
minority interest ownership, if any, of
DS76 through DS100 in financial
Line 10. Other Adjustments To
Reconcile to Amount on Line 11
Include on line 10 any other
adjustments to reconcile net income
(loss) on Part I, line 4a, through Part I,
line 9, with net income (loss) on Part I,
line 11.
For any adjustments reported on Part
I, line 10, attach a supporting statement
with an explanation of each net
P must remove the $100 net income
of DS1 on Part I, line 6a. P must reverse
on Part I, line 8, the elimination of the
$40 minority interest net income of DS1.
In addition, P reverses its elimination of
the $30 intercompany dividend in its
financial statements on Part I, line 8.
The net result is that P includes the $30
dividend from DS1 at Part I, line 11, and
on Part II, line 6, column (a). P's
adjustment included on line 10.
Line 11. Net Income (Loss) per
Income Statement of the
Corporation
Report on line 11 the net income (loss)
per the income statement (or books and
records, if applicable) of the
statement consolidation entries.
P must check “Yes” on Part I, line 1a.
On Part I, line 4a, P must report the
consolidated net income for the
consolidated financial statement group
of P, DS1 through DS100, and FS1
through FS50. P must remove the net
income (loss) of FS1 through FS50 on
Part I, line 5a or 5b, as applicable, and
remove on Part I, line 6a or 6b, as
applicable, any net income (loss) from
DS1 through DS75 where a QSub
election hasn't been made by P. P must
remove the net income (loss) before
minority interests of DS76 through
DS100 on Part I, line 6a or 6b, as
applicable. P must reverse on Part I,
line 8, the elimination of any
dividend income included on the tax
return from DS1 must be reported on
Part II, line 6, column (d).
corporation. Amounts reported in
column (a) of Parts II and III (see later)
must be reported on the same
accounting method used to report the
amount of net income (loss) per income
statement of the corporation on Part I,
line 11.
Don't, in any event, report on this
line 11 the net income of entities not
included in the U.S. income tax return
for the tax year. For example, it isn't
permissible to remove the income of
nonincludible entities on lines 5 and/or
6, above, then to add back such income
on lines 7 through 10, such that the
amount reported on line 11 includes the
net income of entities not includible in
the U.S. income tax return. A principal
purpose of Schedule M-3 is to report on
this Part I, line 11, only the financial
accounting net income of only the
entities included in the U.S. income tax
return.
2. U.S. corporation C owns 60% of
the capital and profits interests in U.S.
LLC N. C doesn't account for N in C's
separate general ledger on the equity
method. N has net income of $100
(before minority interests) and makes no
distributions during the tax year. C
treats N as a corporation for financial
statement purposes and as a
partnership for U.S. income tax
purposes. In its financial statements, C
consolidates N and includes $60 of net
income ($100 less the minority interest
of $40) on Part I, line 4a.
transactions between the includible
entity (P and any QSubs) and the
nonincludible entities (DS1 through
DS75 with no QSub election, DS76
through DS100 and FS1 through FS50),
including dividends received from
non-QSub DS1 through DS75, DS76
through DS100, and FS1 through FS50
and the minority interest's share of the
net income (loss) of DS76 through
DS100.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of N. The
result is that C includes no income for N
either on Part I, line 11, or on Part II,
line 7, column (a). C's taxable income
from N must be reported by C on Part II,
line 7, column (d).
Whether or not the corporation
prepares financial statements, Part I,
line 11, must include all items that
impact the net income (loss) of the
corporation even if they aren't recorded
in the profit and loss accounts in the
corporation's general ledger, including,
for example, all post-closing adjusting
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the
3. U.S. corporation P owns 60% of
corporation DS1, which is fully
corporation and QSubs. Intercompany
transactions between the corporation
and the QSubs that had been eliminated
consolidated in P's financial statements.
P accounts for DS1 in P's separate
general ledger on the equity method.
Instructions for Schedule M-3 (Form 1120-S)
-6-
DS1 has net income of $100 (before
DS1 is a QSub, 100% of the net income
Specific Instructions for
Parts II and III
minority interests) and pays dividends of of both P and DS1 must be reported on
$50, of which P receives $30. The
dividend reduces P's investment in DS1
for equity method reporting on P's
separate general ledger where P
includes its 60% equity share of DS1
income, which is $60. In its financial
statements, P eliminates the DS1 equity
method income of $60 and consolidates
DS1, including $60 of net income ($100
less the minority interest of $40) on Part
I, line 4a.
Form 1120-S of P's U.S. income tax
return, and the intercompany interest
income and expense must be removed
by consolidation elimination entries.
General Reporting information
A schedule or statement may be
attached to any line even if none is
required.
P must report its financial statement
net income of $1,040 on Part I, line 4a,
and reports DS1's net income of $100
on Part I, line 7c. Then, in order to
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included in Part I, line 11,
and report in column (d) the amount
included in total income (loss) on Form
1120-S, Schedule K, line 18.
reflect the full consolidation of the
financial accounting net income of P
and DS1 at Part I, line 11, the following
consolidation and elimination entries are
P must remove the $100 net income
of DS1 on Part I, line 6a. P must reverse reported on Part I, line 8: offsetting
on Part I, line 8, the elimination of the
$40 minority interest net income of DS1
and the elimination of the $60 of DS1
equity income. The net result is that P
includes the $60 of equity method
income from DS1 at Part I, line 11, and
on Part II, line 5, column (a). P's
entries to remove the $40 of interest
income received from DS1 included by
P on line 4a, and to remove the $40 of
interest expense of DS1 included in
line 7c for a net change of zero. The
result is that Part I, line 11, reports
$1,140: $1,040 from line 4a, and $100
from line 7c. Stated another way, Part I,
line 11, includes the entire $1,000 net
Part II, line 26, column (a) must
equal Part I, line 11, and column
(d) must equal the amount on
TIP
Form 1120-S, Schedule K, line 18.
For any item of income, gain, loss,
expense, or deduction for which there is
a difference between columns (a) and
(d), the portion of the difference that is
temporary must be entered in column
(b) and the portion of the difference that
is permanent must be entered in column
(c).
dividend income included on the tax
return from its investment in DS1 must
be reported on Part II, line 6, column (d). income of P, measured before
recognition of the intercompany interest
4. U.S. corporation C owns 60% of
income from DS1 and the consolidation
the capital and profits interests in U.S.
of DS1 operations, plus the entire $140
LLC N. C accounts for N in C's separate
net income of DS1, measured before
interest expense to P. P's U.S. income
tax group isn't required to include on the
attached supporting statement for Part I,
line 8, the offsetting adjustment to the
intercompany elimination of interest
income and interest expense (though it
is permitted to do so).
general ledger on the equity method. N
has net income of $100 (before minority
interests) and makes no distributions
during the tax year. C treats N as a
corporation for financial statement
purposes and as a partnership for U.S.
income tax purposes. For equity method
reporting on C's separate general
ledger, C includes its 60% equity share
of N income, which is $60. In its
financial statements, C eliminates the
$60 of N net income ($100 less the
minority interest of $40) on Part I,
line 4a.
If financial statements are prepared
by the corporation under with generally
accepted accounting principles (GAAP),
differences that are treated as
temporary under GAAP must be
reported in column (b) and differences
that are permanent (that is, not
temporary) for GAAP must be reported
in column (c). Generally, under to
GAAP, a temporary difference affects
(creates, increases, or decreases) a
deferred tax asset or liability.
Line 12. Total Assets and
Liabilities of Entities Included
or Removed on Part I, Lines 4,
5, 6, and 7
Line 12 must be completed by all
corporations that file Schedule M-3.
Report on lines 12a, 12b, 12c, and 12d
the total amount (not just the
If the corporation doesn't prepare
financial statements, or the financial
statements aren't prepared under
GAAP, report in column (b) any
C must remove the $100 net income
of N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of N and the
elimination of the $60 of N equity
corporation's share) of assets and
liabilities of entities included or removed
on Part I, lines 4, 5, 6, and 7. All assets
and liabilities reported on lines 12a
through 12d must be reported as
positive amounts.
difference that the corporation believes
will reverse in a future tax year (that is,
have an opposite effect on total income
(loss) in a future tax year (or years) due
to the difference in timing of recognition
for financial accounting and U.S.
method income. The result is that C
includes the $60 of equity method
income for N on Part I, line 11, and on
Part II, line 7, column (a). C's taxable
income from N must be reported by C
on Part II, line 7, column (d).
income tax purposes) or is the reversal
of such a difference that arose in a prior
tax year. Report in column (c) any
difference that the corporation believes
won't reverse in a future tax year (and
isn't the reversal of such a difference
that arose in a prior tax year).
On line 12a, enter the worldwide
consolidated total assets and total
liabilities of all of the entities included in
computing Part I, line 4a. On line 12b,
enter the total assets and total liabilities
of the entities removed in completing
Part I, line 5. On line 12c, enter the total
assets and total liabilities removed in
completing Part I, line 6. On line 12d,
enter total assets and total liabilities
included in completing Part I, line 7.
Example 4. U.S. corporation P
owns 100% of the stock of QSub
corporation DS1. DS1 is included in P's
federal income tax return, even though
DS1 isn't included in P's consolidated
financial statements on either a
If the corporation is unable to
consolidated basis or on the equity
method. DS1 has current year net
income of $100 after taking into account
its $40 interest payment to P. P has net
income of $1,040 after recognition of the
interest income from DS1. Because
determine whether a difference between
column (a) and column (d) for an item
will reverse in a future tax year or is the
reversal of a difference that arose in a
prior tax year, report the difference for
that item in column (c).
Instructions for Schedule M-3 (Form 1120-S)
-7-
Example 5. At the end of
Corporation A's first tax year, it wasn't
required to file Schedule M-3 for any
reason.
amount would otherwise be reported on
Schedule M, Part II or Part III. So, if a
taxpayer is required to file Form 8886,
Reportable Transaction Disclosure
Statement, the amounts attributable to
that reportable transaction must be
reported on Part II, line 10.
Furthermore, in applying the two
preceding paragraphs, a corporation is
required to report in column (a) of Parts
II and III the amount of any item
specifically listed on Schedule M-3 that
is included in the corporation's financial
statements or exists in the corporation's
books and records, regardless of the
nomenclature associated with that item
in the financial statements or books and
records. Accurate completion of
A may elect to file Schedule M-3
instead of completing Schedule M-1.
If A elects to file schedule M-3, it
must either (i) complete Schedule M-3
entirely or (ii) complete Schedule M-3
through Part I and complete
A corporation is required to report in
column (a) of Parts II and III the amount
of any item specifically listed on
Schedule M-1 instead of completing
Parts II and III of Schedule M-3.
Schedule M-3 that is in any manner
included in the corporation's current
year financial statement net income
(loss) or in an income or expense
Schedule M-3 requires reporting
amounts according to the substantive
nature of the specific line items included
in Schedule M-3 and consistent
If A elects to complete Schedule M-3
entirely, it must complete all columns of
Parts II and III.
If A completes Schedule M-3 through
Part I and completes Schedule M-1
instead of completing Parts II and III of
Schedule M-3, line 11 of Part I of
Schedule M-3 must equal line 1 of
Schedule M-1.
account maintained in the corporation's
books and records, even if there is no
difference between that amount and the
amount included in total income (loss)
unless (a) otherwise provided in these
instructions or (b) the amount is
reporting of all transactions of like
substantive nature that occurred during
the tax year. For example, all expense
amounts that are included in the
financial statements or exist in the
books and records that represent some
form of “Bad debt expense,” must be
reported on Part III, line 25, in column
(a), regardless of whether the amounts
are recorded or stated under different
nomenclature in the financial
attributable to a reportable transaction
described in Regulations section
Example 6. Corporation B is a U.S.
corporation that files a U.S. tax return
and prepares GAAP financial
1.6011-4(b) so it is reported on Part II,
line 10. For example, with the exception
of interest income reflected on a
statements. In prior years, B acquired
intellectual property (IP) and goodwill.
The IP is amortizable for both U.S.
income tax and financial statement
purposes. In the current year, B's annual
amortization expense for IP is $9,000 for
U.S. income tax purposes and $6,000
for financial statement purposes. In its
financial statements, B treats the
difference in IP amortization as a
temporary difference. The goodwill isn't
amortizable for U.S. income tax
Schedule K-1 received by a corporation
as a result of the corporation's
statements or the books and records
such as: “Provision for doubtful
investment in a partnership or other
pass-through entity, all interest income
included on Part I, line 11, whether from
affiliated companies, third parties,
banks, or other entities, whether from
foreign or domestic sources, whether
taxable or exempt from tax, and whether
classified as some other type of income
for U.S. income tax purposes (such as
dividends), must be included on Part II,
line 11, column (a). Likewise, all fines
and penalties included in Part I, line 11,
paid to a government or other authority
for the violation of any law for which
fines or penalties are assessed must be
included on Part III, line 9, column (a),
regardless of the government authority
that imposed the fines or penalties,
regardless of whether the fines or
penalties are civil or criminal, regardless
of the classification, nomenclature, or
terminology attached to the fines or
penalties by the imposing authority in its
actions or documents.
accounts”; “Expense for uncollectible
notes receivable”; or “Impairment of
trade accounts receivable.” Likewise, as
stated in the preceding paragraph, all
fines and penalties must be included on
Part III, line 9, column (a), regardless of
the terminology or nomenclature
attached to them by the corporation in
its books and records or financial
statements.
purposes and is subject to impairment
for financial statement purposes. In the
current year, B records an impairment
charge on the goodwill of $5,000. In its
financial statements, B treats the
goodwill impairment as a permanent
difference. B must report the
With limited exceptions, Part II
includes lines for specific items of
income, gain, or loss (income items).
(See Part II, lines 1 through 21.) If an
income item is described in Part II, lines
1 through 21, report the amount of the
item on the applicable line, regardless of
whether there is a difference for the
item. If there is a difference for the
income item, or only a portion of the
income item has a difference and a
portion of the item doesn't have a
difference, and the item isn't described
in Part II, lines 1 through 21, report and
describe the entire amount of the item
on Part II, line 22.
amortization attributable to the IP on
Part III, line 21, and report $6,000 in
column (a), a temporary difference of
$3,000 in column (b), and $9,000 in
column (d). B must report the goodwill
impairment on Part III, line 19, and
report $5,000 in column (a), a
permanent difference of ($5,000) in
column (c), and $0 in column (d).
If a corporation would be required to
report in column (a) of Parts II and III the
amount of any item specifically listed on
Schedule M-3 in accordance with the
preceding paragraph, except that the
corporation has capitalized the item of
income or expense and reports the
amount in its financial statement
Reporting Requirements
for Parts II and III
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
(See Part III, lines 1 through 28.) If an
expense item is described on Part III,
lines 1 through 28, report the amount of
the item on the applicable line,
General Reporting
Requirements
If an amount is attributable to a
balance sheet or in asset and liability
accounts maintained in the
reportable transaction described in
Regulations section 1.6011-4(b), the
amount must be reported in columns
(a), (b), (c), and (d), as applicable, of
Part II, line 10, regardless of whether the
regardless of whether there is a
corporation's books and records, the
corporation must report the proper tax
treatment of the item in columns (b), (c),
and (d), as applicable.
difference for the item. If there is a
difference for the expense item, or only
a portion of the expense item has a
difference and a portion of the item
Instructions for Schedule M-3 (Form 1120-S)
-8-
doesn't have a difference and the item
isn't described in Part III, lines 1 through
28, report and describe the entire
in the financial statements or books and
reserves are expenses in D's current
records of the taxpayer, under which the financial statements but aren't
amount in column (a) was recorded in
the accounting records. Also, the
description for each amount entered in
column (a) must include detailed
information supporting each adjustment
reported in columns (b) and (c),
deductions for U.S. income tax
purposes in its current tax years. D
mustn't combine the Schedule M-3
differences for the three reserve
accounts. D must report the amounts
attributable to the allowance for
uncollectible accounts receivable on
amount of the item on Part III, line 31.
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, loss, expense, or deduction
and the item isn't described or included
in Part II, lines 1 through 21, or Part III,
lines 1 through 28, report the entire
amount of the item in columns (a) and
(d) of Part II, line 25.
Separately stated and adequately
disclosed. Each difference reported in
Parts II and III must be separately stated
and adequately disclosed. In general, a
difference is adequately disclosed if the
difference is labeled in a manner that
clearly identifies the item or transaction
from which the difference arises. For
further guidance about adequate
including how the adjustment is
identified in the accounting records. The Part III, line 25, and must separately
entire description is considered the tax
description for the amount reported in
column (d) for each item reported on
Part II, line 22, or Part III, line 31.
state and adequately disclose the
amounts attributable to each of the
other two reserves, coupons
outstanding and warranty costs, on a
required, attached statement that
supports the amounts at Part III, line 31.
Each description should adequately
describe all four columns of Part II,
line 22, or Part III, line 31. If additional
information is required to provide an
acceptable description, provide a
supporting statement.
D must also provide a description for
each reserve that meets the
requirements for Part III, line 31,
discussed earlier under Required
III, line 31. In this example, an
acceptable description would be
"Coupon Issue Reserves - Rewards
Expense" and "Future Warranty
Expense Reserve."
Example 7. Corporation C is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. C placed in service 10
depreciable fixed assets in a previous
year. C's total depreciation expense for
its current tax year for five of the assets
is $50,000 for income statement
disclosure, see Regulations section
1.6662-4(f). If a specific item of income,
gain, loss, expense, or deduction is
described on Part II, lines 7 through 21,
or Part III, lines 1 through 28, and the
line doesn't indicate to “attach
There is no need to add the title
of the reserve account to the
TIP
purposes and $70,000 for U.S. income
tax purposes. C's total annual
description if the account name
for the amount in column (a) is already
part of the adjustment description.
statement,” and the specific instructions
for the line don't call for an attachment
of a statement, then the item is
depreciation expense for its current tax
year for the other five assets is $40,000
for income statement purposes and
$30,000 for U.S. income tax purposes.
In its financial statements, C treats the
differences between financial statement
and U.S. income tax depreciation
expense as giving rise to temporary
differences that will reverse in future
years. C must combine all of its
considered separately stated and
adequately disclosed if the item is
reported on the applicable line and the
amount(s) of the item(s) are reported in
the applicable columns of the applicable
line. See the instructions for Part II, lines
1 through 6, for specific additional
information required to be provided for
these particular lines.
Example 9. Corporation E is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On January 2 of its
current tax year, E establishes an
allowance for uncollectible accounts
receivable (bad debt reserve) of
$100,000. During its current tax year, E
increased the reserve by $250,000 for
additional accounts receivable that may
become uncollectible. Additionally,
during its current tax year, E decreases
the reserve by $75,000 for accounts
receivable that were discharged in
bankruptcy during its current tax year.
The balance in the reserve account on
December 31 of its current tax year is
$275,000. The $100,000 amount to
establish the reserve account and the
$250,000 to increase the reserve
depreciation adjustments. Accordingly,
C must report on Part III, line 24, for its
current tax year income statement
depreciation expense of $90,000 in
column (a), a temporary difference of
$10,000 in column (b), and U.S. income
tax depreciation expense of $100,000 in
column (d).
Example 8. Corporation D is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On December 31, of its
current tax year, D establishes three
reserve accounts in the amount of
$100,000 for each account. One
Except as otherwise provided,
differences for the same item must be
combined or netted together and
reported as one amount on the
applicable line of Schedule M-3.
However, differences for separate items
mustn't be combined or netted together.
Each item (and corresponding amount
attributable to that item) must be
separately stated and adequately
disclosed on the applicable line of
Schedule M-3, or any statement
required to be attached, even if the
amounts are below a certain dollar
amount.
Required statements for Part II,
line 22, and Part III, line 31. A
separate statement must be attached to
Schedule M-3 (Form 1120-S) that
includes a detailed description of each
item and adjustment entered on Part II,
line 22, and Part III, line 31.
account are expenses on E's current tax
year financial statements but aren't
deductible for U.S. income tax purposes
in its current tax year. However, the
$75,000 decrease to the reserve is
deductible for U.S. income tax purposes
in its current tax year. In its financial
statements, E treats the reserve
reserve account is an allowance for
accounts receivable that are estimated
to be uncollectible. The second reserve
is an estimate of coupons outstanding
that may have to be paid. The third
reserve is an estimate of future warranty
expenses. In its financial statements, D
treats the three reserve accounts as
giving rise to temporary differences that
will reverse in future years. The three
account as giving rise to a temporary
difference that will reverse in future tax
years. E must report on Part III, line 25,
for its current tax year income statement
bad debt expense of $350,000 in
The description for each amount
entered in column (a) must be readily
identifiable to the name of the account
column (a), a temporary difference of
Instructions for Schedule M-3 (Form 1120-S)
-9-
($275,000) in column (b), and U.S.
income tax bad debt expense of
$75,000 in column (d).
foreign corporations on Part II, lines 2
through 4, as applicable.
Also include on line 3 passive foreign
investment company (PFIC)
mark-to-market gains and losses under
section 1296. Don't report such gains
and losses on Part II, line 14.
Line 2. Gross Foreign
Dividends Not Previously
Taxed
Example 10. Corporation F is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, F incurs $200 in meal expenses
and $100 in entertainment expenses
that F deducts in computing net income
per the income statement. All of the
$200 meal expense is subject to the
50% limitation under section 274(n).
The $100 of entertainment expenses is
disallowed as a deduction under section
274(a). In its financial statements, F
treats the limitation on deductions for
meals and entertainment as a
Line 4. Gross Foreign
Except as otherwise provided in this
paragraph, report on line 2, column (d),
the amount (before any withholding tax)
of any foreign dividends included in
current year total income (loss) on Form
1120-S, Schedule K, line 18, and report
on line 2, column (a), the amount of
dividends from any foreign corporation
included in Part I, line 11. Don't report
on line 2 any amounts that must be
reported on Part II, line 3, or dividends
that were previously taxed and must be
reported on Part II, line 4. (See the
Distributions Previously Taxed
Report on line 4, column (a), any
distributions received from foreign
corporations that were included in Part I,
line 11, and that were previously taxed
for U.S. income tax purposes. For
example, include in column (a) amounts
that are excluded from income under
sections 959 and 1293(c). Remove
such amount in column (b) or (c), as
applicable. Report the full amount of the
distribution before any withholding tax.
Report withholding taxes on Part III,
line 31, or Part II, line 25, as applicable.
Since previously taxed foreign
permanent difference. Because meal
and entertainment expenses are
instructions below for Part II, lines 3 and
4.) Report withholding taxes on Part III,
line 31, or Part II, line 25, as applicable.
specifically described in Part III, line 8, F
must report all of its meal and
distributions aren't currently taxable,
line 4, column (d), is shaded. Also, see
the instructions above for Part II, line 2.
entertainment expenses on this line,
regardless of whether there is a
For any dividends reported on Part II,
line 2, that are received on a class of
voting stock of which the corporation
directly or indirectly owned 10% or more
of the outstanding shares of that class at
any time during the tax year, report on
an attached supporting statement: (1)
the name of the dividend payer, (2) the
payer's EIN (if applicable), (3) the class
of voting stock on which the dividend
was paid, (4) the percentage of the
class directly or indirectly owned, and
(5) the amounts for columns (a) through
(d).
difference. Accordingly, F must report
$300 in column (a), $200 in column (c),
and $100 in column (d). F must report
all meal and entertainment expenses,
whether allowed fully or subject to
limitations, on Part III, line 8. No amount
should be reflected on Part II, line 25.
Line 5. Income (Loss) From
Equity Method U.S.
Corporations
Report on line 5, column (a), the
financial income (loss) included in Part I,
line 11, for any U.S. corporation
accounted for on the equity method and
remove such amount in column (b) or
(c), as applicable. Report on Part II,
line 6, dividends received from any U.S.
corporation accounted for on the equity
method.
Part II. Reconciliation of
Net Income (Loss) per
Income Statement of the
Corporation With Total
Income (Loss) per Return
Line 3. Subpart F, QEF, and
Similar Income Inclusions
Line 6. U.S. Dividends Not
Lines 1 Through 9. Additional
Information for Each Entity
Report on line 3, column (d), the amount
included in income under section 951
(relating to Subpart F), the amount
included in income under section 951A
(relating to global intangible low-taxed
income (GILTI)), gains or other income
inclusions resulting from elections under
sections 1291(d)(2) and 1298(b)(1), and
any amount included in income
Eliminated in Tax Consolidation
Report on line 6, column (a), the amount
of dividends included in Part I, line 11,
that were received from any U.S.
For any item reported on Part II, lines 1,
and 3 through 5, attach a supporting
statement that provides the name of the
entity for which the item is reported, the
entity's EIN (if applicable), the type of
entity (corporation, partnership, etc.),
and the item amounts for columns (a)
through (d). See the instructions for Part
II, lines 2 and 6 through 9, for the
specific information required for those
particular lines.
corporation. Report on line 6, column
(d), the amount of any U.S. dividends
included in total income (loss) on Form
1120-S, Schedule K, line 18.
pursuant to section 1293 (relating to
qualified electing funds (QEFs)). The
amount of Subpart F income
For any dividends included on Part II,
line 6, that are received on classes of
voting stock in which the corporation
directly or indirectly owned 10% or more
of the outstanding shares of that class at
any time during the tax year, report on
an attached supporting statement for
Part II, line 6: (1) the name of the
corresponds to the total of the amounts
reported by the corporation on
Line 1. Income (Loss) From
Equity Method Foreign
Corporations
Schedule I, lines 1 through 4, of all
Forms 5471, Information Return of U.S.
Persons With Respect To Certain
Foreign Corporations. The amount of
QEF income corresponds to the total of
the amounts reported by the corporation
on all Forms 8621, Information Return
by a Shareholder of a Passive Foreign
Investment Company or Qualified
Electing Fund. See Form 8621 and the
Instructions for Form 8621.
dividend payer, (2) the payer's EIN (if
applicable), (3) the class of voting stock
on which the dividend was paid, (4) the
percentage of the class directly or
Report on line 1, column (a), the
financial income (loss) included in Part I,
line 11, for any foreign corporation
accounted for on the equity method and
remove such amount in column (b) or
(c), as applicable. Report the amount of
dividends received and other taxable
amounts received or includible from
indirectly owned, and (5) the item
amounts for columns (a) through (d).
Instructions for Schedule M-3 (Form 1120-S)
-10-
supporting statement for Part II, line 10,
each sequentially numbered reportable
transaction and the amounts required
for Part II, line 10, columns (a) through
(d).
Line 7. Income (Loss) From
U.S. Partnerships and Line 8.
Income (Loss) From Foreign
Partnerships
For any interest owned by the
corporation that is treated as an
investment in a partnership for U.S.
income tax purposes (other than an
interest in a disregarded entity), report
amounts on Part II, line 7 or 8, as
described below.
1. In column (a), the sum of the
corporation's distributive share of
income or loss from a U.S. or foreign
partnership that is included in Part I,
line 11.
Line 9. Income (Loss) From
Other Pass-Through Entities
For any interest in a pass-through entity
(other than an interest in a partnership
reportable on Part II, line 7 or 8, as
applicable) owned by the corporation
(other than an interest in a disregarded
entity), report the following on line 9.
1. In column (a), the sum of the
corporation's distributive share of
income or loss from the pass-through
entity that is included in Part I, line 11.
2. In column (b) or (c), as
applicable, the sum of all differences, if
any, attributable to the pass-through
entity.
In lieu of the requirements of the
preceding paragraph, a corporation will
be considered to have separately stated
and adequately disclosed a reportable
transaction if the corporation attaches a
supporting statement that provides the
following for each reportable
transaction.
1. A description of the reportable
transaction disclosed on Form 8886 for
which amounts are reported on Part II,
line 10.
2. The name and reportable
transaction or tax shelter registration
number, if applicable, as reported on
lines 1a and 1c, respectively, of Form
8886.
3. The type of reportable transaction
(that is, listed transaction, confidential
transaction, transaction with contractual
protection, etc.) as reported on line 2 of
Form 8886.
3. In column (d), the sum of all
taxable amounts of income, gain, loss,
or deduction reportable on the
corporation's Schedules K-1 received
from the pass-through entity (if
applicable).
2. In column (b) or (c), as
applicable, the sum of all differences, if
any, attributable to the corporation's
distributive share of income or loss from
a U.S. or foreign partnership.
3. In column (d), the sum of all
amounts of income, gain, loss, or
deduction attributable to the
For each pass-through entity
reported on line 9, attach a supporting
statement that provides that entity's
name, EIN (if applicable), the
corporation's distributive share of
income or loss from a U.S. or foreign
partnership (that is, the sum of all
amounts reportable on the corporation's
Schedule(s) K-1 received from the
partnership (if applicable)), without
regard to any limitations computed at
the partner level.
corporation's end of year profit-sharing
percentage (if applicable), the
corporation's end of year loss-sharing
percentage (if applicable), and the
amounts reported by the corporation in
column (a), (b), (c), or (d) of line 9, as
applicable.
If a transaction is a listed transaction
described in Regulations section
1.6011-4(b)(2), the description also
must include the description provided
on line 3 of Form 8886. In addition, if the
reportable transaction involves an
investment in the transaction through
another entity such as a partnership, the
description must include the name and
EIN (if applicable) of that entity as
reported on line 5 of Form 8886.
For each partnership reported on
line 7 or 8, attach a supporting
Line 10. Items Relating to
Reportable Transactions
statement that provides the name, EIN
(if applicable), end of year profit-sharing
percentage (if applicable), end of year
loss-sharing percentage (if applicable),
and the amount reported in column (a),
(b), (c), or (d) of lines 7 or 8, as
applicable.
Any amounts attributable to any
reportable transactions (as described in
Regulations section 1.6011-4(b)) must
be included on Part II, line 10,
Example 12. Corporation J is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. J incurred seven
different abandonment losses during its
current tax year. One loss of $12 million
results from a reportable transaction
described in Regulations section
regardless of whether the difference, or
differences, would otherwise be
Example 11. U.S. corporation H is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. H has an investment in
a U.S. partnership USP. H prepares
financial statements in accordance with
GAAP. In its financial statements, H
treats the difference between financial
statement net income and taxable
reported elsewhere in Part II or Part III.
So, if a taxpayer is required to file Form
8886 for any reportable transaction
described in Regulations section
1.6011-4(b), the amounts attributable to
that reportable transaction must be
reported on Part II, line 10. In addition,
all income and expense amounts
attributable to a reportable transaction
must be reported on Part II, line 10,
columns (a) and (d), even if there is no
difference between the financial
1.6011-4(b)(5), another loss of $5
million results from a reportable
transaction described in Regulations
section 1.6011-4(b)(4), and the
remaining five abandonment losses
aren't reportable transactions. J
income from its investment in USP as a
permanent difference. For its current tax
year, H's financial statement net income
includes $10,000 of income attributable
to its share of USP's net income. H's
Schedule K-1 from USP reports $5,000
of ordinary income, $7,000 of long-term
capital gains, $4,000 of charitable
discloses the reportable transactions
giving rise to the $12 million and $5
million losses on separate Forms 8886
and sequentially numbers them X1 and
X2, respectively. J must separately state
and adequately disclose the $12 million
and $5 million losses on Part II, line 10.
The $12 million loss and the $5 million
loss will be adequately disclosed if J
attaches a supporting statement for
line 10 that lists each of the sequentially
numbered forms, Form 8886-X1 and
amounts and the taxable amounts.
Each difference attributable to a
reportable transaction must be
separately stated and adequately
disclosed. A corporation will be
contributions, and $200 of section 179
expense. H must report on Part II, line 7, considered to have separately stated
$10,000 in column (a), a permanent
and adequately disclosed a reportable
difference of ($2,200) in column (c), and transaction on line 10 if the corporation
$7,800 in column (d).
sequentially numbers each Form 8886
and lists by identifying number on the
Instructions for Schedule M-3 (Form 1120-S)
-11-
Form 8886-X2, and for each reportable
transaction reports the appropriate
amounts required for Part II, line 10,
columns (a) through (d). Alternatively,
J's disclosures will be adequate if the
description provided for each loss on
the supporting statement includes the
names and reportable transaction or tax
shelter registration numbers, if any,
disclosed on the applicable Form 8886,
identifies the type of reportable
files a Schedule M-3, isn't required to
file Form 8916-A but may voluntarily do
so.
current tax year report accounts
receivable of $35,000, an allowance for
bad debts of $10,000, and accounts
payable of $17,000 related to current
year acquisition and reorganization
legal and accounting fees. In addition,
for L's year ending December 31 of its
current tax year, L reported financial
statement depreciation expense of
$15,000 and depreciation for U.S.
income tax purposes of $25,000. For L's
current tax year using an overall cash
method of accounting, L doesn't
Report on Part II, line 11, column (a),
the total amount of interest income
included on Part I, line 11, and report on
Part II, line 11, column (d), the total
amount of interest income included on
Form 1120-S, Schedule K, line 18, that
isn't required to be reported elsewhere
on Schedule M-3. In columns (b) or (c),
as applicable, adjust for any amounts
treated for U.S. income tax purposes as
interest income that are treated as some
other form of income for financial
accounting purposes, or vice versa. For
example, adjustments to interest
income resulting from adjustments
made in accordance with the
transaction for the loss, and reports the
appropriate amounts required for Part II,
line 10, columns (a) through (d). J must
report the losses attributable to the
other five abandonment losses on Part
II, line 21e, regardless of whether a
difference exists for any or all of those
abandonment losses.
recognize the $35,000 of revenue
attributable to the accounts receivable,
can't deduct the $10,000 allowance for
bad debt, and can't deduct the $17,000
of accounts payable. In its financial
statements, L treats both the difference
in overall accounting methods used for
financial statement and U.S. income tax
purposes and the difference in
Example 13. Corporation K is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. K enters into a
instructions for Part II, line 16, should be
made in columns (b) and (c) of this
line 11.
Don't report on this line 11 or include
on Form 8916-A amounts reported in
accordance with instructions for Part II,
lines 7, 8, 9, 10, and 20.
depreciation expense as temporary
differences. L must combine all
transaction with contractual protection
that is a reportable transaction
adjustments attributable to the
differences related to the overall
described in Regulations section
1.6011-4(b)(4). This reportable
accounting methods on Part II, line 12.
As a result, L must report on Part II,
line 12, $8,000 in column (a) ($35,000 –
$10,000 – $17,000), ($8,000) in column
(b), and zero in column (d). L mustn't
report the accrual to cash adjustment
attributable to the legal and accounting
fees on Part III, line 17. Because the
difference in depreciation expense
doesn't relate to the use of the cash or
accrual method of accounting, L must
report the depreciation difference on
Part III, line 24, and report $15,000 in
column (a), $10,000 in column (b), and
$25,000 in column (d).
transaction is the only reportable
transaction for K's current tax year and
results in a $7 million capital loss for
both financial accounting purposes and
U.S. income tax purposes. Although the
transaction doesn't result in a
Line 12. Total Accrual to Cash
Adjustment
This line is completed by a corporation
that prepares financial statements (or
books and records, if permitted) using
an overall accrual method of accounting
and uses an overall cash method of
accounting for U.S. income tax
difference, K is required to report on
Part II, line 10, the following amounts:
($7 million) in column (a), zero in
columns (b) and (c), and ($7 million) in
column (d). The transaction will be
adequately disclosed if K attaches a
supporting statement for line 10 that (a)
sequentially numbers the Form 8886
and refers to the sequentially-numbered
Form 8886-X1 and (b) reports the
applicable amounts required for line 10,
columns (a) through (d). Alternatively,
the transaction will be adequately
disclosed if the supporting statement for
line 10 includes a description of the
transaction, the name and tax shelter
registration number, if any, and the type
of reportable transaction disclosed on
Form 8886.
purposes (or vice versa). With the
exception of amounts required to be
reported on Part II, line 10, the
corporation must report on Part II,
line 12, a single amount net of all
adjustments attributable solely to the
use of the different overall methods of
accounting (for example, adjustments
related to accounts receivable,
Line 13. Hedging Transactions
Report on line 13, column (a), the net
gain or loss from hedging transactions
included on Part I, line 11. Report in
column (d) the amount of income (loss)
from hedging transactions as defined in
section 1221(b)(2). Use columns (b)
and (c) to report all differences caused
by treating hedging transactions
accounts payable, compensation,
accrued liabilities, etc.), regardless of
whether a separate line on
Schedule M-3 corresponds to an item
within the accrual to cash reconciliation.
Differences not attributable to the use of
the different overall methods of
differently for financial accounting
purposes and for U.S. income tax
accounting must be reported on the
appropriate lines of Schedule M-3 (for
example, a depreciation difference must
be reported on Part III, line 24).
purposes. For example, if a portion of a
hedge is considered ineffective under
GAAP but still is a valid hedge under
section 1221(b)(2), the difference must
be reported on line 13. The hedge of a
capital asset, which isn't a valid hedge
for U.S. income tax purposes but may
be considered a hedge for GAAP
Line 11. Interest Income
Attach Form 8916-A, Supplemental
Attachment to Schedule M-3. Complete
Part II and enter the amounts shown on
line 6, columns (a) through (d), on
Schedule M-3, line 11, columns (a)
through (d), as applicable.
Example 14. Corporation L is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. L prepares financial
statements in accordance with GAAP
using an overall accrual method of
accounting. L uses an overall cash
method of accounting for U.S. income
tax purposes. L's financial statements
for the year ending December 31 of its
Any corporation that files Form
purposes, must also be reported here.
1120-S that (a) is required to file
a Schedule M-3 and has less
TIP
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 13 and not
on Part II, line 14.
than $50 million in total assets at the
end of the tax year or (b) isn't required
to file a Schedule M-3 and voluntarily
Instructions for Schedule M-3 (Form 1120-S)
-12-
Report any gain or loss from
inventory hedging transactions on
line 13 and not on Part II, line 15.
(including depreciation) such as section
263A costs, inventory shrinkage
accruals, inventory obsolescence
reserves, and lower of cost or market
(LCM) write-downs.
Complete Part I of Form 8916-A.
Enter the amounts from line 8, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 15, columns
(a) through (d), as applicable. Attach
Form 8916-A.
purposes and $30,000 for U.S. income
tax purposes. In addition, C incurs $200
of meal expenses that C deducts in
computing net income for financial
accounting purposes. All $200 of the
meal expenses is subject to the 50%
limitation under section 274(n). In its
financial statements, C treats the
Line 14. Mark-to-Market Income
(Loss)
Report on line 14 any amount
representing the mark-to-market income
or loss for any securities held by a
dealer in securities, a dealer in
commodities having made a valid
election under section 475(e), or a
trader in securities or commodities
having made a valid election under
section 475(f). “Securities” for these
purposes are securities described in
section 475(c)(2) and “commodities” are
described in section 475(e)(2).
“Securities” don't include any items
specifically excluded from sections
475(c)(2) and 475(e)(2), such as certain
contracts to which section 1256(a)
applies.
$50,000 depreciation and $100 of the
meals as other costs in computing cost
of goods sold. C must include on
Schedule M-3, Part II, line 15, in column
(a), the $50,000 of depreciation and
$100 of meals. C must also include a
temporary difference of $20,000 in
column (b), a permanent difference of
($50) in column (c), and $70,050 in
column (d) ($70,000 depreciation and
$50 meal expenses). In addition, C must
report on Part III, line 24, for its current
tax year income statement, depreciation
expense of $40,000 in column (a), a
temporary difference of ($10,000) in
column (b), and $30,000 in column (d);
and on Part III, line 8, meals and
The entries in columns (a) and
(d) of Schedule M-3, line 15, are
negative amounts.
TIP
Don't report the following on line 15
or on Form 8916-A.
Amounts reportable on Part II, line 10.
Any gain or loss from inventory
•
•
hedging transactions reportable on Part
II, line 13.
•
•
•
Amounts reportable on Part II, line 16.
Amounts reportable on Part II, line 19.
Mark-to-market income or (loss)
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line 13,
and not on line 14.
Traders in securities and commodi-
ties. For a trader in securities or
commodities that made a valid election
under section 475(f) to use the
associated with the inventories of
dealers in securities under section 475
reportable on Part II, line 14.
entertainment expense of $100 in
column (a), a permanent difference of
($50) in column (c), and $50 in column
(d). All other cost of goods sold items
would be added to the amounts
Section 481(a) adjustments related to
•
cost of goods sold or inventory valuation
reportable on Part II, line 17.
included on Part II, line 15, detailed in
this example and reported on Part II,
line 15, in the appropriate columns.
Fines and penalties reportable on
•
Part III, line 9.
mark-to-market method to account for
securities or commodities held in
connection with a trading business that
files Form 4797, Sales of Business
Property, any Schedule M-3 entries
required as a result of marking to market
these securities or commodities are
reported as follows: (a) mark-to-market
gains and losses from Form 4797,
line 10, are included on Schedule M-3
(Form 1120-S), Part II, line 14; (b) any
other Schedule M-3 entries required
based on other results (non
Judgments, damages, awards, and
•
Line 16. Sale Versus Lease (for
Sellers and/or Lessors)
similar costs, reportable on Part III,
line 10.
Amounts included on Part III, line 28.
•
Also see the instructions at Part
Form 8916-A. Any corporation filing
Form 1120-S that (a) is required to file a
Schedule M-3 and has less than $50
million in total assets at the end of the
tax year or (b) isn't required to file a
Schedule M-3 and voluntarily files a
Schedule M-3, isn't required to file Form
8916-A but may voluntarily do so.
If you are required to (or voluntarily)
file Form 8916-A, complete Part I to
provide a detailed schedule of cost of
goods sold. Enter the amounts from
line 8, columns (a) through (d) of Form
8916-A, on Schedule M-3, Part II,
line 15, columns (a) through (d), as
applicable. Attach Form 8916-A.
Example 15. Corporation C is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. C placed in service 10
depreciable fixed assets in a previous
tax year. C's total depreciation expense
for its current tax year for five of the
assets is $50,000 for financial
III, line 28.
TIP
Asset transfer transactions with periodic
payments characterized for financial
accounting purposes as either a sale or
a lease may, under some
circumstances, be characterized as the
opposite for tax purposes. If the
mark-to-market gains and losses)
included in the total reported on Form
4797, line 17, should be reported on
Schedule M-3 (Form 1120-S), Part II,
line 21d, unless the instructions for
Schedule M-3 require the amounts to be
reported on another line.
transaction is treated as a lease, the
seller/lessor reports the periodic
payments as gross rental income and
also reports depreciation expense or
deduction. If the transaction is treated
as a sale, the seller/lessor reports gross
profit (sale price less cost of goods sold)
from the sale of assets and reports the
periodic payments as payments of
principal and interest income.
Line 15. Cost of Goods Sold
Report on line 15 any amounts
deducted as part of cost of goods sold
during the tax year, regardless of
whether the amounts would otherwise
be reported elsewhere in Part II or Part
III.
On Part II, line 16, column (a), report
the gross profit or gross rental income
for financial accounting purposes for all
sale or lease transactions that must be
given the opposite characterization for
U.S. income tax purposes. On Part II,
line 16, column (d), report the gross
profit or gross rental income for federal
income tax purposes. Interest income
amounts for such transactions must be
Examples of amounts that must be
included as cost of goods sold items are accounting purposes and $70,000 for
amounts attributable to inventory
valuation, such as amounts attributable
to cost-flow assumptions, additional
costs required to be capitalized
U.S. income tax purposes. C's total
annual depreciation expense for its
current tax year for the other five assets
is $40,000 for financial accounting
Instructions for Schedule M-3 (Form 1120-S)
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reported on Part II, line 11, in column (a)
or (d), as applicable. Depreciation
expense for such transactions must be
reported on Part III, line 24, in column
(a) or (d), as applicable. Use columns
(b) and (c) of Part II, lines 11 and 16,
and Part III, line 24, as applicable to
report the differences between column
(a) and (d).
Example 17. Corporation N is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. N was depreciating
certain fixed assets over an erroneous
recovery period and, effective for its
current tax year, N receives IRS consent
to change its method of accounting for
the depreciable fixed assets and begins
using the proper recovery period. The
change in method of accounting results
in a positive section 481(a) adjustment
of $100,000 that is required to be
1. The excess of a debt instrument's
stated redemption price at maturity over
its issue price, as determined under
section 1273;
2. Amounts that are imputed interest
on a deferred sales contract under
section 483;
3. Amounts treated as interest or
OID under the stripped bond rules under
section 1286; and
4. Amounts treated as OID under
the below-market interest rate rules
under section 7872.
Example 16. Corporation M is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. M sells and leases
property to customers. For financial
accounting purposes, M accounts for
each transaction as a sale. For U.S.
income tax purposes, each of M's
transactions must be treated as a lease.
In its financial statements, M treats the
difference in the financial accounting
and the U.S. income tax treatment of
these transactions as temporary. During
its current tax year, M reports in its
financial statements $1,000 of sales and
$700 of cost of goods sold regarding its
current tax year lease transactions. M
receives periodic payments of $500 in
its current tax year for these current tax
year transactions and similar
spread over 4 tax years, beginning with
the current tax year. In its financial
statements, N treats the section 481(a)
adjustment as a temporary difference. N
must report on Part II, line 17, $25,000
in columns (b) and (d) for its current tax
year and each of the subsequent 3 tax
years (unless N is otherwise required to
recognize the remainder of the 481(a)
adjustment earlier). N mustn't report the
section 481(a) adjustment on Part III,
line 24.
Line 21a. Income Statement
Gain/Loss on Sale, Exchange,
Abandonment, Worthlessness,
or Other Disposition of Assets
Other Than Inventory and
Pass-Through Entities
Report on line 21a, column (a), all gains
and losses on the disposition of assets
except for (a) gains and losses on the
disposition of inventory, and (b) gains
and losses allocated to the corporation
from a pass-through entity (for example,
on Schedule K-1) that are included in
the net income (loss) of the corporation
reported on Part I, line 11. Reverse the
amount reported in column (a) in
column (b) or (c), as applicable. The
corresponding gains and losses for U.S.
income tax purposes are reported on
Part II, lines 21b through 21g, as
Line 18. Unearned/Deferred
Revenue
Report on line 18, column (a), amounts
of revenues included in Part I, line 11,
that were deferred from a prior financial
accounting year. Report on line 18,
column (d), amounts of revenues
transactions from prior years and treats
$400 as principal and $100 as interest
income. For financial accounting
purposes, M reports gross profit of $300
($1,000 – $700) and interest income of
$100 from these transactions. For U.S.
income tax purposes, M reports $500 of
gross rental income (the periodic
recognizable for U.S. income tax
purposes in the current tax year that are
recognized for financial accounting
purposes in a different year. Also report
on line 18, column (d), any amount of
revenues reported on line 18, column
(a), that are recognizable for U.S.
income tax purposes in the current tax
year. Use columns (b) and (c) of line 18,
as applicable, to report the differences
between columns (a) and (d).
applicable.
payments) and (based on other facts)
$200 of depreciation deduction on the
property. On its current tax year
Line 21b. Gross Capital Gains
From Schedule D, Excluding
Amounts From Pass-Through
Entities
Schedule M-3, M must report on Part II,
line 11, $100 in column (a), ($100) in
column (b), and zero in column (d). In
addition, M must report on Part II,
Report on line 21b gross capital gains
reported on Schedule D (Form 1120-S),
Capital Gains and Losses and Built-in
Gains, or Form 8949, Sales and Other
Dispositions of Capital Assets,
excluding capital gains from
line 16, $300 of gross profit in column
(a), $200 in column (b), and $500 of
gross rental income in column (d).
Lastly, M must report on Part III, line 24,
$200 in columns (b) and (d).
Line 18 mustn't be used to report
income recognized from long-term
contracts. Instead, use line 19.
Line 19. Income Recognition
From Long-Term Contracts
pass-through entities, which must be
reported on Part II, lines 7, 8, or 9, as
applicable.
Line 17. Section 481(a)
Adjustments
Report on line 19 the amount of net
income or loss for financial statement
purposes (or books and records, if
applicable) or U.S. income tax purposes
for any contract accounted for under a
long-term contract method of
Line 21c. Gross Capital Losses
From Schedule D, Excluding
Amounts From Pass-Through
Entities, Abandonment Losses,
and Worthless Stock Losses
Report on line 21c gross capital losses
reported on Schedule D (Form 1120-S)
or Form 8949, excluding capital losses
from (a) pass-through entities, which
must be reported on Part II, lines 7, 8, or
9, as applicable; (b) abandonment
losses, which must be reported on Part
II, line 21e; and (c) worthless stock
With the exception of a section 481(a)
adjustment that is required to be
reported on Part II, line 10, for
reportable transactions, any difference
between an income or expense item
attributable to an authorized (or
accounting.
Line 20. Original Issue Discount
and Other Imputed Interest
Report on line 20 any amounts of
original issue discount (OID) and other
imputed interest. The term “original
issue discount and other imputed
interest” includes, but isn't limited to:
unauthorized) change in method of
accounting made for U.S. income tax
purposes that results in a section 481(a)
adjustment must be reported on Part II,
line 17, regardless of whether a
separate line for that income or expense
item exists in Part II or Part III.
Instructions for Schedule M-3 (Form 1120-S)
-14-
losses, which must be reported on Part
II, line 21f.
the amount of each item and provides a
description that states the income (loss)
name for book purposes for the amount
recorded in column (a) and describes
the adjustment being recorded in
deduction and the item isn't described
or included in Part II, lines 1 through 22,
or Part III, lines 1 through 31, report the
entire amount of the item in columns (a)
and (d) of line 25. If a portion of an item
of income, loss, expense, or deduction
has a difference and a portion of the
item doesn't have a difference, don't
report any portion of the item on line 25.
Instead, report the entire amount of the
item (that is, both the portion with a
difference and the portion without a
difference) on the applicable line of Part
II, lines 1 through 22, or Part III, lines 1
Line 21d. Net Gain/Loss
Reported on Form 4797,
Line 17, Excluding Amounts
From Pass-Through Entities,
Abandonment Losses, and
Worthless Stock Losses
Report on line 21d the net gain or loss
reported on line 17 of Form 4797,
excluding amounts from (a)
column (b) or (c). The entire description
completes the tax description for the
amount included in column (d) for each
item separately stated on this line.
The attached statement should have
five columns. The first column has the
description for the next four columns.
The second column is column (a)
pass-through entities, which must be
reported on Part II, lines 7, 8, or 9, as
applicable; (b) abandonment losses,
which must be reported on Part II,
line 21e; and (c) worthless stock losses,
which must be reported on Part II,
line 21f. The amount reported on
line 21d is the amount that would have
been carried to line 17 of Form 4797 in
the case of a corporation that isn't an S
corporation.
income (loss) per income statement,
third column is column (b) temporary
difference, the fourth column is column
(c) permanent difference, and the fifth
column is column (d) income (loss) per
tax return. Every item listed on the
attached statement for line 22 must
always have columns (a) + (b) + (c) =
(d). Each item with amounts in columns
(a), (b), (c), and (d) will be totaled and
included as one line on line 22.
Part III. Reconciliation of
Net Income (Loss) per
Income Statement of the
Corporation With Total
Income (Loss) per
Return—Expense/
Deduction Items
Traders in securities or
If any “comprehensive income” as
defined by Statement of Financial
Accounting Standards (SFAS) No. 130
is reported on this line, describe the
item(s) in detail. Examples of sufficiently
detailed descriptions include “Foreign
currency translation
commodities that have made a
valid election under section
TIP
Expense amounts that reduce
financial accounting income
must be reported on Part III,
TIP
475(f) to use the mark-to-market
method to account for securities or
commodities, see the instructions for
Part II, line 14.
column (a), as positive amounts.
Deduction amounts that reduce taxable
income must be reported on Part III,
column (d), as positive amounts.
Amounts reported on Part II, line 24,
must be the negative of the amounts
reported on Part III, line 32.
adjustments—comprehensive income”
and “Gains and losses on
Line 21e. Abandonment Losses
Report on line 21e any abandonment
losses, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss.
available-for-sale
securities—comprehensive income.”
Line 23. Total Income (Loss)
Items
Combine lines 1 through 22 and enter
the total on line 23.
Lines 1 Through 6. Income Tax
Expense
Line 21f. Worthless Stock
Losses
If the corporation doesn't distinguish
between current and deferred income
tax expense in its financial statements
(or its books and records, if applicable),
report income tax expense as current
income tax expense using lines 1, 3,
and 5, as applicable.
Report on line 21f any worthless stock
loss, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss. Attach a statement that
separately states and adequately
discloses each transaction that gives
rise to a worthless stock loss and the
amount of each loss.
Line 15, Cost of goods sold,
columns (a) and (d), are
TIP
negative amounts which will
affect the totals entered on line 23.
Line 24. Total Expense/
Deduction Items
Line 7. Equity-Based
Compensation
Report on Part II, line 24, columns (a)
through (d), as applicable, the negative
of the amounts reported on Part III,
line 32, columns (a) through (d). For
example, if Part III, line 32, column (a),
reflects an amount of $1 million, then
report on Part II, line 24, column (a), ($1
million). Similarly, if Part III, line 32,
column (b), reflects an amount of
($50,000), then report on Part II, line 24,
column (b), $50,000.
Report on line 7 any amounts for
equity-based compensation or
Line 21g. Other Gain/Loss on
Disposition of Assets Other
Than Inventory
Report on line 21g any gains or losses
from the sale or exchange of property
other than inventory that aren't reported
on lines 21b through 21f.
consideration that are reflected as
expense for financial accounting
purposes (column (a)) or deducted in
the U.S. income tax return (column (d))
other than amounts reportable
elsewhere on Schedule M-3, Parts II
and III. Examples of amounts reportable
on line 7 include payments attributable
to stock options (including incentive
stock options and nonqualified stock
options), employee stock purchase
plans (ESPPs), phantom stock options,
phantom stock units, stock warrants,
stock appreciation rights, and restricted
stock, regardless of whether such
Line 22. Other Income (Loss)
Items With Differences
Separately state and adequately
Line 25. Other Items With No
Differences
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or
disclose on Part II, line 22, all items of
income (loss) with differences that aren't
otherwise listed on Part II, lines 1
through 21. Attach a statement that
itemizes the type of income (loss) and
Instructions for Schedule M-3 (Form 1120-S)
-15-
payments are made to employees or
non-employees, or as payment for
property or compensation for services.
other indemnitors for any fines and
penalties described above.
income (loss) amount reported in Part I,
line 11, for the current tax year and that
isn't reportable elsewhere on
Line 10. Judgments, Damages,
Awards, and Similar Costs
Schedule M-3. For example, report
originations and reversals of deferred
compensation subject to section 409A
on line 13.
Line 8. Meals and
Entertainment
Report on line 10, column (a), the
amount of any estimated or actual
judgments, damages, awards,
Report on line 8, column (a), any
amounts paid or accrued by the
corporation during the tax year for
meals, beverages, and entertainment
that are accounted for in financial
accounting income, regardless of the
classification, nomenclature, or
Line 15. Charitable
Contribution of Intangible
Property
Report on line 15 any charitable
contribution of intangible property, for
example, contributions of:
settlements, and similar costs, however
named or classified, included in
financial accounting income, regardless
of whether the amount deducted was
attributable to an estimate of future
terminology used for such amounts, and anticipated payments or actual
regardless of how or where such
amounts are classified in the
payments. Also report on line 10,
column (a), the reversal of any
Intellectual property, patents
•
(including any amounts of additional
contributions allowable by virtue of
income earned by donees subsequent
to the year of donation), copyrights,
trademarks;
corporation's financial income statement overaccrual of any amount described in
or the income and expense accounts
maintained in the corporation's books
and records. Report only amounts not
otherwise reportable elsewhere on
Schedule M-3, Parts II and III (for
example, Part II, line 15).
this paragraph.
Report on line 10, column (d), any
such amounts as are described in the
preceding paragraph that are includible
in taxable income, regardless of the
financial accounting period in which
such amounts were or are included in
financial accounting net income.
Complete columns (b) and (c) as
appropriate.
Securities (including stocks and their
•
derivatives, stock options, and bonds);
Conservation easements (including
•
scenic easements or air rights);
Line 9. Fines and Penalties
Railroad rights of way;
Mineral rights; and
•
•
•
Report on line 9 any fines or similar
penalties paid to a government or other
authority for the violation of any law for
which fines or penalties are assessed.
All fines and penalties expensed in
financial accounting income (paid or
accrued) must be included on this line 9,
column (a), regardless of the
Other intangible property.
Line 16. Current Year
Don't report on this Part III, line 10,
amounts required to be reported in
accordance with instructions for Part III,
line 9.
Acquisition or Reorganization
Investment Banking Fees
Report on line 16 any investment
banking fees paid or incurred in
Don't report on this Part III, line 10,
amounts recovered from insurers or any
other indemnitors for any judgments,
damages, awards, or similar costs
described above.
government or other authority that
imposed the fines or penalties,
connection with a taxable or tax-free
acquisition of property (for example,
stock or assets) or a tax-free
regardless of whether the fines and
penalties are civil or criminal, regardless
of the classification, nomenclature, or
terminology used for the fines or
reorganization. Report on this line any
investment banking fees incurred at any
stage of the acquisition or
Line 11. Pension and
Profit-Sharing
Report on line 11 any amounts
attributable to the corporation's pension
plans, profit-sharing plans, and any
other retirement plans.
penalties by the imposing authority in its
actions or documents, and regardless of
how or where the fines or penalties are
classified in the corporation's financial
income statement or the income and
expense accounts maintained in the
corporation's books and records. Also
report on line 9, column (a), the reversal
of any overaccrual of any amount
described in this paragraph. See section
162(f) for additional guidance.
reorganization process including, for
example, fees paid or incurred to
evaluate whether to investigate an
acquisition, fees to conduct an actual
investigation, and fees to consummate
the acquisition. Also include on this
line 16 investment banking fees incurred
in connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.
Line 12. Other Post-Retirement
Benefits
Report on line 12 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 11 (for example, retiree health
and life insurance coverage, dental
coverage, etc.).
Line 17. Current Year
Acquisition or Reorganization
Legal and Accounting Fees
Report on line 9, column (d), any
such amounts as described in the
preceding paragraph that are includible
in taxable income, regardless of the
financial accounting period in which
such amounts were or are included in
financial accounting net income.
Complete columns (b) and (c) as
appropriate.
Report on line 17 any legal and
accounting fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (for example,
stock or assets) or tax-free
Line 13. Deferred
Compensation
Report on line 13, column (a), any
compensation expense included in the
net income (loss) amount reported in
Part I, line 11, that isn't deductible for
U.S. income tax purposes in the current
tax year and that wasn't reported
reorganization. Report on this line any
legal and accounting fees incurred at
any stage of the acquisition or
Don't report on this Part III, line 9,
amounts required to be reported in
accordance with instructions for Part III,
line 10.
reorganization process including, for
example, fees paid or incurred to
evaluate whether to investigate an
acquisition, fees to conduct an actual
elsewhere on Schedule M-3, column
(a). Report on line 13, column (d), any
compensation deductible in the current
Don't report on this Part III, line 9,
amounts recovered from insurers or any tax year that wasn't included in the net
Instructions for Schedule M-3 (Form 1120-S)
-16-
investigation, and fees to consummate
the acquisition. Also include on this line
legal and accounting fees incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.
gas that isn't required to be reported
elsewhere on Schedule M-3 (for
life insurance policy if the corporation is
directly or indirectly a beneficiary under
the policy or if the policy has a cash
value. Report in column (d) the amount
of the premiums that are deductible for
federal income tax purposes.
example, on Part II, line 7, 8, 9, or 15).
Line 24. Depreciation
Report on line 24 any depreciation
expense that isn't required to be
reported elsewhere on Schedule M-3
(for example, on Part II, line 7, 8, 9, or
15).
Line 18. Current Year
Acquisition/Reorganization
Other Costs
Line 28. Purchase Versus
Lease (for Purchasers and/or
Lessees)
Report on line 18 any other fees paid or
incurred in connection with a taxable or
tax-free acquisition of property (for
example, stock or assets) or a tax-free
reorganization not otherwise reportable
on Schedule M-3 (for example, Part III,
line 16 or 17). Report on this line any
fees paid or incurred at any stage of the
acquisition or reorganization process
including, for example, fees paid or
incurred to evaluate whether to
Line 25. Bad Debt Expense
Also see the instructions for
sellers and/or lessors in the
instructions for Part II, line 16.
TIP
Report on line 25, column (a), any
amounts attributable to an allowance for
uncollectible accounts receivable or
actual write-offs of accounts receivable
included on Part I, line 11. Report in
column (d) the amount of bad debt
expense deductible for federal income
tax purposes under section 166.
Asset transfer transactions with periodic
payments characterized for financial
accounting purposes as either a
purchase or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes.
Line 26. Interest Expense
If a transaction is treated as a lease,
the purchaser/lessee reports the
periodic payments as gross rental
expense. If the transaction is treated as
a purchase, the purchaser/lessee
reports the periodic payments as
payments of principal and interest and
also reports depreciation expense or
deduction regarding the purchased
asset.
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line other
Attach Form 8916-A. Complete Part III
and enter the amounts shown on line 5,
columns (a) through (d), on
Schedule M-3, line 27, columns (a)
through (d), as applicable.
acquisition/reorganization costs
incurred in connection with the
Any corporation that files Form
liquidation of a subsidiary, a spin-off of a
subsidiary, or an initial public stock
offering.
1120-S that (a) is required to file
a Schedule M-3 and has less
TIP
than $50 million in total assets at the
end of the tax year or (b) isn't required
to file a Schedule M-3 and voluntarily
files a Schedule M-3, isn't required to
file Form 8916-A but may voluntarily do
so.
Line 19. Amortization/
Impairment of Goodwill
Report on line 19 amortization of
goodwill or amounts attributable to the
impairment of goodwill.
Report in column (a) gross rent
expense for a transaction treated as a
lease for financial accounting purposes
but as a sale for U.S. income tax
purposes. Report in column (d), gross
rental deductions for a transaction
treated as a lease for U.S. income tax
purposes but as a purchase for financial
accounting purposes. Report interest
expense for such transactions on Part
III, line 26, in column (a) or (d), as
applicable. Report depreciation
Line 20. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
Report on Part III, line 26, column (a),
the total amount of interest expense
included on Part I, line 11, and report on
Part III, line 26, column (d), the total
amount of interest deduction included
on Form 1120-S, Schedule K, line 18,
that isn't required to be reported
Report on line 20 amortization of
acquisition, reorganization, and start-up
costs. For purposes of columns (b), (c),
and (d), include amounts amortizable
under section 167, 195, or 248.
expense or deductions for such
elsewhere on Schedule M-3. In columns
(b) or (c), as applicable, include any
adjustments for any amounts treated for
U.S. income tax purposes as interest
deduction that are treated as some
other form of expense for financial
accounting purposes, or vice versa. For
example, adjustments to interest
transactions on Part III, line 24, in
column (a) or (d), as applicable. Use
columns (b) and (c) of Part III, lines 24,
26, and 28, as applicable, to report the
differences between column (a) and (d)
for such recharacterized transactions.
Line 21. Other Amortization or
Impairment Write-Offs
Report on line 21 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.
Example 18. U.S. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. X acquired property in
a transaction that, for financial
expense/deduction resulting from
adjustments made in accordance with
the instructions for Part III, line 28,
should be made in columns (b) and (c),
as applicable, of this line 26.
Line 22.
When using this line to figure amounts
on other tax forms or worksheets, this
line should be considered to be zero.
accounting purposes, X treats as a
lease. Because of its terms, the
Line 23a. Depletion—Oil & Gas
Report on line 23a, column (a), any oil
and gas depletion included on Part I,
line 11.
Don't report on Form 8916-A and on
line 26 amounts reported in accordance
with the instructions for Part II, lines 7, 8,
9, and 10.
transaction is treated for U.S. income
tax purposes as a purchase and X must
treat the periodic payments it makes
partially as payment of principal and
partially as payment of interest. In its
financial statements, X treats the
difference between the financial
Line 23b. Depletion—Other
than Oil & Gas
Line 27. Corporate Owned Life
Insurance Premiums
Report on line 23b any depletion
Report on line 27 all amounts of
accounting and U.S. income tax
expense/deduction other than oil and
insurance premiums attributable to any
treatment of this transaction as a
Instructions for Schedule M-3 (Form 1120-S)
-17-
temporary difference. During its current
tax year, X reports in its financial
statements $1,000 of gross rental
expense that, for U.S. income tax
purposes, is recharacterized as a $700
payment of principal and a $300
which they are paid or incurred, or they
may be deferred and amortized.
column (d). X must also report $6,000 in
column (a), ($4,000) in column (b), and
$2,000 in column (d) on Part III, line 24.
Example 19. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, X incurred $100,000 of research
and development costs that X
Example 22. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. During its current tax
year, X incurred $10,000 of research
and development costs related to social
sciences that it recognized as an
payment of interest, accompanied by a
depreciation deduction of $1,200
(based on other facts). On its current tax
year Schedule M-3, X must report the
following on Part III, line 28: column (a),
$1,000, its financial accounting gross
rental expense; column (b), ($1,000);
and column (d), zero. On Part III, line 26,
X reports zero in column (a) and $300 in
columns (b) and (d) for the interest
deduction. On Part III, line 24, X reports
zero in column (a) and $1,200 in
recognized as an expense in its
financial statements. Also, X incurred
$20,000 in attorney fees in obtaining a
expense in its financial statements. X
patent application that X capitalized and adopted the current expense method for
amortized in its financial statements. X
recognized a $2,000 amortization
deduction. In compliance with its
research and experimental
expenditures for U.S. income tax
purposes. Because such costs aren't
allowable costs under section 174, X
must report $10,000 in column (a),
permanent difference ($10,000) in
column (c), and $0 in column (d). If such
costs are otherwise deductible for U.S.
income tax purposes, X must report this
adopted method of accounting under
section 174, X deducts research and
experimental expenditures for U.S.
income tax purposes. Accordingly, X
must report $100,000 in column (a),
$20,000 in column (b), and $120,000 in
columns (b) and (d) for the depreciation
deduction.
Line 29. Research and
Development Costs
column (d). X must also report $2,000 in item of expense on Part III, line 31.
column (a), ($2,000) in column (b), and
Example 23. Corporation X is a
Report in column (a) the amount of
expenses included in net income
reported on Part I, line 11, that are
related to research and development
expense. Report in column (d) the
amount of deductions included in Form
1120-S, line 21, and/or separately
reported on Form 1120-S, Schedule K,
that are recognized and reported as
Section 174 research and experimental
expenditures consistent with the
corporation’s adopted method of
accounting for such expenditures. In
column (c), as applicable, include any
adjustments for any amounts treated for
U.S. income tax purposes as research
or experimental expenditures that are
treated as some other form of expense
for financial accounting purposes, or
vice versa. Report any difference in
timing recognition in column (b). For
example, if the taxpayer's financial
accounting method doesn't specify
otherwise, column (b) adjustments
include adjustments for timing
$0 in column (d) on Part III, line 21.
calendar year taxpayer that files and
Example 20. Assume the same
entirely completes Schedule M-3 for its
facts as Example 19 except Corporation current tax year. During its current tax
X elected to capitalize and amortize its
research and expenditures over 60
months for all its research programs for
U.S. tax purposes. X first realized
year, X paid $75,000 to acquire or
in-license intangible assets under a
collaborative arrangement with another
company that X recognized as a
benefits from such expenditures on
August 1. Accordingly, X must report
$100,000 in column (a), a temporary
difference of ($90,000) ($20,000 less
($120,000/60 months X 55 months)) in
column (b), and $10,000 in column (d).
research and development expense in
its financial statements. X adopted the
current expense method for research
and experimental expenditures for U.S.
income tax purposes. Because
payments made to acquire rights to a
product or technology are excluded
costs from the definition of research and
experimental expenditures, X must
report $75,000 in column (a), ($75,000)
in column (c), and $0 in column (d). X
must report any amortization otherwise
allowable related to the payments on
Part III, line 21.
Example 21. Corporation X is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. X adopted the current
expense method for research and
experimental expenditures for U.S.
income tax purposes. During it current
tax year, X incurred $50,000 of research
and development costs that X
Line 30. Section 118 Exclusion
recognized as an expense in its
Report on line 30 any inducements
received in the current year and treated
as contributions to the capital of a
corporation by a non-shareholder. The
following non-shareholder contributions
to capital are not eligible for exclusion
under section 118.
financial statements. Also, X undertook
to develop a new machine for its
differences between financial and tax
accounting for: (1) deferral and
business. X expended $30,000 on the
project of which $10,000 represents
actual costs of material, labor, and
component cost to construct the
amortization of research expenditures,
(2) reduction of section 174
expenditures under section 280C or
section 482, (3) costs attributable to
obtaining a patent, (4) research in social
sciences, and (5) cost elements for
property of a character subject to
depreciation.
machine, and $20,000 represents
research costs not attributable to the
machine itself. X capitalized all costs of
$30,000 related to the machine and
recognized $6,000 of depreciation
expense in its financial statements. X’s
depreciation expense on the $10,000 of
costs related to the machine itself was
$2,000 for U.S. income tax purposes.
Accordingly, X must report $50,000 in
column (a), $20,000 (research costs
which aren't attributable to the machine
itself) in column (b), and $70,000 in
Any contribution in aid of construction
•
or any other contribution as a customer
or potential customer.
Any contribution by any civic group.
Any contribution by any governmental
•
•
entity, except any contribution made
after December 22, 2017, and made
pursuant to a master development plan
that was approved prior to December
22, 2017, by a governmental entity.
Section 174 provides two methods
for the treatment of research and
experimental expenditures paid or
incurred by a taxpayer in connection
with the taxpayer’s trade or business.
These expenditures may be treated as
expenses not chargeable to a capital
account and deducted in the year in
Instructions for Schedule M-3 (Form 1120-S)
-18-
Report in column (a) any income
amount as a negative number and any
expense amount as a positive number.
lease cancellation costs, loss on sale of
equipment, etc., a supporting statement
that lists those categories of expenses
and their details will satisfy the
deductible in the current tax year for
U.S. income tax purposes. Examples of
reserves that are allowed for book
purposes, but not for tax purposes,
include warranty reserves, restructuring
reserves, reserves for discontinued
operations, and reserves for
Corporations must identify on an
accompanying statement referencing
line 36 the fair market value of land or
other property (including cash) provided
to the corporation by any
requirement to separately state and
adequately disclose. In order to
separately state and adequately
disclose the employee termination
acquisitions and dispositions. Only
costs, it isn't required that an anticipated report on line 31 items that aren't
non-shareholder, including a
termination cost amount be listed for
each employee, or that each asset (or
category of asset) be listed along with
the anticipated loss on disposition.
required to be reported elsewhere on
governmental unit as an inducement, or
for any other purpose.
Schedule M-3, Parts II and III.
Example 24. Corporation Q is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. On July 1 of each year,
Q has a fixed liability for its annual
insurance premiums on its home office
building that provides a 12-month
coverage period beginning July 1
through June 30. In addition, Q
On the accompanying statement,
also identify any inducements that
include refundable or transferable tax
credits, including transferable credits
that were sold.
The statement must separately state,
adequately disclose, and identify all of
the dollar amounts summarized by this
line. An accompanying statement is
required even if there are no dollar
amounts reported on line 30.
The attached statement should have
five columns. The first column has the
description for the next four columns.
The second column is column (a)
expense per income statement, the third
column is column (b) temporary
difference, the fourth column is column
(c) permanent difference, and the fifth
column is column (d) deduction per tax
return. Every item listed on the attached
statement for line 31 must always have
columns (a) + (b) + (c) = (d). Each item
with amounts in columns (a), (b), (c),
and (d) will be totaled and included as
one line on line 31.
historically prepays 12 months of
advertising expense on July 1. On July
1 of its current tax year, Q prepays its
insurance premium of $500,000 and
advertising expenses of $800,000. For
financial accounting purposes, Q
Line 31. Other Expense/
Deduction Items With
Differences
capitalizes and amortizes the prepaid
insurance and advertising over 12
months. For U.S. income tax purposes,
Q deducts the insurance premium when
paid and amortizes the advertising over
the 12-month period. In its financial
statements, Q treats the differences
attributable to the financial statement
treatment and U.S. income tax
Separately state and adequately
disclose on Part III, line 31, all items of
expense/deduction that aren't otherwise
listed on Part III, lines 1 through 30.
Comprehensive income. If any
“comprehensive income” as defined by
SFAS No. 130 is reported on this line,
describe the item(s) in detail as, for
example, “Foreign currency translation
adjustments—comprehensive income”
and “Gains and losses on
Attach a statement that describes
and itemizes the type of expense/
deduction and the amount of each item,
and provides a description that states
the expense/deduction name for book
purposes for the amount recorded in
column (a) and describes the
treatment of the prepaid insurance and
advertising as temporary differences.
available-for-sale
securities—comprehensive income.”
Q also has a legal expense reserve
where $300,000 was expensed for
financial accounting purposes and a
($100,000) temporary difference was
calculated to arrive at the income tax
deduction of $200,000. The statement
attached to Q's return for Part III, line 31,
must be separately stated and
Reserves and contingent liabilities.
Report on line 31 amounts related to the
change in each reserve or contingent
liability that isn't required to be reported
elsewhere on Schedule M-3. For
adjustment being recorded in column
(b) or (c). The entire description
completes the tax description for the
amount included in column (d) for each
item separately stated on this line.
example: (1) amounts relating to
The statement of details attached to
the Schedule M-3 for line 31 must
separately state and adequately
changes in reserves for litigation must
be reported on Part III, line 10; and (2)
amounts relating to changes in reserves
for uncollectible accounts receivable
must be reported on Part III, line 25. See
Example 24, later.
adequately disclosed as shown below.
disclose the nature and amount of the
expense related to each reserve and/or
contingent liability. The appropriate level
of disclosure depends upon each
taxpayer’s operational activity and the
nature of its accounting records. For
example, if a corporation’s net income
amount reported in the income
Line 32. Total Expense/
Deduction Items
Report on Part II, line 24, columns (a)
though (d), as applicable, the negative
of the amounts reported on Part III,
line 32, columns (a) through (d), as
applicable. Report positive amounts as
negative and negative amounts as
positive. For example, if Part III, line 32,
column (a), reflects an amount of $1
million, then report on Part II, line 24,
column (a), ($1 million). Similarly, if Part
III, line 32, column (b), reflects an
Report on line 31, the amortization of
various items of prepaid expense, such
as prepaid subscriptions and license
fees, prepaid insurance, etc.
Report on line 31, column (a),
expenses included in net income
reported on Part I, line 11, that are
related to reserves and contingent
liabilities. Report on line 31, column (d),
amounts related to liabilities for reserves
and contingent liabilities that are
statement includes anticipated
expenses for a discontinued operation
as a single amount, and its general
ledger or other books, records, and
work papers provide details for the
anticipated expenses under more
explanatory and defined categories,
such as employee termination costs,
amount of ($50,000), then report on Part
II, line 24, column (b), $50,000.
Instructions for Schedule M-3 (Form 1120-S)
-19-
Line 31—Example 24
Statement Concerning Other Expense/Deduction Items With Differences
Column (a) Expense Column (b) Temporary
Column (c)
Permanent Difference
Column (d) Deduction
per Tax Return
Description
per Income Statement
Difference
Prepaid insurance premium
expensed not capitalized
$250,000
$300,000
$550,000
$250,000
($100,000)
$150,000
-0-
-0-
-0-
$500,000
$200,000
$700,000
Legal expense reserve
Total line 31
Instructions for Schedule M-3 (Form 1120-S)
-20-