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