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Форма 1120 Інструкція по графіку М-3

Інструкції щодо розкладу M-3 (Форм 1120), Net Income (Loss) для корпорації з загальними активами $10 млн або більше

Рев. Листопад 2022

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  • Форма 1120 Графік М-3 - Чистий дохід (Losss) для корпорацій із загальними активами $10 млн або більше
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Department of the Treasury  
Internal Revenue Service  
Instructions for  
Schedule M-3 (Form 1120)  
(Rev. November 2022)  
(For use with the December 2019 revision of Schedule M-3 (Form 1120))  
Net Income (Loss) Reconciliation for Corporations With Total Assets of  
$10 Million or More  
Section references are to the Internal Revenue  
Code unless otherwise noted.  
million must file Schedule M-3 (Form  
1120).  
Where To File  
If the corporation is required to file (or  
voluntarily files) Schedule M-3 (Form  
1120), the corporation must file Form  
1120 (or Form 1120-C, if applicable)  
and all attachments and schedules,  
including Schedule M-3 (Form 1120) at  
the following address.  
A corporation filing Form 1120 (or  
Future Developments  
Form 1120-C) that is not required to file  
Schedule M-3 may voluntarily file  
Schedule M-3.  
For the latest information about  
developments related to Schedule M-3  
(Form 1120) and its instructions, such  
as legislation enacted after they were  
published, go to IRS.gov/Form1120.  
If a corporation was required to file  
Schedule M-3 for the preceding tax  
year, but reports on Form 1120, page 1,  
item D, and on Form 1120, Schedule L,  
total consolidated assets at the end of  
the current tax year of less than $10  
million, the corporation is not required to  
file Schedule M-3 for the current tax  
year.  
Department of the Treasury  
Internal Revenue Service Center  
Ogden, UT 84201-0012  
What’s New  
Contributions in aid of construction  
for regulated water and sewerage  
disposal utility companies. For  
contributions made after December 31,  
2020, a special rule applies to  
Who Must File  
Generally, the following apply.  
See Completing Schedule M-3, later.  
A domestic corporation or group of  
corporations required to file Form 1120,  
U.S. Corporation Income Tax Return,  
that reports on Form 1120, Schedule L,  
Balance Sheets per Books, total assets  
at the end of the corporation's tax year  
that equal or exceed $10 million must  
file Schedule M-3 instead of  
contributions to the capital of water and  
sewerage disposal utilities. See the  
instructions for Part III, line 36, later. For  
additional information, see section 118.  
In the case of a U.S. consolidated tax  
group, total assets at the end of the tax  
year must be determined based on the  
total year-end assets of all includible  
corporations listed on Form 851, net of  
eliminations for intercompany  
Amortization of research and devel-  
opment costs. Specified research or  
experimental expenditures paid or  
incurred in tax years beginning in 2022  
must be capitalized and amortized  
ratably over a 5-year period (15-year  
period for any expenditures related to  
foreign research). See the instructions  
Costs, later.  
transactions and balances between the  
includible corporations. In addition, for  
purposes of determining whether the  
corporation (or U.S. consolidated tax  
group) has total assets at the end of the  
current tax year of $10 million or more,  
the corporation's total consolidated  
assets must be determined on an  
overall accrual method of accounting  
unless both of the following apply: (a)  
the tax returns of all includible  
Schedule M-1, Reconciliation of Income  
(Loss) per Books With Income per  
Return.  
A corporation filing a  
non-consolidated Form 1120 that  
reports on Schedule L total assets that  
equal or exceed $10 million must  
complete and file Schedule M-3 and  
must check box (1) Non-consolidated  
return, at the top of page 1 of  
Schedule M-3.  
General Instructions  
corporations in the U.S. consolidated  
tax group are prepared using an overall  
cash method of accounting, and (b) no  
includible corporation in the U.S.  
Any U.S. consolidated tax group  
Purpose of Schedule  
consisting of a U.S. parent corporation  
and additional includible corporations  
listed on Form 851, Affiliations  
Schedule M-3, Part I, asks certain  
questions about the corporation's  
financial statements and reconciles  
financial statement net income (loss) for  
the corporation (or consolidated  
financial statement group, if applicable),  
as reported on Part I, line 4a, to net  
income (loss) of the corporation for U.S.  
taxable income purposes, as reported  
on Part I, line 11.  
consolidated tax group prepares or is  
included in financial statements  
Schedule, required to file Form 1120,  
that reports on Schedule L total  
prepared on an accrual basis.  
consolidated assets at the end of the tax  
year that equal or exceed $10 million  
must file Schedule M-3 and must check  
box (2) Consolidated return (Form 1120  
only), or box (3) Mixed 1120/L/PC  
group, as applicable, at the top of  
page 1 of Schedule M-3.  
Special Filing Requirements for  
Certain Groups  
Mixed groups. If the parent  
corporation of a U.S. consolidated tax  
group files Form 1120 and files and  
completes Schedule M-3, Parts II and  
III, then Schedule M-3, Parts II and III,  
must be completed for each member of  
the group. However, if the parent  
Schedule M-3, Parts II and III,  
reconcile financial statement net income  
(loss) for the U.S. corporation (or  
consolidated tax group, if applicable),  
as reported on Schedule M-3, Part I,  
line 11, to taxable income on Form  
1120, page 1, line 28.  
Cooperatives filing Form 1120-C,  
U.S. Income Tax Return for Cooperative  
Associations, that report total assets at  
tax year end that equal or exceed $10  
corporation of a U.S. consolidated tax  
group files Form 1120 and any member  
Nov 30, 2022  
Cat. No. 38103Y  
 
of the group files Form 1120-PC, U.S.  
Property and Casualty Insurance  
Company Income Tax Return, or Form  
1120-L, U.S. Life Insurance Company  
Income Tax Return, that member must  
complete Parts II and III of  
intercompany dividends and statutory  
accounting adjustments.  
by Schedule M-3 must be provided. Any  
statement required to support a line item  
on Schedule M-3 must be attached at  
the time Schedule M-3 is filed and must  
provide the information required for that  
line item.  
No Schedule M-3 is required for  
taxpayers filing Form 1120-REIT, U.S.  
Income Tax Return for Real Estate  
Investment Trusts; Form 1120-RIC, U.S.  
Income Tax Return for Regulated  
Investment Companies; Form 1120-H,  
U.S. Income Tax Return for  
Schedule M-3 (Form 1120-PC) or  
Schedule M-3 (Form 1120-L),  
All detailed statements for Part II and  
Part III of Schedule M-3 must be  
respectively, and the group must  
comply with the mixed group  
attached for each separate entity  
included in the consolidated Part II and  
Part III, including those for the parent  
company and the eliminations entity, if  
applicable. It is not required that the  
same supporting detailed information be  
presented for Part II and Part III of the  
consolidated Schedule M-3.  
Homeowners Associations; and Form  
1120-SF, U.S. Income Tax Return for  
Settlement Funds.  
consolidated Schedule M-3 instructions  
under Schedule M-3 Consolidation for  
Mixed Groups (1120/L/PC), later. A  
mixed group must also file Form 8916,  
Reconciliation of Schedule M-3 Taxable  
Income With Tax Return Taxable  
Income for Mixed Groups, and, if  
applicable, Form 8916-A, Supplemental  
Attachment to Schedule M-3.  
Completing Schedule M-3  
A corporation (or any member of a U.S.  
consolidated tax group) that is required  
to file Schedule M-3 and has at least  
$50 million total assets at the end of the  
tax year must complete the schedule in  
its entirety. In particular, a corporation  
filing a non-consolidated return that has  
at least $50 million total assets at the  
end of the tax year must complete Parts  
I, II, and III. Such a corporation does not  
check any of the checkboxes at the top  
of Parts II and III. In the case of a U.S.  
consolidated tax group, Part I must be  
completed once, on the consolidated  
Schedule M-3, by the parent  
Example 1.  
1. U.S. corporation A owns U.S.  
subsidiary B and foreign subsidiary F.  
For its current tax year, A prepares  
consolidated financial statements with B  
and F that report total assets of $12  
million. A files a consolidated U.S.  
income tax return with B and reports  
total consolidated assets on Schedule L  
of $8 million. A's U.S. consolidated tax  
group is not required to file  
If the parent company of a U.S.  
consolidated tax group files Form 1120  
and any member of the group files Form  
1120-PC or Form 1120-L and the  
consolidated Schedule L reported in the  
return includes the assets of all of the  
companies (the insurance companies  
as well as the non-insurance  
companies), in order to determine if the  
group meets the $10 million threshold  
test for the requirement to file  
Schedule M-3 for the current tax year.  
corporation. Parts II and III must be  
completed by the parent corporation,  
each includible corporation, and a  
consolidating eliminations entity.  
2. U.S. corporation C owns U.S.  
subsidiary D. For its current tax year, C  
prepares consolidated financial  
Schedule M-3, use the amount of total  
assets reported on Schedule L of the  
consolidated return. If the parent  
company of a U.S. consolidated tax  
group files Form 1120 and any member  
of the group files Form 1120-PC or  
Form 1120-L and the consolidated  
Schedule L reported in the return does  
not include the assets of one or more of  
the insurance companies in the U.S.  
consolidated tax group, in order to  
determine if the group meets the $10  
million threshold test, use the sum of the  
amount of total assets reported on the  
consolidated Schedule L plus the  
amounts of all assets reported on Forms  
1120-PC and 1120-L that are included  
in the consolidated return but not  
included on the consolidated  
statements with D, but C and D file  
separate U.S. income tax returns. The  
consolidated accrual basis financial  
statements for C and D report total  
assets at the end of the tax year of $12  
million after intercompany eliminations.  
C reports separate company total  
year-end assets on its Schedule L of $7  
million. D reports separate company  
total year-end assets on its Schedule L  
of $6 million. Neither C nor D is required  
to file Schedule M-3 for the current tax  
year.  
Form 1120 and Form 1120-C filers  
that (a) are required to file  
Schedule M-3 (Form 1120) and have  
less than $50 million total assets at the  
end of the tax year, or (b) are not  
required to file Schedule M-3 (Form  
1120) and voluntarily file Schedule M-3  
(Form 1120), must either (i) complete  
Schedule M-3 (Form 1120) entirely, or  
(ii) complete Schedule M-3 (Form 1120)  
through Part I, and complete  
Schedule M-1 of Form 1120 (or Form  
1120-C, if applicable) instead of  
completing Parts II and III of  
3. Foreign corporation A owns  
100% of both U.S. corporation B and  
U.S. corporation C. C owns 100% of  
U.S. corporation D. For its current tax  
year, A prepares a consolidated  
Schedule M-3 (Form 1120). If the filer  
chooses to complete Schedule M-1  
instead of completing Parts II and III of  
Schedule M-3, line 1 of the applicable  
Schedule M-1 must equal line 11 of Part  
I of Schedule M-3.  
Schedule L.  
Other entities. There are unique  
separate Schedules M-3 for taxpayers  
required to file Form 1065, U.S. Return  
of Partnership Income; Form 1120-S,  
U.S. Income Tax Return for an S  
worldwide financial statement for the  
ABCD consolidated group. The ABCD  
consolidated financial statement reports  
total year-end assets of $65 million. A is  
not required to file a U.S. income tax  
return. B files a separate U.S. income  
tax return and reports separate  
Note. In the case of an 1120 mixed  
group, Parts II and III of Schedule M-3  
(Form 1120) must be completed for all  
members of the mixed group whether  
Schedule M-3 (Form 1120) is required  
or voluntarily filed.  
Corporation; Form 1120-F, U.S. Income  
Tax Return of a Foreign Corporation;  
and for Forms 1120-PC or 1120-L. For  
more information, see the instructions  
for the applicable Schedule M-3.  
company total year-end assets on its  
Schedule L of $52 million. C files a  
consolidated U.S. income tax return  
with D and, after eliminating  
For insurance companies included in  
the consolidated U.S. income tax return,  
see the instructions for Part I, lines 10  
and 11, and Part II, line 7, for guidance  
on Schedule M-3 reporting of  
For any part of Schedule M-3 (Form  
1120) that is completed, all applicable  
questions must be answered on Part I,  
intercompany transactions between C  
and D, reports consolidated total  
year-end assets on Schedule L of $8  
all columns must be completed on Parts million. B is required to file  
II and III, and all numerical data required Schedule M-3 because its total  
Instructions for Schedule M-3 (Form 1120)  
-2-  
year-end assets reported on Schedule L and (3) no amounts to report on Part II  
exceed $50 million. The CD U.S. and Part III of Schedule M-3 for the tax  
the tax year, and must be the same total  
assets reported by the corporation (or  
by each member of the U.S.  
consolidated tax group is not required to year, the parent corporation of the U.S.  
file Schedule M-3 because its total  
year-end assets do not exceed $10  
million.  
consolidated tax group may attach to  
the consolidated Schedule M-3 a  
statement that provides the name and  
employer identification number (EIN) of  
the includible corporation in lieu of filing  
a blank Part II and Part III of  
consolidated tax group) in the non-tax  
basis financial statements, if any, used  
for Schedule M-3. If the corporation  
prepares non-tax-basis financial  
statements, Schedule L must equal the  
sum of the financial statement total  
assets for each corporation listed on  
Form 851 and included in the  
Example 2. At the end of  
Corporation A's current tax year, A's  
total assets were less than $10 million.  
A is not required to file Schedule M-3 for  
any reason. A may elect to file  
Schedule M-3 for the entity. On Part I,  
check box (4) Dormant subsidiaries  
schedule attached.  
consolidated U.S. income tax return  
(includible corporation) net of  
Schedule M-3 instead of completing  
Schedule M-1 of Form 1120. If A elects  
to file Schedule M-3, A must either (i)  
complete Schedule M-3 entirely, or (ii)  
complete Schedule M-3 through Part I  
and complete Schedule M-1 instead of  
completing Parts II and III of  
eliminations for intercompany  
Other Form 1120  
Schedules Affected by  
Schedule M-3  
transactions between includible  
corporations. If the corporation does not  
prepare non-tax-basis financial  
Requirements  
statements, Schedule L must be based  
on the corporation's books and records.  
The Schedule L balance sheet can  
show tax-basis balance sheet amounts  
if the corporation is allowed to use  
books and records for Schedule M-3  
and the corporation's books and records  
reflect only tax-basis amounts.  
Schedule M-3. If A elects to complete  
Schedule M-3 entirely, A must complete  
all columns of Parts II and III.  
Schedule B  
Generally, a corporation or group of  
corporations that files a Form 1120 and  
is required to file Schedule M-3, must  
also file Schedule B (Form 1120),  
Additional Information for Schedule M-3  
Filers. In the case of a consolidated  
group, a parent corporation files one  
Schedule B (Form 1120) for the entire  
consolidated group.  
Certain Allocations,  
Limitations, and Carryovers  
If an item attributable to an includible  
corporation is not shared by or allocated  
to the appropriate member of the group  
but is retained in the parent  
Generally, total assets at the  
beginning of the year (Schedule L,  
line 15, column (b)) must equal total  
assets at the close of the prior year  
(Schedule L, line 15, column (d)). For  
each Schedule L balance sheet item  
reported for which there is a difference  
between the current opening balance  
sheet amount and the prior closing  
balance sheet amount, attach a  
statement that reports the balance sheet  
item, the prior closing amount, the  
current opening amount, and a short  
explanation of the change. Reasons for  
these differences include mergers and  
acquisitions.  
corporation's financial statements (or  
books and records, if applicable), then  
the item must be reported by the parent  
corporation in its separate  
Certain corporations or groups of  
corporations filing Form 1120 that (a)  
are required to file Schedule M-3 and  
have less than $50 million in total assets  
at the end of the tax year, or (b) are not  
required to file Schedule M-3 and  
voluntarily file Schedule M-3, are not  
required to file Schedule B (Form 1120).  
See the instructions for Schedule B  
(Form 1120).  
Schedule M-3. For example, if the  
parent of a U.S. consolidated tax group  
prepares financial statements that  
include all members of the U.S.  
consolidated tax group and the parent  
does not allocate the group's income tax  
expense as reflected in the financial  
statements among the members of the  
group but retains it in the parent  
Schedule L  
If a non-tax-basis income statement and  
related non-tax-basis balance sheet are  
prepared for any purpose for a period  
ending with or within the tax year,  
Schedule L must be prepared showing  
non-tax-basis amounts. See the  
corporation, the parent corporation must  
report on its separate Schedule M-3 the  
U.S. consolidated tax group's income  
tax expense as reflected in the financial  
statements.  
For purposes of measuring total  
assets at the end of the year, the  
corporation's assets may not be netted  
or reduced by the corporation's  
liabilities. In addition, total assets may  
not be reported as a negative amount. If  
Schedule L is prepared on a  
Any adjustments made at the  
instructions for Part I, line 1, for the  
discussion of non-tax-basis income  
statements and related non-tax-basis  
balance sheets prepared for any  
purpose and the impact on the selection  
of the income statement used for  
Schedule M-3 and the related  
consolidated group level that are not  
attributable to any specific member of  
the U.S. consolidated tax group (for  
example, disallowance of net capital  
losses, contribution deduction  
non-tax-basis method, an investment in  
a partnership may be shown as  
appropriate under the corporation's  
non-tax-basis method of accounting,  
including, if required by the  
carryovers, and limitation of contribution  
deductions) must not be reported on the  
separate consolidating parent or  
corporation's reporting methodology,  
the equity method of accounting for  
investments. If Schedule L is prepared  
on a tax basis, an investment by the  
corporation in a partnership must be  
shown as an asset and measured by the  
corporation's adjusted basis in its  
partnership interest. Any liabilities  
contributing to such adjusted basis must  
be shown on Schedule L as corporate  
liabilities.  
non-tax-basis balance sheet amounts  
that must be used for Schedule L.  
subsidiary Schedules M-3 but rather on  
the consolidated Schedule M-3 and on  
the consolidating Schedule M-3 for  
consolidation eliminations (or on Form  
8916 in the case of a mixed group).  
Total assets shown on Schedule L,  
line 15, column (d) (or, for some  
consolidated mixed groups with a Form  
1120 parent and an insurance  
subsidiary, the assets reported on Form  
If an includible corporation has (1) no 1120, page 1, item D), must equal the  
activity for the tax year (for example,  
because the corporation is dormant or  
inactive); (2) no amount for the  
total assets of the corporation (or, for a  
U.S. consolidated tax group, the total  
assets of all members of the group  
listed on Form 851) as of the last day of  
corporation to include in Part I, line 11;  
Instructions for Schedule M-3 (Form 1120)  
-3-  
   
tax return or return of income filed prior  
to that day.  
8. The interest in the partnership it  
owns or is deemed to own in the  
partnership, directly or indirectly (as  
defined under these instructions), as of  
the date with respect to which it is  
reporting.  
9. Any change in that interest as of  
the date with respect to which it is  
reporting.  
Schedule M-2  
The amount shown on Schedule M-2,  
line 2, Net income (loss) per books,  
must equal the amount shown on  
Schedule M-3, Part I, line 11.  
For the purposes of these  
instructions, the following rules apply.  
1. The parent corporation of a  
consolidated tax group is deemed to  
own all corporate and partnership  
interests owned or deemed to be owned  
under these instructions by any member  
of the tax consolidated group.  
2. The owner of a disregarded entity  
is deemed to own all corporate and  
partnership interests owned or deemed  
to be owned under these instructions by  
the disregarded entity.  
3. The owner of 50% or more of a  
corporation by vote on any day of the  
corporation’s tax year is deemed to own  
all corporate and partnership interests  
owned or deemed to be owned under  
these instructions by the corporation  
during its tax year.  
4. The owner of 50% or more of  
partnership income, loss, or capital on  
any day of the partnership tax year is  
deemed to own all corporate and  
partnership interests owned or deemed  
to be owned under these instructions by  
the partnership during the partnership  
tax year.  
Schedule M-2 must reflect activity only  
of corporations included in the  
consolidated U.S. income tax return.  
Consolidated Return  
(Form 1120, Page 1)  
The reportable entity partner must  
retain copies of required reports it  
makes to partnerships under these  
instructions. Each partnership must  
retain copies of the required reports it  
receives under these instructions from  
reportable entity partners.  
Report on Form 1120, page 1, each  
item of income, gain, loss, expense, or  
deduction net of elimination entries for  
intercompany transactions between  
includible corporations. The corporation  
must not report as dividends on Form  
1120, Schedule C, any amounts  
received from an includible corporation.  
In general, dividends received from an  
includible corporation must be  
Example 3.  
1. A, limited liability company (LLC)  
filing a Form 1065 for 2022, is owned  
50% by U.S. corporation Z. A owns 50%  
of B, C, D, and E, which are also LLCs  
filing a Form 1065 for calendar year  
2022. Z was first required to file  
eliminated in consolidation rather than  
offset by the dividends-received  
deduction.  
Schedule M-3 (Form 1120) for its  
corporate tax year ending December  
31, 2021, and filed its Form 1120 with  
Schedule M-3 for 2021 on October 15,  
2022. As of October 16, 2022, Z was a  
reportable entity partner with respect to  
A and, through A, with respect to B, C,  
D, and E. On November 5, 2022, Z  
reports to A, B, C, D, and E, as it is  
required to do within 30 days of October  
16, that Z is a reportable entity partner  
directly owning (with respect to A) or  
deemed to own indirectly (with respect  
to B, C, D, and E) a 50% interest.  
Therefore, because Z was a reportable  
entity partner for 2022, each of A, B, C,  
D, and E is required to file Schedule M-3  
(Form 1065) for 2022, regardless of  
whether they would otherwise be  
required to file Schedule M-3 for that  
year.  
Entity Considerations for  
Schedule M-3  
For purposes of Schedule M-3,  
references to the classification of an  
entity (for example, as a corporation, a  
partnership, or a trust) are references to  
the treatment of the entity for U.S.  
income tax purposes. An entity that is  
generally disregarded as separate from  
its owner for U.S. income tax purposes  
(disregarded entity) must not be  
5. The beneficial owner of 50% or  
more of the beneficial interest of a trust  
or nominee arrangement on any day of  
the trust or nominee arrangement tax  
year is deemed to own all corporate and  
partnership interests owned or deemed  
to be owned under these instructions by  
the trust or nominee arrangement.  
separately reported on Schedule M-3  
except, if required, on Part I, line 7a or  
7b. On Schedule M-3, Parts II and III,  
any item of income, gain, loss,  
A reportable entity partner with  
respect to a partnership (as defined  
above) must report the following to the  
partnership within 30 days of first  
becoming a reportable entity partner  
and, after first reporting to the  
deduction, or credit of a disregarded  
entity must be reported as an item of its  
owner. In particular, the income or loss  
of a disregarded entity must not be  
reported on Part II, line 9, 10, or 11, as  
from a separate partnership or other  
pass-through entity. The financial  
statement income or loss of a  
2. P, a U.S. corporation, is the  
parent of a financial consolidation group  
with 50 domestic subsidiaries, DS1  
through DS50, and 50 foreign  
partnership under these instructions,  
thereafter within 30 days of the date of  
any change in the interest it owns or is  
deemed to own, directly or indirectly,  
under these instructions, in the  
partnership.  
disregarded entity is included on Part I,  
line 7a or 7b, only if its financial  
subsidiaries, FS1 through FS50, all  
100% owned on October 16, 2022. On  
October 15, 2022, P filed a consolidated  
tax return on Form 1120 and was  
required to file Schedule M-3 for the tax  
year ending December 31, 2021. On  
October 16, 2022, DS1, DS2, DS3, FS1,  
and FS2 each acquire a 10%  
statement income or loss is included on  
Part I, line 11, but not on Part I, line 4a.  
1. Name.  
2. Mailing address.  
Reportable Entity Partner  
Reporting Responsibilities  
A reportable entity partner with respect  
to a partnership filing Form 1065 is an  
entity that:  
3. Taxpayer identification number  
(TIN) or EIN, if applicable.  
partnership interest in partnership K,  
which files Form 1065 for the tax year  
ending December 31, 2022. P is  
4. Entity or organization type.  
Owns or is deemed to own, directly or  
5. State or country in which it is  
indirectly, under these instructions a  
50% or greater interest in the income,  
loss, or capital of the partnership on any  
day of the tax year; and  
organized.  
deemed to own, directly or indirectly  
(under these instructions), all corporate  
and partnership interests of DS1, DS2,  
and DS3 as the parent of the tax  
6. Date on which it first became a  
reportable entity partner.  
7. Date with respect to which it is  
reporting a change in its ownership  
interest in the partnership, if applicable.  
Was required to file Schedule M-3  
consolidation group and is therefore  
deemed to own 30% of K on October  
with its most recently filed U.S. income  
Instructions for Schedule M-3 (Form 1120)  
-4-  
     
16, 2022. P is deemed to own, directly  
or indirectly (under these instructions),  
all corporate and partnership interests  
of FS1 and FS2 as the owner of 50% or  
more of each corporation by vote and is  
therefore deemed to own 20% of K on  
September 16, 2022. P is therefore  
deemed to own 50% of K on October  
16, 2022. Since P owns or is deemed to  
own, directly or indirectly (under these  
instructions), 50% or more of K on  
Parts II and III of a separate  
sub-consolidations, there will generally  
be a total of six additional Schedules  
M-3, Part II, and six additional  
Schedule M-3 for each of the four  
includible corporations to reflect the  
activity of each includible corporation.  
Schedules M-3, Part III, for the  
Parts II and III of a separate  
subgroup sub-consolidations.  
Schedule M-3 to eliminate  
Specifically, there must be one Part II  
and one Part III for each subgroup's  
sub-consolidated amounts and one Part  
II and one Part III for each subgroup's  
sub-consolidation eliminations amounts.  
intercompany transactions between  
includible corporations and to include  
limitations on deductions (charitable  
contribution limitations and capital loss  
limitations) and carryover amounts  
(charitable contribution carryovers and  
capital loss carryovers).  
At the mixed group consolidated  
level, there must be a consolidated  
Schedule M-3, Part II, and, if applicable,  
a Part II for consolidation eliminations  
not includible in the subgroup  
October 16, 2022, and was required to  
file Schedule M-3 on its most recently  
filed U.S. income tax return filed prior to  
See Completing Schedule M-3 and  
that date, P is a reportable entity partner Certain Allocations, Limitations, and  
of K as of October 16, 2022. On  
Carryovers, earlier.  
eliminations. At the consolidated level,  
there must also be a consolidated  
Schedule M-3, Part I, and a  
November 5, 2022, P reports to K, as it  
is required to do, that P is a reportable  
entity partner as of October 16, 2022,  
deemed to own (under these  
Note. Complete only one  
Schedule M-3, Part I, for each  
consolidated Form 8916. For a mixed  
group, there is no Schedule M-3, Part III,  
at the consolidated level.  
consolidated group. A subsidiary of a  
consolidated group does not complete  
Schedule M-3, Part I. Enter on  
instructions), a 50% interest in K. K is  
therefore required to file Schedule M-3  
when it files its Form 1065 for its tax  
year ending December 31, 2022.  
Schedule M-3, Part I, the name and EIN  
of the common parent of the  
The corporation must check the  
applicable mixed group checkboxes on  
all Schedules M-3, Parts I, II, and III, as  
discussed below.  
consolidated group. Indicate on  
Schedule M-3, Parts II and III, on the  
line after the common parent's name  
and EIN, whether the Schedule M-3,  
Parts II and III, is for the (1) consolidated  
group, (2) parent corporation, (3)  
consolidation eliminations, or (4)  
subsidiary corporation, by checking the  
appropriate box. If Schedule M-3, Parts  
II and III, are for a subsidiary in a  
consolidated return, also enter the name  
and EIN of the subsidiary.  
Consolidated  
Schedule M-3 Versus  
Consolidating Schedules  
M-3 for Form 1120 Groups  
Subgroup Sub-Consolidation:  
1120 Subgroup, 1120-PC  
Subgroup, and 1120-L Subgroup  
A consolidated tax return group with a  
parent corporation that files a Form  
1120 is a mixed group if any member is  
a life insurance company (files using  
Form 1120-L) or a property and casualty  
insurance company (files using Form  
1120-PC). See Schedule M-3  
A subgroup Schedule M-3, Parts II and  
III, sub-consolidation must be prepared  
with all necessary eliminations within  
the subgroup for each of the three  
possible subgroups that are in fact  
present: one subgroup for those  
Schedule M-3 Consolidation for  
Mixed Groups (1120/L/PC)  
Consolidation for Mixed Groups  
(1120/L/PC), later.  
A U.S. consolidated tax group must  
file a consolidated Schedule M-3. Parts  
I, II, and III of the consolidated  
corporations reporting on Form 1120,  
one subgroup for those corporations  
reporting on Form 1120-PC, and one  
subgroup for those reporting on Form  
1120-L. The parent corporation is  
included in the subgroup that  
Special Schedule M-3 consolidation  
rules apply to a mixed group, that is, a  
consolidated tax group that includes (a)  
both a corporation that is an insurance  
company and a corporation that is not  
an insurance company; or (b) both a life  
insurance company and a property and  
casualty insurance company; or (c) a life  
insurance company, a property and  
casualty insurance company, and a  
corporation that is not an insurance  
company.  
Schedule M-3 must reflect the activity of  
the entire U.S. consolidated tax group.  
The parent corporation must also  
complete Parts II and III of a separate  
Schedule M-3 to reflect the parent's own  
activity. In addition, Parts II and III of a  
separate Schedule M-3 must be  
completed by each includible  
corresponds to the form on which it  
reports and the entire consolidated  
group files. For example, in the case of  
a Form 1120 parent and Form 1120  
consolidated group, the parent is  
included in the Form 1120 subgroup  
sub-consolidation. Each subgroup uses  
its own Schedule M-3 (Form 1120,  
1120-PC, or 1120-L), Parts II and III, for  
each corporation within the subgroup  
and for the subgroup sub-consolidation  
and the subgroup eliminations.  
corporation to reflect the activity of that  
includible corporation. Lastly, it will  
generally be necessary to complete  
Parts II and III of a separate  
Mixed group consolidation for  
Schedule M-3, Parts II and III, requires  
(a) subgroup sub-consolidation of the  
1120 subgroup, the 1120-PC subgroup,  
and the 1120-L subgroup, each with its  
own sub-consolidated Schedule M-3,  
Parts II and III; and (b) consolidation of  
the subgroup sub-consolidation totals  
on a consolidated Schedule M-3, Part II,  
that ties to a consolidated  
Schedule M-3 for consolidation  
eliminations.  
If a U.S. consolidated tax group that  
is not a mixed group consists of four  
includible corporations (the parent and  
three subsidiaries) all filing Form 1120,  
the U.S. consolidated tax group must  
complete six Schedules M-3 as follows.  
The three subgroup  
sub-consolidation taxable income  
calculations on Schedule M-3 must  
follow the separate return requirements  
of the regulation under section 1502 and  
all other applicable regulations, taking  
into account the amounts separately  
Schedule M-3, Part I, and a  
consolidated Form 8916.  
One consolidated Schedule M-3 with  
Parts I, II, and III completed to reflect the  
activity of the entire U.S. consolidated  
tax group.  
In addition to one Schedule M-3, Part reported on Form 8916. Capital loss  
II, and one Schedule M-3, Part III, for  
each corporation in the three subgroup  
limitation and carryforward used and  
charitable deduction limitation and  
Instructions for Schedule M-3 (Form 1120)  
-5-  
     
carryforward used are not taken into  
For mixed groups, the consolidated  
eliminations for the eliminations. The  
1120-L subgroup sub-consolidation  
Schedule M-3 (Form 1120-L), Parts II  
and III, must be indicated by checking  
box (5) Mixed 1120/L/PC group, and  
box (6) 1120-L group for the  
account in the determination of the three Part II, line 30, column (a), must equal  
subgroup sub-consolidated taxable  
incomes on Schedule M-3, but are  
reflected on Form 8916 and in the  
calculation of the life/non-life loss  
limitation and carryforward used. See  
Life/Non-Life Loss Limitation and  
Carryforward Used Calculations, later.  
Part I, line 11, with appropriate  
adjustments for statutory accounting  
requirements reflected on Part I, lines  
10a and 10b. The consolidated taxable  
income indicated on Part II, line 30,  
column (d), must equal the amount  
shown on Form 8916, line 1. Form  
8916, line 8, must equal taxable income  
reported on the tax return.  
sub-consolidation, and by checking box  
(5) Mixed 1120/L/PC group, and box (7)  
1120-L eliminations for the eliminations.  
The reconciliation totals for book,  
temporary difference, permanent  
difference, and taxable income for each  
subgroup are reported on Form 1120,  
1120-PC, or 1120-L, as applicable,  
Schedule M-3, Part II, line 29a, columns  
(a), (b), (c), and (d), and equal the sum  
of the line amounts on Part II, lines 26  
through 28. For a mixed group,  
A mixed group with a Form 1120  
parent corporation completes a  
consolidated level Schedule M-3 (Form  
1120), Parts I and II, and a consolidated  
Form 8916. The mixed group  
Completion of Mixed Group  
Checkboxes for Schedule M-3,  
Part II and Part III  
consolidated Schedule M-3, Part II,  
must be indicated by checking box (1)  
Consolidated group, and box (5) Mixed  
1120/L/PC group. (If a consolidated  
level Part II for consolidation  
Note. The following discussion of  
checkboxes will assume that the 1120  
subgroup includes the corporate parent  
of the mixed group.  
Schedule M-3, Part II, lines 29b, 29c,  
and 30 are blank on the Form 1120,  
1120-PC, or 1120-L, as applicable, for  
the separate corporations (parent and  
subsidiary) and for the three subgroup  
sub-consolidations.  
eliminations not includible in the  
subgroup eliminations is applicable, that  
Part II must be indicated by checking  
box (3) Consolidated eliminations, and  
box (5) Mixed 1120/L/PC group.)  
Forms 1120, 1120-PC, and 1120-L,  
Schedule M-3, Parts II and III, each  
have a checkbox (5) at the top  
indicating a mixed group. Checkbox (5)  
and one or more other applicable  
checkboxes must be checked.  
Note. A sub-consolidation is required  
for every subgroup, even if the  
subgroup consists of only one  
Life/Non-Life Loss Limitation and  
Carryforward Used Calculations  
corporation. In addition, Form 8916-A, if  
applicable, is required at the  
For example, an 1120 parent  
The applicable life/non-life loss  
corporation included in the 1120  
limitation and all carryforward used  
calculations are made using the  
amounts determined for taxable income  
in the three subgroup  
sub-consolidated level and the  
sub-consolidated elimination level.  
subgroup must check Schedule M-3  
(Form 1120), Parts II and III, box (2)  
Parent corporation, and box (5) Mixed  
1120/L/PC group. An 1120 subsidiary  
corporation within the 1120 subgroup  
must check Schedule M-3 (Form 1120),  
Parts II and III, box (4) Subsidiary  
corporation, and box (5) Mixed  
Reconciliation of Mixed Group  
Subgroup Sub-Consolidation  
Amounts to Schedule M-3, Part I,  
Line 11, and to Tax Return Taxable  
Income  
sub-consolidations and other applicable  
amounts separately reported on Form  
8916. The calculated life/non-life loss  
limitation or carryforward used amounts,  
if any, are not entered on Schedule M-3.  
The calculated amounts, if any, are  
entered on Form 8916.  
1120/L/PC group. An 1120-PC  
subsidiary corporation within the  
1120-PC subgroup must check  
At the consolidated level, use the  
Schedule M-3 (Form 1120, 1120-PC, or  
1120-L), Parts I and II, that matches the  
form on which the parent corporation  
reports and the entire consolidated  
group files. For a mixed group, on the  
consolidated Schedule M-3, Part II,  
lines 29a, 29b, and 29c, report the  
applicable amounts from the three  
subgroup sub-consolidation Part II,  
line 29a, amounts. (If a consolidated  
level Part II for consolidation  
Schedule M-3 (Form 1120-PC), Parts II  
and III, box (4) Subsidiary corporation,  
and box (5) Mixed 1120/L/PC group. An  
1120-L subsidiary corporation within the  
1120-L subgroup must check  
Specific Instructions  
for Part I  
Schedule M-3 (Form 1120-L), Parts II  
and III, box (4) Subsidiary corporation,  
and box (5) Mixed 1120/L/PC group.  
Part I. Financial  
Information and Net  
Income (Loss)  
The 1120 subgroup  
Reconciliation  
sub-consolidation Schedule M-3 (Form  
1120), Parts II and III, must be indicated  
by checking box (5) Mixed 1120/L/PC  
group, and box (6) 1120 group for the  
sub-consolidation, and by checking box  
(5) Mixed 1120/L/PC group, and box (7)  
1120 eliminations for the eliminations.  
The 1120-PC subgroup  
When To Complete Part I  
eliminations not includible in the  
subgroup eliminations is applicable, the  
applicable amounts must be adjusted by  
the applicable elimination amounts.)  
The consolidated Schedule M-3, Part II,  
line 30, amounts are the sum of the  
applicable amounts on the consolidated  
Part II, lines 29a, 29b, and 29c. For a  
mixed group, the consolidated Part II,  
lines 1 through 28, are blank and no  
consolidated Part III is required to be  
completed.  
Part I must be completed for any tax  
year for which the corporation files  
Schedule M-3. Check either box (1)  
Non-consolidated return, (2)  
Consolidated return (Form 1120 only),  
or (3) Mixed 1120/L/PC group, as  
applicable. In addition, check box (4)  
Dormant subsidiaries schedule  
attached, if applicable.  
sub-consolidation Form 1120-PC,  
Schedule M-3, Parts II and III, must be  
indicated by checking box (5) Mixed  
1120/L/PC group, and box (6) 1120-PC  
group for the sub-consolidation, and by  
checking box (5) Mixed 1120/L/PC  
group, and box (7) 1120-PC  
Instructions for Schedule M-3 (Form 1120)  
-6-  
       
tax year, the corporation must check  
“Yes” for Part I, line 1a, and use that  
income statement for Schedule M-3. If  
Form 10-K is not filed and a  
U.S. corporation (or U.S. consolidated  
tax group) on Part I, line 4a.  
Line 1. Questions Regarding  
the Type of Income Statement  
Prepared  
If no non-tax-basis financial  
For Part I, lines 1 through 12, use only  
the financial statements of the U.S.  
corporation filing the U.S. income tax  
return (or the consolidated financial  
statements for the U.S. parent  
non-tax-basis income statement is  
prepared that is a certified non-tax-basis  
income statement for the period ending  
with or within the tax year, the  
statements are prepared for a U.S.  
corporation (or, in the case of a U.S.  
consolidated tax group, for the U.S.  
parent corporation's consolidated  
group) filing Schedule M-3 (Form 1120)  
and the U.S. corporation is owned by a  
foreign corporation that prepares  
financial statements that includes the  
U.S. corporation (or the U.S. parent  
corporation's consolidated group), the  
U.S. corporation (or the U.S. parent  
corporation of the U.S. consolidated tax  
group) must check “No” on questions  
1a, 1b, and 1c; skip Part I, lines 2a  
through 3c; and enter the net income  
(loss) per the books and records of the  
U.S. corporation (or U.S. consolidated  
tax group) on Part I, line 4a.  
corporation must check “Yes” for Part I,  
line 1b, and use that income statement  
for Schedule M-3. If Form 10-K is not  
filed and no certified non-tax-basis  
income statement is prepared but an  
unaudited non-tax-basis income  
statement is prepared for the period  
ending with or within the tax year, the  
corporation must check “Yes” for Part I,  
line 1c, and use that income statement  
for Schedule M-3.  
corporation of a U.S. consolidated tax  
group). If the U.S. corporation filing a  
U.S. income tax return (or the U.S.  
parent corporation of a U.S.  
consolidated tax group) prepares its  
own financial statements but is  
controlled by another corporation (U.S.  
or foreign) that prepares financial  
statements that include the U.S.  
corporation, the U.S. corporation (or the  
U.S. parent corporation of a U.S.  
consolidated tax group) must use for its  
Schedule M-3, Part I, its own financial  
statements and not the financial  
statements of the controlling  
Order of priority in accounting  
standards. If no Form 10-K is filed and  
two or more non-tax-basis income  
statements are both certified  
Line 2. Questions Regarding  
Income Statement Period and  
Restatements  
Enter the beginning and ending dates  
on line 2a for the corporation's annual  
income statement period ending with or  
within the current tax year.  
non-tax-basis income statements for the  
period, the income statement prepared  
according to the following order of  
priority in accounting standards must be  
used.  
corporation.  
If a non-publicly traded U.S. parent  
corporation of a U.S. consolidated tax  
group prepares financial statements and  
that group includes a publicly traded  
subsidiary that files financial statements  
with the Securities and Exchange  
Commission (SEC), the consolidated  
financial statements of the parent  
corporation are the appropriate financial  
statements for purposes of completing  
Part I. Do not use any separate  
1. U.S. Generally Accepted  
Accounting Principles (GAAP).  
2. International Financial Reporting  
Standards (IFRS).  
The questions on Part I, lines 2b and  
2c, regarding income statement  
restatements refer to the worldwide  
consolidated income statement issued  
by the corporation filing the U.S. income  
tax return (the consolidated financial  
statements for the U.S. parent  
3. Any other International  
Accounting Standards (IAS).  
4. Statutory accounting for  
insurance companies.  
company financial statements that might  
be prepared for publicly traded  
5. Other regulatory accrual  
corporation of a U.S. consolidated tax  
group) and used to prepare  
subsidiaries.  
accounting.  
6. Any other accrual accounting  
standard.  
Schedule M-3. Answer “Yes” on lines 2b  
and/or 2c if the corporation's annual  
income statement has been restated for  
any reason. Attach a short explanation  
of the reasons for the restatement in net  
income for each annual income  
statement period that is restated,  
including the original amount and  
restated amount of each annual  
statement period's net income. The  
attached statement is not required to  
report restatements on an  
Non-Tax-Basis Financial  
Statements and Tax-Basis  
Financial Statements  
7. Any fair market value standard.  
8. Any cash basis standard.  
A tax-basis income statement is allowed  
for Schedule M-3, and a tax-basis  
balance sheet for Schedule L, only if no  
non-tax-basis income statement and no  
non-tax-basis balance sheet were  
prepared for any purpose and the books  
and records of the corporation reflect  
only tax-basis amounts. The corporation  
is deemed to have non-tax-basis  
income statements and the related  
non-tax-basis balance sheets for the  
current tax year for purposes of  
If no non-tax-basis income statement  
is certified and two or more  
non-tax-basis income statements are  
prepared, the income statement  
prepared according to the first listed of  
the accounting standards listed above  
must be used.  
entity-by-entity basis.  
If no non-tax-basis financial  
Line 3. Questions Regarding  
Publicly Traded Voting  
Common Stock  
statements are prepared for a U.S.  
corporation (or, in the case of a U.S.  
consolidated tax group, for the U.S.  
parent corporation's consolidated  
group) filing Schedule M-3 (Form 1120),  
the U.S. corporation (or the U.S. parent  
corporation of a U.S. consolidated tax  
group) must check “No” on questions  
1a, 1b, and 1c; skip Part I, lines 2a  
through 3c; and enter the net income  
(loss) per the books and records of the  
Schedule M-3 and Schedule L if such  
non-tax-basis financial statements were  
prepared for and presented to  
The primary U.S. publicly traded voting  
common stock class is the most widely  
held or most heavily traded within the  
United States as determined by the  
corporation. If the corporation has more  
than one class of publicly traded voting  
common stock, attach a list of the  
management, creditors, shareholders,  
government regulators, or any other  
third parties for a period ending with or  
within the tax year.  
classes of publicly traded voting  
If a Form 10-K is filed with the SEC  
for the period ending with or within the  
common stock and the trading symbol  
Instructions for Schedule M-3 (Form 1120)  
-7-  
           
and the nine-digit CUSIP number of  
each class.  
line 4a (whether from financial  
statements or books and records), to  
net income (loss) of includible  
corporations that must be reported on  
Part I, line 11.  
between any nonincludible foreign entity  
and any includible corporation. Do not  
remove in Part I the financial net income  
(loss) of any nonincludible foreign entity  
accounted for on line 4a using the  
equity method.  
Line 4a. Worldwide  
Consolidated Net Income  
(Loss) per Income Statement  
Report on line 12a the worldwide  
consolidated total assets and total  
liabilities amounts for the corporation  
using the same financial statements (or  
books and records) used for the  
Report on Part I, line 4a, the worldwide  
consolidated net income (loss) per the  
income statement (or books and  
records, if applicable) of the  
Attach a supporting statement that  
provides the name, EIN (if applicable),  
and net income (loss) included on  
line 4a that is removed on this line 5 for  
each separate nonincludible foreign  
entity. Also state the total assets and  
total liabilities for each such separate  
nonincludible foreign entity and include  
those assets and liabilities amounts in  
the total assets and total liabilities  
reported on Part I, line 12b. The  
corporation. A corporation filing a  
non-consolidated Form 1120 for itself  
must report its worldwide income on  
Part I, line 4a.  
worldwide consolidated income (loss)  
amount reported on Part I, line 4a.  
If a U.S. corporation (a) has net  
income (loss) included on Part I, line 4a,  
and removed on Part I, line 6a or 6b, on  
another U.S. corporation's  
In completing Schedule M-3, the  
corporation must use financial  
statement amounts from the financial  
statement type checked “Yes” on Part I,  
line 1, or from its books and records if  
Part I, line 1c, is checked “No.” If Part I,  
line 1a, is checked “Yes,” report on Part  
I, line 4a, the net income amount  
reported in the income statement  
presented to the SEC on the  
Schedule M-3; (b) files its own Form  
1120 (separate or consolidated); (c)  
does not have a separate non-tax-basis  
financial statement (certified or  
amounts of income (loss) detailed on  
the supporting statement should be  
reported for each separate  
nonincludible foreign entity without  
regard to the effect of consolidation or  
elimination entries. If there are  
otherwise) of its own; and (d) reports on  
Schedule L of its own Form 1120 total  
consolidated assets that equal or  
exceed $10 million at the end of the  
corporation's tax year, the corporation  
must answer questions 1a, 1b, and 1c  
of Part I as appropriate for its own Form  
1120 and must report on Part I, line 4a,  
the amount for the corporation's net  
income (loss) that is removed on Part I,  
line 6a or 6b, of the other corporation's  
Schedule M-3. However, if in the  
consolidation or elimination entries  
relating to nonincludible foreign entities  
whose income (loss) is reported on the  
attached statement that are not  
corporation's Form 10-K (the Form 10-K  
for the security identified on Part I,  
line 3b, if applicable).  
reportable on Part I, line 8, the net  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
If a corporation prepares  
non-tax-basis financial statements, the  
amount on line 4a must equal the  
financial statement net income (loss) for  
the income statement period ending  
with or within the tax year as indicated  
on Part I, line 2a.  
statement, so that the separate financial  
accounting income (loss) of each  
nonincludible foreign entity remains  
separately stated.  
circumstances described immediately  
above, the corporation does have  
separate non-tax-basis financial  
For example, if the net income (after  
consolidation and elimination entries) of  
a nonincludible foreign  
If the corporation prepares  
statements (certified or otherwise) of its  
own, independent of the amount of the  
corporation's net income included in  
Part I, line 4a, of the other U.S.  
non-tax-basis financial statements and  
the income statement period differs  
from the corporation's tax year, the  
income statement period indicated on  
Part I, line 2a, applies for purposes of  
Part I, lines 4a through 8.  
sub-consolidated group is being  
reported on line 5a, the attached  
supporting statement should report the  
income (loss) of each separate  
nonincludible foreign legal entity from  
each such entity's own financial  
accounting net income statement or  
books and records, and any  
corporation, the corporation must  
answer questions 1a, 1b, and 1c of Part  
I, as appropriate, for its own Form 1120,  
based on its own separate income  
statement, and must report on Part I,  
line 4a, the net income amounts shown  
on its separate income statement.  
If the corporation does not prepare  
non-tax-basis financial statements and  
has checked “No” on Part I, line 1c,  
enter the net income (loss) per the  
books and records of the U.S.  
consolidation or elimination entries (for  
intercompany dividends, minority  
interests, etc.) not reportable on Part I,  
line 8, should be reported on the  
attached supporting statement as a net  
amount on a line separate and apart  
from lines that report each nonincludible  
foreign entity's separate net income  
(loss).  
If line 4a includes net income (loss)  
for a corporation that files Form  
1120-PC or Form 1120-L, see the  
instructions for Part I, line 10, for  
adjustments that may be necessary to  
reconcile financial statement income to  
statutory income.  
corporation or the U.S. consolidated tax  
group on Part I, line 4a.  
Indicate on Part I, line 4b, which of  
the following accounting standards were  
used for line 4a.  
1. U.S. Generally Accepted  
Accounting Principles (GAAP).  
Line 5. Net Income (Loss) of  
Nonincludible Foreign Entities  
Remove the financial net income  
Line 6. Net Income (Loss) of  
Nonincludible U.S. Entities  
Remove the financial net income  
2. International Financial Reporting  
Standards (IFRS).  
3. Statutory.  
4. Tax-basis.  
5. Other (specify).  
(line 5a) or loss (line 5b) of each foreign  
entity that is included on line 4a and is  
not an includible corporation in the U.S.  
consolidated tax group (nonincludible  
foreign entity). In addition, on Part I,  
line 8, adjust for consolidation  
(line 6a) or loss (line 6b) of each U.S.  
entity that is included on line 4a and is  
not an includible corporation in the U.S.  
consolidated tax group (nonincludible  
U.S. entity). In addition, on Part I, line 8,  
adjust for consolidation eliminations and  
correct for minority interest and  
Report on Part I, lines 5a through 10,  
as instructed below, all adjustment  
amounts required to adjust worldwide  
eliminations and correct for minority  
net income (loss) reported on this Part I, interest and intercompany dividends  
Instructions for Schedule M-3 (Form 1120)  
-8-  
     
intercompany dividends between any  
nonincludible U.S. entity and any  
income reported on Part I, line 4a.  
Include on line 7a or 7b financial income  
of any disregarded entity that is not  
included in the income reported on Part  
I, line 4a, but is included in Part I, line 11  
(other disregarded entities). Include on  
line 7c the financial income of any entity  
not a disregarded entity that is not  
included in the income reported on  
line 4a, but is included on line 11 (other  
includible entities). In addition, on Part I,  
line 8, adjust for consolidation  
Line 8. Adjustment to  
Eliminations of Transactions  
Between Includible Entities and  
Nonincludible Entities  
includible corporation. Do not remove in  
Part I the financial net income (loss) of  
any nonincludible U.S. entity accounted  
for on line 4a using the equity method.  
Adjustments on Part I, line 8, to reverse  
certain financial accounting  
Attach a supporting statement that  
provides the name, EIN, and net income  
(loss) included on line 4a that is  
consolidation or elimination entries are  
necessary to ensure that transactions  
between includible entities and  
removed on this line 6 for each separate  
nonincludible U.S. entity. Also state the  
total assets and total liabilities for each  
such separate nonincludible U.S. entity  
and include those assets and liabilities  
amounts in the total assets and total  
liabilities reported on Part I, line 12c.  
The amounts of income (loss) detailed  
on the supporting statement should be  
reported for each separate  
nonincludible U.S. or foreign entities are  
not eliminated, in order to report the  
correct total amount on Part I, line 11.  
Also, additional consolidation entries  
and elimination entries may be  
eliminations and correct for minority  
interest and intercompany dividends for  
any other disregarded entity or other  
includible entities.  
necessary on Part I, line 8, related to  
transactions between includible entities  
that are in the consolidated financial  
group and other disregarded entities  
and other includible entities that are not  
in the consolidated financial group but  
that are reported on Part I, line 7a, 7b, or  
7c, in order to report the correct total  
amount on Part I, line 11.  
Attach a supporting statement that  
provides the name, EIN, and net income  
(loss) per the financial statement or  
books and records on lines 7a, 7b, and  
7c, for each separate other U.S.  
nonincludible U.S. entity without regard  
to the effect of consolidation or  
disregarded entity or other includible  
entity. Also, state the total assets and  
total liabilities for each such separate  
includible entity and include those asset  
and liability amounts in the total assets  
and total liabilities reported on Part I,  
line 12d. The amounts of income (loss)  
detailed on the supporting statement  
should be reported for each separate  
other disregarded entity or other  
elimination entries. If there are  
consolidation or elimination entries  
relating to nonincludible U.S. entities  
whose income (loss) is reported on the  
attached statement that are not  
Include on Part I, line 8, the total of  
the following: (a) amounts of any  
adjustments to consolidation entries  
and elimination entries that are  
reportable on Part I, line 8, the net  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
contained in the amount reported on  
Part I, line 4a, required as a result of  
removing amounts on Part I, line 5 or 6;  
and (b) amounts of any additional  
consolidation entries and elimination  
entries that are required as a result of  
including amounts on Part I, line 7a, 7b,  
or 7c. This is necessary in order that the  
consolidation entries and intercompany  
elimination entries included in the  
amount reported on Part I, line 11, are  
only those applicable to the financial net  
income (loss) of includible entities for  
the financial statement period. For  
example, adjustments must be reported  
statement, so that the separate financial  
accounting income (loss) of each  
nonincludible U.S. entity remains  
separately stated. For example, if the  
net income (after consolidation and  
elimination entries) of a nonincludible  
U.S. sub-consolidated group is being  
reported on line 6a, the attached  
includible entity without regard to the  
effect of consolidation or elimination  
entries solely between or among the  
entities listed. If there are consolidation  
or elimination entries relating to such  
disregarded entity or other includible  
entities whose income (loss) is reported  
on the attached statement that are not  
reportable on Part I, line 8, the net  
amounts of all such consolidation and  
elimination entries must be reported on  
a separate line on the attached  
supporting statement should report the  
income (loss) of each separate  
nonincludible U.S. legal entity from each  
such entity's own financial accounting  
net income statement or books and  
records, and any consolidation or  
elimination entries (for intercompany  
dividends, minority interests, etc.) not  
reportable on Part I, line 8, should be  
reported on the attached supporting  
statement as a net amount on a line  
separate and apart from lines that report  
each nonincludible U.S. entity's  
statement, so that the separate financial on line 8 to remove minority interest and  
accounting income (loss) of each other  
disregarded entity or other includible  
entity remains separately stated. For  
example, if the net income (after  
to reverse the elimination of  
intercompany dividends included on  
Part I, line 4a, that relate to the net  
income of entities removed on Part I,  
line 5 or 6, because the income to which  
the consolidation or elimination entries  
relate has been removed. Also, for  
example, consolidation or elimination  
entries must be reported on line 8 to  
reflect any minority interest ownership in  
the net income of other disregarded  
entities or other includible entities  
reported on Part I, line 7a, 7b, or 7c.  
Consolidation and elimination entries  
must also be reported on line 8 to  
eliminate any intercompany dividends  
between entities whose income is  
included on Part I, line 7a, 7b, or 7c, and  
other entities included in the  
consolidation and elimination entries) of  
a sub-consolidated group of other U.S.  
disregarded entities is being reported  
on line 7b, the attached supporting  
statement should report the income  
(loss) of each separate other U.S.  
disregarded entity from each entity's  
own financial accounting net income  
statement or books and records, and  
any consolidation or elimination entries  
(for intercompany dividends, minority  
interests, etc.) not reportable on Part I,  
line 8, should be reported on the  
separate net income (loss).  
Line 7. Net Income (Loss) of  
Other Includible Foreign  
Disregarded Entities, Other  
Includible U.S. Disregarded  
Entities, and Other Includible  
Entities  
Include on Part I, line 7a, 7b, or 7c, the  
financial net income or (loss) of each  
foreign or U.S. disregarded entity or  
other includible entity that is not  
attached supporting statement as a net  
amount on a line separate and apart  
from lines that report each other  
consolidated U.S. income tax return.  
See Examples 4, 5, and 6 in the  
instructions for line 11.  
included in the consolidated financial  
group and therefore not included in the  
includible corporation's or entity's  
separate net income (loss).  
Instructions for Schedule M-3 (Form 1120)  
-9-  
     
If a corporate owner of an interest in  
another entity (a) accounts for the  
interest in the entity in the owner  
net income included on Part I, line 11;  
the amount of the net adjustment that is  
attributable to intercompany dividend  
adjustments required to be reported by  
statutory accounting and included on  
Part I, line 10a; the amount of the net  
adjustment attributable to other  
Line 10a. Intercompany  
Dividend Adjustments To  
Reconcile to Line 11,  
corporation's separate general ledger  
on the equity method, and (b) fully  
consolidates the entity in the owner  
corporation's consolidated financial  
statements, but the entity is not  
Line 10b. Other Statutory  
Accounting Adjustments To  
Reconcile to Line 11, and  
Line 10c. Other Adjustments To  
Reconcile to Amount on Line 11  
Include on lines 10a, 10b, and 10c any  
other adjustments to reconcile net  
income (loss) on Part I, line 4a, through  
Part I, line 9, with net income (loss) on  
Part I, line 11. Include on line 10a the  
amount of any intercompany dividend  
adjustment required by statutory  
accounting. Include on line 10b the  
amount of any other required statutory  
accounting adjustment. Include on  
line 10c the amount of any other  
adjustment not required by statutory  
accounting.  
statutory accounting requirements and  
included on Part I, line 10b; and the  
amount of the remainder of the net  
adjustment not required because of  
statutory accounting and included on  
Part I, line 10c. If any net adjustment is  
included for the corporation on Part I,  
line 10b or 10c, attach a supplemental  
supporting statement identifying the line  
(10b or 10c), the type, and the amount  
of each adjustment included in the net  
adjustment.  
includible in the owner corporation's  
consolidated U.S. income tax return,  
then, as part of reversing all  
consolidation and elimination entries for  
the nonincludible entity, the corporate  
owner must reverse on Schedule M-3,  
Part I, line 8, the elimination of the equity  
income inclusion from the entity. If the  
owner corporation does not account for  
the entity on the equity method on its  
own general ledger, it will not have  
eliminated the equity income for  
Line 11. Net Income (Loss) per  
Income Statement of Includible  
Corporations  
consolidated financial statement  
purposes and therefore will have no  
elimination of equity income to reverse.  
Report on line 11 the net income (loss)  
per the income statement (or books and  
records, if applicable) of the  
Normally, all intercompany dividends  
will have been eliminated or excluded  
from the financial accounting  
The attached supporting statement  
for Part I, line 8, must identify the type  
(for example, minority interest,  
corporation. In the case of a U.S.  
consolidated tax group, report the  
consolidated income statement net  
income (loss) of all corporations listed  
on Form 851 and included in the  
consolidated net income (loss) reported  
on Part I, line 4a. However, an  
intercompany dividends, etc.) and  
amount of consolidation or elimination  
entries reported, as well as the names  
of the entities to which they pertain. It is  
not necessary, but it is permitted, to  
report intercompany eliminations that  
net to zero on Part I, line 8, such as  
intercompany interest income and  
expense.  
insurance company may be required to  
include certain intercompany dividends  
on Part I, line 11, so that the amount  
reported on Part I, line 11, agrees with  
statutory accounting net income (Annual  
Statement). If the net income (loss) of a  
corporation that files Form 1120-PC or  
Form 1120-L is included on Part I,  
line 4a or line 7, and is computed on a  
basis other than statutory accounting,  
include on line 10a the adjustments  
necessary such that Part I, line 11,  
includes intercompany dividends in the  
net income (loss) for the corporation to  
the extent required by statutory  
consolidated U.S. income tax return for  
the tax year. Amounts reported in  
column (a) of Parts II and III (see  
instructions, later) must be reported on  
the same accounting method used to  
report the amount of net income (loss)  
per income statement of includible  
corporations on Part I, line 11, which for  
insurance companies is statutory  
accounting. If an insurance company is  
included in a consolidated Form 1120,  
the amount of net income reported on  
Part I, line 11, will include the statutory  
accounting net income for the insurance  
corporation and the GAAP net income  
for the non-insurance corporations  
included in the U.S. consolidated tax  
group. (For insurance companies  
included in the consolidated U.S.  
income tax return, see the instructions  
for Part I, line 10, and Part II, line 7.)  
Line 9. Adjustment To  
Reconcile Income Statement  
Period to Tax Year  
Include on line 9 any adjustments  
necessary to the income (loss) of  
includible corporations to reconcile  
differences between the corporation's  
income statement period reported on  
line 2a and the corporation's tax year.  
Attach a statement describing the  
adjustment.  
accounting principles. (For insurance  
companies included in the consolidated  
U.S. income tax return, see the  
instructions for Part I, line 11, and Part  
II, line 7.)  
Statutory accounting for an insurance  
company subsidiary acquired or merged  
may require the use of a financial  
statement period for income reported on  
Part I, line 11, that differs from the  
period reported on Part I, line 4a or  
line 7. Report on Part I, line 10b,  
Statutory accounting for an insurance  
company subsidiary acquired or merged  
may require the use of a financial  
statement period for income reported on  
Part I, line 11, that differs from the  
period reported on Part I, line 4a or  
line 7. Report on Part I, line 10b,  
Do not, in any event, report on this  
line 11 the net income of entities not  
listed on Form 851 and not included in  
the consolidated U.S. income tax return  
for the tax year. For example, it is not  
permissible to remove the income of  
adjustments to income because of the  
differences in accounting period.  
adjustments to income because of such  
differences in accounting period.  
For any adjustments reported on Part nonincludible entities on lines 5 and/or  
I, lines 10a, 10b, and 10c, attach a  
supporting statement that provides, for  
each corporation to which an  
6, discussed earlier, then add back such  
income on lines 7 through 10, such that  
the amount reported on line 11 includes  
adjustment relates, the name and EIN of the net income of entities not includible  
the corporation; the amount of net  
income included in Part I before any  
adjustments on line 10; the amount of  
in the consolidated U.S. income tax  
return. A principal purpose of  
Schedule M-3 is to report on this Part I,  
Instructions for Schedule M-3 (Form 1120)  
-10-  
     
line 11, only the financial accounting net includible corporations. Intercompany  
2. U.S. corporation C owns 60% of  
the capital and profits interests in U.S.  
income of only the corporations  
included in the consolidated U.S.  
income tax return.  
transactions between the includible  
corporations that had been eliminated in LLC N. C does not account for N in C's  
the net income amount on line 4a  
remain eliminated in the net income  
amount on line 11. Transactions  
separate general ledger on the equity  
method. N has net income of $100  
(before minority interests) and makes no  
Whether or not the corporation  
prepares financial statements, Part I,  
line 11, must include all items that  
impact the net income (loss) of the  
corporation even if they are not  
between the includible corporations and distributions during the tax year. C  
the nonincludible entities that are  
eliminated in the net income amount on  
line 4a are included in the net income  
amount on line 11 since the elimination  
of those transactions was reversed on  
line 8.  
treats N as a corporation for financial  
statement purposes and as a  
partnership for U.S. income tax  
purposes. In its financial statements, C  
consolidates N and includes $60 of net  
income ($100 less the minority interest  
of $40) on Part I, line 4a.  
recorded in the profit and loss accounts  
in the corporation's general ledger,  
including, for example, all post-closing  
adjusting entries (including workpaper  
adjustments) and dividend income or  
other income received from  
2. Foreign corporation F owns 100%  
of the stock of U.S. corporation P. P  
owns 100% of the stock of DS1, 60% of  
C must remove the $100 net income  
of N on Part I, line 6a. C must reverse on  
nonincludible corporations.  
the stock of DS2, and 100% of the stock Part I, line 8, the elimination of the $40  
Example 4.  
of FS1. F prepares certified audited  
minority interest net income of N. The  
financial statements. P does not prepare result is that C includes no income for N  
1. U.S. corporation P is publicly  
traded and files Form 10-K with the  
SEC. P owns 80% or more of the stock  
of 75 U.S. corporations, DS1 through  
DS75, between 51% and 79% of the  
stock of 25 U.S. corporations DS76  
through DS100, and 100% of the stock  
of 50 foreign subsidiaries FS1 through  
FS50. P eliminates all dividend income  
from DS1 through DS100, and FS1  
through FS50 in financial statement  
consolidation entries. Furthermore, P  
eliminates the minority interest  
any financial statements. P files a  
consolidated U.S. income tax return  
with DS1.  
either on Part I, line 11, or on Part II,  
line 9, column (a). C's taxable income  
from N must be reported by C on Part II,  
line 9, column (d).  
P must not complete Schedule M-3,  
Part I, with reference to the financial  
statements of its foreign parent F. P  
must check “No” on Part I, lines 1a, 1b,  
and 1c; skip lines 2a through 3c of Part  
3. U.S. corporation P owns 60% of  
corporation DS1, which is fully  
consolidated in P's financial statements.  
P accounts for DS1 in P's separate  
I; and enter worldwide net income (loss) general ledger on the equity method.  
per the books and records of the  
includible corporations (P and DS1) on  
Part I, line 4a. P must enter any  
DS1 has net income of $100 (before  
minority interests) and pays dividends of  
$50, of which P receives $30. The  
dividend reduces P's investment in DS1  
for equity method reporting on P's  
ownership, if any, of DS1 through  
DS100 in financial statement  
necessary adjustments on lines 5a  
through 10 in order for Part I, line 11, to  
consolidation entries. P's SEC Form  
10-K includes P, DS1 through DS100,  
and FS1 through FS50 on a fully  
consolidated basis. P files a  
report the net income (loss) of includible separate general ledger where P  
corporations P and DS1, net of  
eliminations for transactions between P  
and DS1.  
includes its 60% equity share of DS1  
income, which is $60. In its financial  
statements, P eliminates the DS1 equity  
method income of $60 and consolidates  
DS1, including $60 of net income ($100  
less the minority interest of $40) on Part  
I, line 4a.  
consolidated U.S. income tax return  
with DS1 through DS75.  
Example 5.  
1. U.S. corporation P owns 60% of  
P must check “Yes” on Part I, line 1a.  
On Part I, line 4a, P must report the  
consolidated net income from the SEC  
Form 10-K for the consolidated financial  
statement group of P, DS1 through  
DS100, and FS1 through FS50. P must  
remove the net income (loss) of FS1  
through FS50 on Part I, line 5a or 5b, as  
applicable. P must remove the net  
income (loss) before minority interests  
of DS76 through DS100 on Part I,  
line 6a or 6b, as applicable. P must  
reverse on Part I, line 8:  
a. The elimination of dividends  
received by P and DS1 through DS75  
from DS76 through DS100 and FS1  
through FS50; and  
b. The recognition of minority  
interests' share of the net income (loss)  
of DS76 through DS100. Note. The  
minority interests' share, if any, of the  
income of DS1 through DS75 must be  
reported in Part II, line 8.  
corporation DS1 which is fully  
consolidated in P's financial statements.  
P does not account for DS1 in P's  
separate general ledger on the equity  
method. DS1 has net income of $100  
(before minority interests) and pays  
dividends of $50, of which P receives  
$30. The dividend is eliminated in the  
consolidated financial statements. In its  
financial statements, P consolidates  
DS1 and includes $60 of net income  
($100 less the minority interest of $40)  
on Part I, line 4a.  
P must remove the $100 net income  
of DS1 on Part I, line 6a. P must reverse  
on Part I, line 8, the elimination of the  
$40 minority interest net income of DS1  
and the elimination of the $60 of DS1  
equity income. The net result is that P  
includes the $60 of equity method  
income from DS1 on Part I, line 11, and  
on Part II, line 6, column (a). P's  
dividend income included on the tax  
return from its investment in DS1 must  
be reported on Part II, line 7, column (d).  
P must remove the $100 net income  
of DS1 on Part I, line 6a. P must reverse  
on Part I, line 8, the elimination of the  
$40 minority interest net income of DS1.  
In addition, P reverses its elimination of  
the $30 intercompany dividend in its  
financial statements on Part I, line 8.  
The net result is that P includes the $30  
dividend from DS1 on Part I, line 11,  
and on Part II, line 7, column (a). P's  
dividend income included on the tax  
return from DS1 must be reported on  
Part II, line 7, column (d).  
4. U.S. corporation C owns 60% of  
the capital and profits interests in U.S.  
LLC N. C accounts for N in C's separate  
general ledger on the equity method. N  
has net income of $100 (before minority  
interests) and makes no distributions  
during the tax year. C treats N as a  
corporation for financial statement  
purposes and as a partnership for U.S.  
income tax purposes. For equity method  
reporting on C's separate general  
P reports on Part I, line 11, the  
consolidated financial statement net  
income (loss) attributable to the  
ledger, C includes its 60% equity share  
Instructions for Schedule M-3 (Form 1120)  
-11-  
of N income, which is $60. In its  
financial statements, C eliminates the  
$60 of N equity method income and  
consolidates N, including $60 of net  
income ($100 less the minority interest  
of $40) on Part I, line 4a.  
consolidated U.S. income tax return,  
and the intercompany interest income  
and expense must be removed by  
consolidation elimination entries.  
P must report its financial statement  
net income of $1,040 on Part I, line 4a,  
and reports DS1's net income of $100  
of the entities removed in completing  
Part I, line 5. On line 12c, enter the total  
assets and total liabilities removed in  
completing Part I, line 6. On line 12d,  
enter total assets and total liabilities  
included in completing Part I, line 7.  
C must remove the $100 net income  
of N on Part I, line 6a. C must reverse on on Part I, line 7c. Then, in order to  
Specific Instructions for  
Parts II and III  
Part I, line 8, the elimination of the $40  
reflect the full consolidation of the  
minority interest net income of N and the financial accounting net income of P  
For consolidated U.S. income tax  
returns, attach supporting statements  
for each includible corporation. See the  
instructions for consolidated returns in  
the Instructions for Form 1120.  
elimination of the $60 of N equity  
method income. The result is that C  
includes the $60 of equity method  
income for N on Part I, line 11, and on  
Part II, line 9, column (a). C's taxable  
income from N must be reported by C  
on Part II, line 9, column (d).  
and DS1 on Part I, line 11, the following  
consolidation and elimination entries are  
reported on Part I, line 8: (a) offsetting  
entries to remove the $40 of interest  
income received from DS1 included by  
P on line 4a, and to remove the $40 of  
interest expense of DS1 included in  
line 7c for a net change of zero; and (b)  
an entry to reflect the $20 minority  
interest in the net income of DS1 (DS1  
net income of $100 times 20% minority  
interest). The result is that Part I, line 11,  
reports $1,120: $1,040 from line 4a,  
$100 from line 7c, and ($20) from line 8.  
Stated another way, Part I, line 11,  
includes the entire $1,000 net income of  
P, measured before recognition of the  
intercompany interest income from DS1  
and the consolidation of DS1  
General Format of Parts II  
and III  
5. U.S. corporation C owns 60% of  
the capital and profits interests in U.S.  
LLC N. C accounts for N in C's separate  
general ledger on the equity method. N  
has net income of $100 (before minority  
interests) and pays a $50 cash  
Check the applicable box(es) at the top  
of pages 2 and 3 of Schedule M-3 to  
indicate whether the Schedule M-3 is for  
the:  
1. Consolidated group,  
2. Parent corporation,  
3. Consolidated eliminations,  
4. Subsidiary corporation, or  
5. Mixed 1120/L/PC group.  
distribution, of which C receives $30.  
The distribution reduces C's investment  
in N for equity method reporting on C's  
separate general ledger. C treats N as a  
corporation for financial statement  
purposes and as a partnership for U.S.  
income tax purposes. For equity method  
reporting on C's separate general  
operations, plus the entire $140 net  
income of DS1, measured before  
interest expense to P, less the minority  
interest ownership of $20 in DS1's  
separate net income ($100). The  
Also check the applicable box to  
indicate whether the Schedule M-3 is for  
a sub-consolidated (6) 1120 group, or  
(7) 1120 eliminations. See Consolidated  
Schedule M-3 Versus Consolidating  
Schedules M-3 for Form 1120 Groups  
and Schedule M-3 Consolidation for  
Mixed Groups (1120/L/PC), earlier.  
ledger, C includes its 60% equity share  
of N income, which is $60. In its  
financial statements, C eliminates the  
$60 of N equity method income and  
consolidates N and includes $60 of net  
income ($100 less the minority interest  
of $40) on Part I, line 4a.  
consolidated U.S. income tax group is  
required to include on the attached  
supporting statement for Part I, line 8,  
the details of the adjustment to the  
minority interest in the net income of  
DS1, but is not required to report the  
offsetting adjustment to the  
For each line item in Parts II and III,  
report in column (a) the amount of net  
income (loss) included in Part I, line 11,  
and report in column (d) the amount  
included in taxable income on Form  
1120, page 1, line 28.  
For any item of income, gain, loss,  
expense, or deduction for which there is  
a difference between columns (a) and  
(d), the portion of the difference that is  
temporary must be entered in column  
(b) and the portion of the difference that  
is permanent must be entered in column  
(c).  
C must remove the $100 net income  
of N on Part I, line 6a. C must reverse on  
Part I, line 8, the elimination of the $40  
minority interest net income of N and the  
elimination of the $60 of N equity  
intercompany elimination of interest  
income and interest expense (though it  
is permitted to do so).  
method income. The result is that C  
includes the $60 of equity method  
income for N on Part I, line 11, and on  
Part II, line 9, column (a). C's taxable  
income from N must be reported by C  
on Part II, line 9, column (d).  
Line 12. Total Assets and  
Liabilities of Entities Included  
or Removed on Part I, Lines 4,  
5, 6, and 7  
Line 12 must be completed by all  
corporations that file Schedule M-3.  
Report on lines 12a, 12b, 12c, and 12d  
the total amount (not just the  
Example 6. U.S. corporation P  
owns 80% of the stock of corporation  
DS1. DS1 is included in P's  
consolidated income tax return, even  
though DS1 is not included in P's  
consolidated financial statements on  
either a consolidated basis or on the  
equity method. DS1 has current year  
net income of $100 after taking into  
account its $40 interest payment to P. P  
has net income of $1,040 after  
Note. A statement or explanation may  
be attached to any line item even if none  
is required.  
corporation's share) of assets and  
liabilities of entities included or removed  
on Part I, lines 4, 5, 6, and 7. All assets  
and liabilities reported for  
If financial statements are prepared  
by the corporation in accordance with  
generally accepted accounting  
Schedule M-3, Part I, lines 12a, 12b,  
12c, and 12d, must be entered as  
positive amounts.  
principles (GAAP), differences that are  
treated as temporary for GAAP must be  
reported in column (b) and differences  
that are permanent (that is, not  
recognition of the interest income from  
DS1. Because DS1 is an includible  
corporation, 100% of the net income of  
both P and DS1 must be reported on  
Form 1120, page 1, of the PDS  
On line 12a, enter the worldwide  
consolidated total assets and total  
liabilities of all of the entities included in  
completing Part I, line 4a. On line 12b,  
enter the total assets and total liabilities  
temporary for GAAP) must be reported  
in column (c). Generally, pursuant to  
GAAP, a temporary difference affects  
Instructions for Schedule M-3 (Form 1120)  
-12-  
(creates, increases, or decreases) a  
deferred tax asset or liability.  
regardless of the classification,  
Reporting Requirements  
for Parts II and III  
nomenclature, or terminology attached  
to the fines or penalties by the imposing  
authority in its actions or documents.  
If the corporation does not prepare  
financial statements, or the financial  
statements are not prepared in  
Except for mixed group consolidation,  
the number of Parts II must equal the  
number of Parts III filed by the  
If a corporation would be required to  
report in Parts II and III, column (a), the  
amount of any item specifically listed on  
Schedule M-3 in accordance with the  
preceding paragraph, except that the  
corporation has capitalized the item of  
income or expense and reports the  
amount in its financial statement  
accordance with GAAP, report in  
column (b) any difference that the  
corporation believes will reverse in a  
future tax year (that is, have an opposite  
effect on taxable income in a future tax  
year (or years) due to the difference in  
timing of recognition for financial  
accounting and U.S. income tax  
corporation. Mixed groups should see  
Schedule M-3 Consolidation for Mixed  
Groups (1120/L/PC), earlier.  
General Reporting  
Requirements  
If an amount is attributable to a  
balance sheet or in asset and liability  
accounts maintained in the  
reportable transaction described in  
Regulations section 1.6011-4(b), the  
amount must be reported in columns  
(a), (b), (c), and (d), as applicable, of  
Part II, line 12, regardless of whether the  
amount would otherwise be reported on  
Part II or Part III of Schedule M-3. Thus,  
if a taxpayer files Form 8886,  
purposes) or is the reversal of such a  
difference that arose in a prior tax year.  
Report in column (c) any difference that  
the corporation believes will not reverse  
in a future tax year (and is not the  
reversal of such a difference that arose  
in a prior tax year).  
corporation's books and records, the  
corporation must report the proper tax  
treatment of the item in columns (b), (c),  
and (d), as applicable.  
Furthermore, in applying the two  
preceding paragraphs, a corporation is  
required to report in Parts II and III,  
column (a), the amount of any item  
specifically listed on Schedule M-3 that  
is included in the corporation's financial  
statements or exists in the corporation's  
books and records, regardless of the  
nomenclature associated with that item  
in the financial statements or books and  
records. Accurate completion of  
If the corporation is unable to  
Reportable Transaction Disclosure  
Statement, the amounts attributable to  
that reportable transaction must be  
entered on Part II, line 12.  
A corporation is required to report in  
column (a) of Parts II and III the amount  
of any item specifically listed on  
determine whether a difference between  
column (a) and column (d) for an item  
will reverse in a future tax year or is the  
reversal of a difference that arose in a  
prior tax year, report the difference for  
that item in column (c).  
Example 7. Corporation B is a U.S.  
publicly traded corporation that files a  
consolidated U.S. income tax return and  
prepares consolidated GAAP financial  
statements. In prior years, B acquired  
intellectual property (IP) and goodwill  
through several corporate acquisitions.  
The IP is amortizable for both U.S.  
income tax and financial statement  
purposes. In the current year, B's annual  
amortization expense for IP is $9,000 for  
U.S. income tax purposes and $6,000  
for financial statement purposes. In its  
financial statements, B treats the  
Schedule M-3 that is in any manner  
included in the corporation's current  
year financial statement net income  
(loss) or in an income or expense  
account maintained in the corporation's  
books and records, even if there is no  
difference between that amount and the  
amount included in taxable income  
unless (a) otherwise provided in these  
instructions, or (b) the amount is  
Schedule M-3 requires reporting  
amounts according to the substantive  
nature of the specific line items included  
in Schedule M-3 and consistent  
reporting of all transactions of like  
substantive nature that occurred during  
the tax year. For example, all expense  
amounts that are included in the  
financial statements or exist in the  
books and records that represent some  
form of “Bad debt expense” must be  
reported in Part III, line 32, column (a),  
regardless of whether the amounts are  
recorded or stated under different  
nomenclature in the financial  
attributable to a reportable transaction  
described in Regulations section  
1.6011-4(b) and is therefore reported on  
Part II, line 12. For example, with the  
exception of interest income reflected  
on a Schedule K-1 received by a  
difference in IP amortization as a  
temporary difference. The goodwill is  
not amortizable for U.S. income tax  
purposes and is subject to impairment  
for financial statement purposes. In the  
current year, B records an impairment  
charge on the goodwill of $5,000. In its  
financial statements, B treats the  
corporation as a result of the  
statements or the books and records  
such as “Provision for doubtful  
corporation's investment in a  
partnership or other pass-through entity,  
all interest income, included on Part I,  
line 11, whether from unconsolidated  
affiliated companies, third parties,  
banks, or other entities; whether from  
foreign or domestic sources; whether  
taxable or exempt from tax; and whether  
classified as some other type of income  
for U.S. income tax purposes (such as  
dividends), must be included on Part II,  
line 13, column (a). Likewise, all fines  
and penalties included in Part I, line 11,  
paid to a government or other authority  
for the violation of any law for which  
fines or penalties are assessed must be  
included on Part III, line 12, column (a),  
regardless of the government authority  
that imposed the fines or penalties;  
regardless of whether the fines or  
penalties are civil or criminal; and  
accounts,” “Expense for uncollectible  
notes receivable,” or “Impairment of  
trade accounts receivable.” Likewise, as  
stated in the preceding paragraph, all  
fines and penalties must be included on  
Part III, line 12, column (a), regardless  
of the terminology or nomenclature  
attached to them by the corporation in  
its books and records or financial  
statements.  
goodwill impairment as a permanent  
difference. B must report the  
amortization attributable to the IP on  
Part III, line 28, and report $6,000 in  
column (a), a temporary difference of  
$3,000 in column (b), and $9,000 in  
column (d). B must report the goodwill  
impairment on Part III, line 26, and  
report $5,000 in column (a), a  
With limited exceptions, Part II  
includes lines for specific items of  
income, gain, or loss (income items).  
See Part II, lines 1 through 24. If an  
income item is described in Part II, lines  
1 through 24, report the amount of the  
item on the applicable line, regardless of  
whether there is a difference for the  
item. If there is a difference for the  
permanent difference of ($5,000) in  
column (c), and $0 in column (d).  
Instructions for Schedule M-3 (Form 1120)  
-13-  
income item, or only a portion of the  
income item has a difference and a  
portion of the item does not have a  
real estate tax expense in its financial  
statements and its real estate tax  
deduction recognized for U.S. taxable  
reported in columns (b) and (c),  
including how the adjustment is  
identified in the accounting records. The  
entire description is considered the tax  
description for the amount reported in  
column (d) for each item reported on  
Part II, line 25, or Part III, line 38.  
Each description should adequately  
describe all four columns of Part II,  
line 25, or Part III, line 38. If additional  
information is required to provide an  
acceptable description, provide a  
supporting statement.  
Example 8. Corporation C is a  
calendar year taxpayer that placed in  
service 10 depreciable fixed assets in a  
previous tax year. C files and entirely  
completes Schedule M-3 for its current  
tax year. C's total depreciation expense  
for its current tax year for five of the  
assets is $50,000 for income statement  
purposes and $70,000 for U.S. income  
tax purposes. C's total annual  
difference, and the item is not described income purposes.  
in Part II, lines 1 through 24, report and  
Separately stated and adequately  
describe the entire amount of the item  
on Part II, line 25.  
disclosed. Each difference reported in  
Parts II and III must be separately stated  
and adequately disclosed. In general, a  
difference is adequately disclosed if the  
difference is labeled in a manner that  
clearly identifies the item or transaction  
from which the difference arises. See  
Regulations section 1.6662-4(f). If a  
specific item of income, gain, loss,  
expense, or deduction is described on  
Part II, lines 9 through 24, or Part III,  
lines 1 through 38, and the line does not  
indicate to “attach statement” and the  
specific instructions for the line do not  
call for an attachment of a statement,  
then the item is considered separately  
stated and adequately disclosed if the  
item is entered on the applicable line  
and the amount(s) of the item(s) is  
entered in the applicable columns of the  
applicable line. See the instructions for  
Part II, lines 1 through 8, for specific  
additional information required to be  
provided for these particular lines.  
With limited exceptions, Part III  
includes lines for specific items of  
expense or deduction (expense items).  
See Part III, lines 1 through 37. If an  
expense item is described on Part III,  
lines 1 through 37, report the amount of  
the item on the applicable line,  
regardless of whether there is a  
difference for the item. If there is a  
difference for the expense item, or only  
a portion of the expense item has a  
difference and a portion of the item does  
not have a difference and the item is not  
described in Part III, lines 1 through 37,  
report and describe the entire amount of  
the item on Part III, line 38.  
depreciation expense for its current tax  
year for the other five assets is $40,000  
for income statement purposes and  
$30,000 for U.S. income tax purposes.  
In its financial statements, C treats the  
differences between financial statement  
and U.S. income tax depreciation  
expense as giving rise to temporary  
differences that will reverse in future  
years. C must combine all of its  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, loss, expense, or deduction  
and the item is not described or  
included in Part II, lines 1 through 25, or  
Part III, lines 1 through 38, report the  
entire amount of the item in columns (a)  
and (d) of Part II, line 28.  
Note. A statement or explanation may  
be attached to any line even if none is  
required.  
Except as otherwise provided,  
differences for the same item must be  
combined or netted together and  
reported as one amount on the  
applicable line of Schedule M-3.  
However, differences for separate items  
must not be combined or netted  
together. Each item (and corresponding  
amount attributable to that item) must  
be separately stated and adequately  
disclosed on the applicable line of  
Schedule M-3, or any statement  
required to be attached, even if the  
amounts are below a certain dollar  
amount.  
Required statements for Part II,  
line 25, and Part III, line 38. A  
separate statement must be attached to  
Schedule M-3 (Form 1120) that includes  
a detailed description of each item and  
adjustment entered on Part II, line 25,  
and Part III, line 38.  
depreciation adjustments. Accordingly,  
C must report on Part III, line 31, for its  
current tax year income statement,  
depreciation expense of $90,000 in  
column (a), a temporary difference of  
$10,000 in column (b), and U.S. income  
tax depreciation expense of $100,000 in  
column (d).  
Special instructions for Part II, lines  
25 and 28, and Part III, line 38.  
Whether a given income (loss) item is  
reported on Part II, line 25, or on Part II,  
line 28, or a given expense/deduction  
item on Part III, line 38, or on Part II,  
line 28, is determined separately by  
each member of the U.S. consolidated  
tax group and not at the U.S.  
Example 9. Corporation D is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On December 31, D  
establishes three reserve accounts in  
the amount of $100,000 for each  
consolidated tax group level. For  
example, U.S. corporation P has two  
subsidiaries, A and B, that are included  
in P's consolidated financial statements  
and in P's consolidated U.S. income tax  
return. For financial statement  
account. One reserve account is an  
allowance for accounts receivable that  
are estimated to be uncollectible. The  
second reserve is an estimate of  
purposes, P, A, and B recognize real  
estate tax expense when accrued. For  
U.S. income tax purposes, P and A  
recognize such expense consistent with  
the method used for financial statement  
purposes, whereas B recognizes such  
deduction based on a method different  
from that used for financial statement  
purposes. P and A must report this  
expense/deduction in columns (a) and  
(d) on Part II, line 28. B must report the  
following on Part III, line 38: in column  
(a), B's expense recognized in the  
financial statements when accrued; in  
column (d), B's real estate tax expense  
recognized for U.S. income tax  
coupons outstanding that may have to  
be paid. The third reserve is an estimate  
of future warranty expenses. In its  
financial statements, D treats the three  
reserve accounts as giving rise to  
temporary differences that will reverse  
in future years. The three reserves are  
expenses in D's current financial  
The description for each amount  
entered in column (a) must be readily  
identifiable to the name of the account  
in the financial statements or books and  
records of the taxpayer, under which the  
amount in column (a) was recorded in  
the accounting records. Also, the  
statements but are not deductions for  
U.S. income tax purposes in the current  
year. D must not combine the  
Schedule M-3 differences for the three  
reserve accounts. D must report the  
amounts attributable to the allowance  
description for each amount entered in  
column (a) must include detailed  
purposes; and in column (b) or (c), as  
applicable, the difference between B's  
information supporting each adjustment  
Instructions for Schedule M-3 (Form 1120)  
-14-  
   
for uncollectible accounts receivable on  
Part III, line 32, Bad debt expense, and  
must separately state and adequately  
disclose the amounts attributable to  
expenses that F deducts in computing  
net income per the income statement.  
All of the $200 of meal expenses are  
subject to the 50% limitation under  
the amount (before any withholding tax)  
of any foreign dividends included in  
current year taxable income on Form  
1120, page 1, line 28, and report on  
line 2, column (a), the amount of  
dividends from any foreign corporation  
included in Part I, line 11. Do not report  
on line 2 any amounts that must be  
reported on Part II, line 3 or 4, or  
dividends that were previously taxed  
and must be reported on Part II, line 5.  
See the instructions below for Part II,  
lines 3, 4, and 5.  
each of the other two reserves, coupons section 274(n). The $100 of  
outstanding, and warranty costs, on a  
required, attached statement that  
entertainment expenses are  
nondeductible under section 274(a). In  
supports the amounts on Part III, line 38. its financial statements, F treats the  
D must also provide a description for  
each reserve that meets the  
limitation on deductions for meals and  
entertainment as a permanent  
requirements for Part III, line 38,  
discussed earlier under Required  
III, line 38. In this example, an  
acceptable description would be  
“Coupon Issue Reserves—Rewards  
Expense” and “Future Warranty  
Expense Reserve.”  
difference. Because meals and  
entertainment expenses are specifically  
described in Part III, line 11, F must  
report all of its meals and entertainment  
expenses on this line, regardless of  
whether there is a difference.  
For any dividends reported on Part II,  
line 2, that are received on a class of  
voting stock of which the corporation  
directly or indirectly owned 10% or more  
of the outstanding shares of that class at  
any time during the tax year, report on  
an attached supporting statement (1)  
the name of the dividend payer, (2) the  
payer's EIN (if applicable), (3) the class  
of voting stock on which the dividend  
was paid, (4) the percentage of the  
class directly or indirectly owned, and  
(5) the amounts for columns (a) through  
(d).  
Accordingly, F must report $300 in  
column (a), $200 in column (c), and  
$100 in column (d). All meals and  
entertainment expenses, whether  
allowed fully or subject to limitations,  
must be reported on Part III, line 11. No  
amounts should be reported on Part II,  
line 28.  
Note. There is no need to add the title  
of the reserve account to the description  
if the account name for the amount in  
column (a) is already part of the  
adjustment description.  
Example 10. Corporation E is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On January 2 of the  
current tax year, E establishes an  
allowance for uncollectible accounts  
receivable (bad debt reserve) of  
Part II. Reconciliation of  
Net Income (Loss) per  
Income Statement of  
Includible Corporations  
With Taxable Income per  
Return  
Line 3. Subpart F, QEF, and  
Similar Income Inclusions  
Report on line 3, column (d), the amount  
included in taxable income under  
section 951, relating to Subpart F; the  
amounts included under section 951A,  
relating to global intangible low-taxed  
income (GILTI); gains or other income  
inclusions resulting from elections under  
sections 1291(d)(2) and 1298(b)(1); and  
any amount included in taxable income  
pursuant to section 1293, relating to a  
qualified electing fund (QEF). The  
amount included under section 951  
corresponds to the total of the amounts  
reported on Form 1120, Schedule C,  
lines 16a, 16b, and 16c (or the  
$100,000. During the current tax year, E  
increased the reserve by $250,000 for  
additional accounts receivable that may  
become uncollectible. Additionally,  
during the current tax year, E decreases  
the reserve by $75,000 for accounts  
receivable that were discharged in  
bankruptcy during the current tax year.  
The balance in the reserve account on  
December 31 of the current tax year is  
$275,000. The $100,000 amount to  
establish the reserve account and the  
$250,000 to increase the reserve  
account are expenses on E's current  
year financial statements but are not  
deductible for U.S. income tax purposes  
in the current tax year. However, the  
$75,000 decrease to the reserve is  
deductible for U.S. income tax purposes  
in the current tax year. In its financial  
statements, E treats the reserve  
Attach supporting statements for Parts  
II, lines 1 through 12. For any item  
reported on lines 1, 3 through 6, or 8,  
include in the supporting statement the  
name of the entity for which the item is  
reported, the entity's EIN (if applicable),  
the type of entity (corporation,  
partnership, etc.), and the item amounts  
for columns (a) through (d). See the  
instructions for Part II, lines 2, 7, and 9  
through 12, for the specific information  
required for those particular lines.  
corresponding line on Form 1120-C,  
Schedule C, if applicable). The amount  
of GILTI corresponds to the amount  
reported on Form 1120, Schedule C,  
line 17 (or the corresponding line on  
Form 1120-C, Schedule C, if  
Line 1. Income (Loss) From  
Equity Method Foreign  
Corporations  
Report on line 1, column (a), the  
financial income (loss) included in Part I,  
line 11, for any foreign corporation  
accounted for on the equity method and  
remove such amount in column (b) or  
(c), as applicable. Report the amount of  
dividends received and other taxable  
amounts received from or includible with  
respect to foreign corporations on Part  
II, lines 2 through 5, as applicable.  
applicable). The amount of QEF income  
corresponds to the total of the amounts  
of income from a QEF reported by the  
corporation on all Forms 8621,  
account as giving rise to a temporary  
difference that will reverse in future tax  
years. E must report on Part III, line 32,  
for its current tax year income  
Information Return by a Shareholder of  
a Passive Foreign Investment Company  
or Qualified Electing Fund. See Form  
8621 and the Instructions for Form  
8621.  
statement, bad debt expense of  
$350,000 in column (a), a temporary  
difference of ($275,000) in column (b),  
and U.S. income tax bad debt expense  
of $75,000 in column (d).  
Line 2. Gross Foreign  
Dividends Not Previously  
Taxed  
Except as otherwise provided in this  
paragraph, report on line 2, column (d),  
Example 11. Corporation F is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. F incurs $200 of meal  
expenses and $100 of entertainment  
Also include on line 3 passive foreign  
investment company (PFIC)  
mark-to-market gains and losses under  
section 1296. Do not report such gains  
and losses on Part II, line 16.  
Instructions for Schedule M-3 (Form 1120)  
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listed on Form 851) are eliminated or  
excluded for financial accounting  
purposes and eliminated for the  
report its equity interest in the income of  
DS1 on its separate financial  
Line 4. Gross-up for Foreign  
Taxes Deemed Paid  
statements. DS1 has financial  
statement net income (before minority  
interests) and taxable income of $1,000  
($2,500 of revenue less $1,500 cost of  
goods sold).  
Report on line 4, column (d), the amount  
of any foreign taxes deemed paid not  
included in column (d) of Part II, lines 9,  
10, and 11, Income (loss) from U.S.  
partnerships, foreign partnerships, and  
other pass-through entities. The foreign  
taxes deemed paid amount on this  
line 4 must correspond to the total  
foreign taxes deemed paid amounts  
reported by the corporation on all Forms  
1118, Foreign Tax  
calculation of U.S. taxable income. In  
the case of an insurance company  
included in the consolidated U.S.  
income tax return required to report  
intercompany dividends as part of  
statutory accounting net income,  
include such intercompany dividends on  
Part II, line 7, column (a), and the  
taxable amount of those dividends on  
Part II, line 7, column (d). (For insurance  
companies included in the consolidated  
U.S. income tax return, see the  
On the consolidated Schedule M-3,  
Part I, line 4, Worldwide consolidated  
net income (loss) per income statement,  
and on line 11, Net income (loss) per  
income statement of includible  
corporations, the U.S. consolidated tax  
group GDS1 must report $900 of  
Credit—Corporations, excluding the  
amounts reported in column (d) of Part  
II, lines 9, 10, and 11.  
financial statement net income ($1,000  
net income less $100 minority interest).  
instructions for Part I, lines 10 and 11.)  
The GDS1 group must prepare one  
consolidated Schedule M-3, Parts II and  
III, and three additional Schedules M-3,  
Parts II and III: one for G, one for DS1,  
and one for consolidation eliminations.  
On the Schedule M-3, Parts II and III,  
for DS1, $1,000 is reported on Part II,  
lines 28 and 30, in both columns (a) and  
(d). On G's Schedule M-3, Parts II and  
III, zero is reported on Part II, line 30, in  
both columns (a) and (d). On the  
consolidation eliminations  
For any intercompany dividends  
(dividends received from includible  
corporations listed on Form 851)  
included on Part II, line 7, report on an  
attached supporting statement (1) the  
name of the dividend payer; (2) the  
payer's EIN; (3) the class of stock or  
security on which the dividends were  
paid; (4) the amount of any net  
Line 5. Gross Foreign  
Distributions Previously Taxed  
Report on line 5, column (a), any  
distributions received from foreign  
corporations that correspond to  
amounts included in Part I, line 11, and  
that were previously taxed for U.S.  
income tax purposes. For example,  
include in column (a) amounts that are  
excluded from taxable income under  
sections 959 and 1293(c). Remove  
such amount in column (b) or (c), as  
applicable. Report the full amount of the  
distribution before any withholding tax.  
Because previously taxed foreign  
distributions are not currently taxable,  
line 5, column (d), is shaded. Also, see  
the instructions for Part II, line 2, earlier.  
adjustment included on Part I, line 10a,  
for such dividends; and (5) the item  
amounts for columns (a) through (d).  
Schedule M-3, Parts II and III, on Part II,  
lines 8 and 30, the minority interest  
elimination for the U.S. consolidated tax  
group is reported as ($100) in column  
(a), $100 in column (c), and $0 in  
column (d).  
For any dividends included on Part II,  
line 7, that are not intercompany  
dividends (dividends received from  
includible corporations listed on Form  
851) that are received on classes of  
voting stock in which the corporation  
directly or indirectly owned 10% or more  
of the outstanding shares of that class at  
any time during the tax year, report on  
an attached supporting statement for  
Part II, line 7, (1) the name of the  
On the Schedule M-3, Parts II and III,  
for the U.S. consolidated tax group, on  
Part II, line 8, Minority interest for  
Line 6. Income (Loss) From  
Equity Method U.S.  
Corporations  
Report on line 6, column (a), the  
financial income (loss) included in Part I,  
line 11, for any U.S. corporation  
accounted for on the equity method and  
remove such amount in column (b) or  
(c), as applicable. Report on Part II,  
line 7, dividends received from any U.S.  
corporation accounted for on the equity  
method.  
includible corporations, ($100) is  
reported in column (a), $100 in column  
(c), and $0 in column (d). On Part II,  
line 28, the U.S. consolidated tax group  
reports $1,000 in both columns (a) and  
(d). As a result, financial statement net  
income on Part II, line 30, column (a),  
will total $900; net permanent  
dividend payer, (2) the payer's EIN (if  
applicable), (3) the class of voting stock  
on which the dividend was paid, (4) the  
percentage of the class directly or  
indirectly owned, and (5) the item  
amounts for columns (a) through (d).  
differences on Part II, line 30, column  
(c), will total $100; and taxable income  
on line 30, column (d), will total $1,000.  
Line 8. Minority Interest for  
Includible Corporations  
Report on line 8, column (a), the  
Line 7. U.S. Dividends Not  
Eliminated in Tax Consolidation  
Line 9. Income (Loss) From  
U.S. Partnerships, and  
minority interest included in the financial  
income (loss) on Part I, line 11, for any  
member of the U.S. consolidated tax  
group that is less than 100% owned.  
Report on line 7, column (a), the amount  
of dividends included in Part I, line 11,  
that were received from any U.S.  
corporation. Report on line 7, column  
(d), the amount of any U.S. dividends  
included in taxable income on Form  
1120, page 1, line 28.  
Line 10. Income (Loss) From  
Foreign Partnerships  
For any interest owned by the  
Example 12. Corporation G is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. G owns 90% of the  
stock of U.S. corporation DS1. G files a  
consolidated U.S. income tax return  
with DS1 as the GDS1 U.S.  
corporation or a member of the U.S.  
consolidated tax group that is treated as  
an investment in a partnership for U.S.  
income tax purposes (other than an  
interest in a disregarded entity), report  
amounts on Part II, line 9 or 10, as  
described below.  
Usually, the amounts included on  
line 7, columns (a) and (d), include only  
dividends received from U.S.  
consolidated group. G prepares certified  
GAAP financial statements for the  
consolidated financial statement group  
consisting of G and DS1. G has no net  
income of its own, and G does not  
corporations that are not included in the  
U.S. consolidated tax group because  
intercompany dividends (dividends  
received from includible corporations  
1. In column (a), report the sum of  
the corporation's distributive share of  
income or loss from a U.S. or foreign  
Instructions for Schedule M-3 (Form 1120)  
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partnership that is included in Part I,  
line 11.  
$3,910 ($4,000–$900) on Part II, line 9.  
H must report the limitation on Part III,  
line 21, and report the disallowed  
charitable contributions of ($3,910) in  
columns (b) and (d).  
disclosed. A corporation will be  
considered to have separately stated  
and adequately disclosed a reportable  
transaction on line 12 if the corporation  
sequentially numbers each Form 8886  
and lists by identifying number on the  
supporting statement for Part II, line 12,  
each sequentially numbered reportable  
transaction and the amounts required  
for Part II, line 12, columns (a) through  
(d).  
2. In column (b) or (c), as  
applicable, report the sum of all  
differences, if any, attributable to the  
corporation's distributive share of  
income or loss from a U.S. or foreign  
partnership.  
3. In column (d), report the sum of  
all amounts of income, gain, loss, or  
deduction attributable to the  
Line 11. Income (Loss) From  
Other Pass-Through Entities  
For any interest in a pass-through entity  
(other than an interest in a partnership  
reportable on Part II, line 9 or 10, as  
applicable) owned by a member of the  
U.S. consolidated tax group (other than  
an interest in a disregarded entity),  
report the following on line 11.  
corporation's distributive share of  
income or loss from a U.S. or foreign  
partnership (that is, the sum of all  
amounts reportable on the corporation's  
Schedule(s) K-1 received from the  
partnership (if applicable)), without  
regard to any limitations computed at  
the partner level (for example,  
In lieu of the requirements of the  
preceding paragraph, a corporation will  
be considered to have separately stated  
and adequately disclosed a reportable  
transaction if the corporation attaches a  
supporting statement that provides the  
following for each reportable  
1. In column (a), report the sum of  
the corporation's distributive share of  
income or loss from the pass-through  
entity that is included in Part I, line 11.  
2. In column (b) or (c), as  
applicable, report the sum of all  
differences, if any, attributable to the  
pass-through entity.  
3. In column (d), report the sum of  
all taxable amounts of income, gain,  
loss, or deduction reportable on the  
corporation's Schedule(s) K-1 received  
from the pass-through entity (if  
applicable).  
transaction.  
limitations on utilization of charitable  
contributions, capital losses, and  
interest expense).  
1. A description of the reportable  
transaction disclosed on Form 8886 for  
which amounts are reported on Part II,  
line 12.  
For each partnership reported on  
line 9 or 10, attach a supporting  
statement that provides the name and  
EIN (if applicable); end of year  
2. The name and tax shelter  
registration number, if applicable, as  
reported on lines 1a and 1c,  
profit-sharing percentage (if applicable);  
end of year loss-sharing percentage (if  
applicable); and the amount reported in  
column (a), (b), (c), or (d) of line 9 or 10,  
as applicable.  
respectively, of Form 8886.  
3. The type of reportable transaction  
(that is, listed transaction, confidential  
transaction, transaction with contractual  
protection, etc.) as reported on line 2 of  
Form 8886.  
For each pass-through entity  
reported on line 11, attach a supporting  
statement that provides that entity's  
name and EIN (if applicable); the  
corporation's end of year profit-sharing  
percentage (if applicable; the  
Example 13. U.S. corporation H is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3. H has  
an investment in a U.S. partnership,  
USP. H prepares financial statements in  
accordance with GAAP. In its financial  
statements, H treats the difference  
between financial statement net income  
and taxable income from its investment  
in USP as a permanent difference. For  
its current tax year, H's financial  
If a transaction is a listed transaction  
described in Regulations section  
1.6011-4(b)(2), the description must  
also include the description provided on  
line 3 of Form 8886. In addition, if the  
reportable transaction involves an  
investment in the transaction through  
another entity such as a partnership, the  
description must include the name and  
EIN (if applicable) of that entity as  
reported on line 5 of Form 8886.  
corporation's end of year loss-sharing  
percentage (if applicable); and the  
amounts reported by the corporation in  
column (a), (b), (c), or (d) of line 11, as  
applicable.  
Line 12. Items Relating to  
Reportable Transactions  
Any amounts attributable to any  
statement net income includes $10,000  
of income attributable to its share of  
USP's net income. H's Schedule K-1  
from USP reports $5,000 of ordinary  
income, $7,000 of long-term capital  
gains, $4,000 of charitable  
reportable transactions (as described in  
Regulations section 1.6011-4) must be  
included on Part II, line 12, regardless of  
whether the difference, or differences,  
would otherwise be reported elsewhere  
in Part II or Part III. Thus, if a taxpayer  
files Form 8886 for any reportable  
transaction described in Regulations  
section 1.6011-4, the amounts  
Example 15. Corporation J is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. J incurred seven  
contributions, and $200 of section 179  
expense. H must report on Part II, line 9,  
$10,000 in column (a), a permanent  
difference of ($2,200) in column (c), and  
$7,800 in column (d).  
different abandonment losses during its  
current tax year. One loss of $12 million  
results from a reportable transaction  
described in Regulations section  
1.6011-4(b)(5), another loss of $5  
million results from a reportable  
attributable to that reportable  
Example 14. The facts are the same  
transaction must be reported on Part II,  
line 12. In addition, all income and  
expense amounts attributable to a  
reportable transaction must be reported  
on Part II, line 12, columns (a) and (d),  
even if there is no difference between  
the financial amounts and the taxable  
amounts.  
transaction described in Regulations  
section 1.6011-4(b)(4), and the  
as in Example 13, except that  
corporation H's charitable contribution  
deduction is wholly attributable to its  
partnership interest in USP and is  
limited to $90 pursuant to section 170(b)  
(2) due to other investment losses  
incurred by H. In its financial  
remaining five abandonment losses are  
not reportable transactions. J discloses  
the reportable transactions giving rise to  
the $12 million and $5 million losses on  
separate Forms 8886 and sequentially  
numbers them X1 and X2, respectively.  
J must separately state and adequately  
disclose the $12 million and $5 million  
losses on Part II, line 12. The $12 million  
statements, H treated this limitation as a  
temporary difference. H must not report  
the charitable contribution limitation of  
Each difference attributable to a  
reportable transaction must be  
separately stated and adequately  
Instructions for Schedule M-3 (Form 1120)  
-17-  
   
loss and the $5 million loss will be  
adequately disclosed if J attaches a  
supporting statement for line 12 that  
lists each of the sequentially numbered  
forms, Form 8886-X1 and Form  
Schedule M-3. In column (b) or (c), as  
applicable, adjust for any amounts  
treated for U.S. income tax purposes as  
current tax year. L prepares financial  
statements in accordance with GAAP  
using an overall accrual method of  
interest income that are treated as some accounting. L uses an overall cash  
other form of income for financial  
accounting purposes, or vice versa. For  
example, adjustments to interest  
method of accounting for U.S. income  
tax purposes. L's financial statements  
for the year ending December 31 report  
accounts receivable of $35,000, an  
allowance for bad debts of $10,000, and  
8886-X2, and with respect to each  
reportable transaction reports the  
appropriate amounts required for Part II, income resulting from adjustments  
line 12, columns (a) through (d).  
made in accordance with the  
Alternatively, J's disclosures will be  
adequate if the description provided for  
each loss on the supporting statement  
includes the names and tax shelter  
registration numbers, if any, disclosed  
on the applicable Form 8886, identifies  
the type of reportable transaction for the  
loss, and reports the appropriate  
amounts required for Part II, line 12,  
columns (a) through (d). J must report  
the losses attributable to the other five  
abandonment losses on Part II, line 23e,  
regardless of whether a difference  
exists for any or all of those  
instructions for Part II, line 18, should be accounts payable of $17,000 related to  
made in columns (b) and (c) of this  
line 13.  
current year acquisition and  
reorganization legal and accounting  
fees. In addition, for L's year ending  
December 31, L reported financial  
statement depreciation expense of  
$15,000 and depreciation for U.S.  
income tax purposes of $25,000. For L's  
current tax year using an overall cash  
method of accounting, L does not  
recognize the $35,000 of revenue  
attributable to the accounts receivable,  
cannot deduct the $10,000 allowance  
for bad debt, and cannot deduct the  
$17,000 of accounts payable. In its  
financial statements, L treats both the  
difference in overall accounting  
Complete Part II of Form 8916-A.  
Enter the amounts from line 6, columns  
(a) through (d) of Form 8916-A, on  
Schedule M-3, Part II, line 13, columns  
(a) through (d), as applicable. Attach  
Form 8916-A.  
Do not report on this line 13 or  
include on Form 8916-A amounts  
reported in accordance with the  
instructions for Part II, lines 9, 10, 11,  
12, and 22.  
abandonment losses.  
Example 16. Corporation K is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. K enters into a  
Note. Any corporation that files Form  
1120 (or Form 1120-C) that (a) is  
required to file Schedule M-3 (Form  
1120) and has less than $50 million in  
total assets at the end of the tax year, or  
(b) is not required to file Schedule M-3  
and voluntarily files Schedule M-3, is not  
required to file Form 8916-A, but may  
voluntarily do so.  
methods used for financial statement  
and U.S. income tax purposes and the  
difference in depreciation expense as  
temporary differences. L must combine  
all adjustments attributable to the  
differences related to the overall  
transaction with contractual protection  
that is a reportable transaction  
described in Regulations section  
1.6011-4(b)(4). This reportable  
accounting methods on Part II, line 14.  
As a result, L must report on Part II,  
line 14, $8,000 in column (a) ($35,000 -  
$10,000 - $17,000), ($8,000) in column  
(b), and zero in column (d). L must not  
report the accrual to cash adjustment  
attributable to the legal and accounting  
fees on Part III, line 24, Current year  
acquisition or reorganization legal and  
accounting fees. Because the difference  
in depreciation expense does not relate  
to the use of the cash or accrual method  
of accounting, L must report the  
transaction is the only reportable  
transaction for K's current tax year and  
results in a $7 million capital loss for  
both financial accounting purposes and  
U.S. income tax purposes. Although the  
transaction does not result in a  
Line 14. Total Accrual to Cash  
Adjustment  
This line is completed by a corporation  
that prepares financial statements (or  
books and records, if permitted) using  
an overall accrual method of accounting  
and uses an overall cash method of  
accounting for U.S. income tax  
difference, K is required to report on  
Part II, line 12, the following amounts:  
($7 million) in column (a), zero in  
columns (b) and (c), and ($7 million) in  
column (d). The transaction will be  
adequately disclosed if K attaches a  
supporting statement for line 12 that (a)  
sequentially numbers the Form 8886  
and refers to the sequentially numbered  
Form 8886-X1, and (b) reports the  
applicable amounts required for line 12,  
columns (a) through (d). Alternatively,  
the transaction will be adequately  
disclosed if the supporting statement for  
line 12 includes a description of the  
transaction; the name and tax shelter  
registration number, if any; and the type  
of reportable transaction disclosed on  
Form 8886.  
purposes, or vice versa. With the  
exception of amounts required to be  
reported on Part II, line 12, the  
depreciation difference on Part III,  
line 31, Depreciation, and report  
corporation must report on Part II,  
line 14, a single amount net of all  
adjustments attributable solely to the  
use of the different overall methods of  
accounting (for example, adjustments  
related to accounts receivable,  
$15,000 in column (a), $10,000 in  
column (b), and $25,000 in column (d).  
Line 15. Hedging Transactions  
Report on line 15, column (a), the net  
gain or loss from hedging transactions  
included on Part I, line 11. Report in  
column (d) the amount of taxable  
income from hedging transactions as  
defined in section 1221(b)(2). Use  
columns (b) and (c) to report all  
accounts payable, compensation,  
accrued liabilities, etc.), regardless of  
whether a separate line on  
Schedule M-3 corresponds to an item  
within the accrual to cash reconciliation.  
Differences not attributable to the use of  
the different overall methods of  
differences caused by treating hedging  
transactions differently for financial  
accounting purposes and for U.S.  
income tax purposes. For example, if a  
portion of a hedge is considered  
Line 13. Interest Income  
Report on Part II, line 13, column (a),  
the total amount of interest income  
included on Part I, line 11, and report on  
Part II, line 13, column (d), the total  
amount of interest income included on  
Form 1120, page 1, line 28, that is not  
required to be reported elsewhere on  
accounting must be reported on the  
appropriate lines of Schedule M-3 (for  
example, a depreciation difference must  
be reported on Part III, line 31).  
ineffective under GAAP but is still a valid  
hedge under section 1221(b)(2), the  
difference must be reported on line 15.  
Example 17. Corporation L is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
Instructions for Schedule M-3 (Form 1120)  
-18-  
     
The hedge of a capital asset, which is  
not a valid hedge for U.S. income tax  
purposes but may be considered a  
hedge for GAAP purposes, must also be  
reported here.  
Report hedging gains and losses  
computed under the mark-to-market  
method of accounting on line 15 and not  
on Part II, line 16.  
be reported elsewhere in Part II or Part  
III.  
current tax year for the other five assets  
is $40,000 for financial accounting  
purposes and $30,000 for U.S. income  
tax purposes. In addition, C incurs $200  
of meals expenses that C deducts in  
computing net income for financial  
accounting purposes. All $200 of the  
meals expenses are subject to the 50%  
limitation under section 274(n). In its  
financial statements, C treats the  
Examples of amounts that must be  
included as cost of goods sold items are  
amounts attributable to inventory  
valuation, such as amounts attributable  
to cost-flow assumptions, additional  
costs required to be capitalized  
(including depreciation) such as section  
263A costs, inventory shrinkage  
accruals, inventory obsolescence  
reserves, and lower of cost or market  
(LCM) write-downs.  
Report any gain or loss from  
inventory hedging transactions on  
line 15 and not on Part II, line 17.  
$50,000 depreciation and $100 of the  
meals as other costs in computing cost  
of goods sold. C must include on Form  
8916-A and on Schedule M-3, Part II,  
line 17, column (a), the $50,000 of  
depreciation and $100 of meals. C must  
also include a temporary difference of  
$20,000 in column (b), a permanent  
difference of ($50) in column (c), and  
$70,050 in column (d) ($70,000  
Line 16. Mark-to-Market Income  
(Loss)  
Report on line 16 any amount  
Complete Part I of Form 8916-A.  
Enter the amounts from line 8, columns  
(a) through (d) of Form 8916-A, on  
Schedule M-3, Part II, line 17, columns  
(a) through (d), as applicable. Attach  
Form 8916-A, if applicable.  
representing the mark-to-market income  
or loss for any securities held by a  
dealer in securities, a dealer in  
commodities having made a valid  
election under section 475(e), or a  
trader in securities or commodities  
having made a valid election under  
section 475(f). “Securities” for these  
purposes are securities described in  
section 475(c)(2) and commodities  
described in section 475(e)(2).  
“Securities” do not include any items  
specifically excluded from sections  
475(c)(2) and 475(e)(2), such as certain  
contracts to which section 1256(a)  
applies.  
depreciation and $50 meals expenses).  
In addition, C must report on Part III,  
line 31, for its current tax year income  
statement, depreciation expense of  
$40,000 in column (a), a temporary  
difference of ($10,000) in column (b),  
and $30,000 in column (d); and on Part  
III, line 11, meals expenses of $100 in  
column (a), a permanent difference of  
($50) in column (c), and $50 in column  
(d). All other cost of goods sold items  
would be added to the amounts  
Note. The entries in columns (a) and  
(d) of Schedule M-3, line 17, are  
negative amounts.  
Do not report on line 17 or on Form  
8916-A amounts such as:  
Amounts reportable on Part II, line 12;  
Any gain or loss from inventory  
hedging transactions reportable on Part  
II, line 15;  
Amounts reportable on Part II, line 18;  
Amounts reportable on Part II, line 21;  
Mark-to-market income or (loss)  
included on Part II, line 17, detailed in  
this example and reported on Form  
8916-A and on Part II, line 17, in the  
appropriate columns.  
Report hedging gains and losses  
computed under the mark-to-market  
method of accounting on Part II, line 15,  
and not on line 16.  
associated with the inventories of  
dealers in securities under section 475,  
reportable on Part II, line 16;  
Line 18. Sale Versus Lease (for  
Sellers and/or Lessors)  
Section 481(a) adjustments related to  
cost of goods sold or inventory  
Traders in securities and commodi-  
ties. For a trader in securities or  
valuation, reportable on Part II, line 19;  
Fines and penalties reportable on  
Note. Also see the instructions for  
purchasers and lessees in Part III,  
line 34.  
Asset transfer transactions with  
periodic payments characterized for  
financial accounting purposes as either  
a sale or a lease may, under some  
circumstances, be characterized as the  
opposite for tax purposes. If the  
commodities that made a valid election  
under section 475(f) to use the  
Part III, line 12;  
Judgments, damages, awards, and  
mark-to-market method to account for  
securities or commodities held in  
connection with a trading business that  
files Form 4797, any Schedule M-3  
entries required as a result of marking to  
market these securities or commodities  
are reported as follows: (a)  
similar costs, reportable on Part III,  
line 13; and  
Amounts included on Part III, line 34.  
Note. Any corporation that files Form  
1120 (or Form 1120-C) that (a) is  
required to file Schedule M-3 (Form  
1120) and has less than $50 million in  
total assets at the end of the tax year, or  
(b) is not required to file Schedule M-3  
and voluntarily files Schedule M-3, is not  
required to file Form 8916-A, but may  
voluntarily do so.  
Example 18. Corporation C is a  
calendar year taxpayer that placed in  
service 10 depreciable fixed assets in a  
prior tax year. C is required to file and  
entirely complete Schedule M-3 for its  
current tax year. C's total depreciation  
expense for its current tax year for five  
of the assets is $50,000 for financial  
accounting purposes and $70,000 for  
U.S. income tax purposes. C's total  
annual depreciation expense for its  
transaction is treated as a lease, the  
seller/lessor reports the periodic  
payments as gross rental income and  
also reports depreciation expense. If the  
transaction is treated as a sale, the  
seller/lessor computes gain from the  
sale of assets and reports the periodic  
payments as payments of principal and  
interest income.  
mark-to-market gains and losses from  
Form 4797, line 10, are included on Part  
II, line 16, of Schedule M-3 (Form 1120);  
(b) any other Schedule M-3 entries  
required based on other results  
(non-mark-to-market gains and losses)  
included in the total reported on Form  
4797, line 17, should be reported on  
Part II, line 23d, of Schedule M-3 (Form  
1120), unless the instructions for  
On Part II, line 18, column (a), report  
the gross profit or gross rental income  
for financial accounting purposes for all  
sale or lease transactions that must be  
given the opposite characterization for  
U.S. income tax purposes. On Part II,  
line 18, column (d), report the gross  
profit or gross rental income for federal  
Schedule M-3 require the amounts to be  
reported on another line.  
Line 17. Cost of Goods Sold  
Report on line 17 any amounts  
deducted as part of cost of goods sold  
during the tax year, regardless of  
whether the amounts would otherwise  
Instructions for Schedule M-3 (Form 1120)  
-19-  
     
income tax purposes. Interest income  
amounts for such transactions must be  
reported on Part II, line 13, in column (a)  
or (d), as applicable. Depreciation  
expense for such transactions must be  
reported on Part III, line 31, in column  
(a) or (d), as applicable. Use columns  
(b) and (c) of Part II, lines 13 and 18,  
and Part III, line 31, as applicable to  
report the differences between columns  
(a) and (d).  
Example 19. Corporation M sells  
and leases property to customers. M is  
a calendar year taxpayer that files and  
entirely completes Schedule M-3. For  
financial accounting purposes, M  
separate line for that income or expense issue discount and other imputed  
item exists in Part II or Part III.  
interest” includes, but is not limited to:  
1. The excess of a debt instrument's  
stated redemption price at maturity over  
its issue price, as determined under  
section 1273;  
2. Amounts that are imputed interest  
on a deferred sales contract under  
section 483;  
3. Amounts treated as interest or  
OID under the stripped bond rules under  
section 1286; and  
4. Amounts treated as OID under  
the below-market interest rate rules  
under section 7872.  
Example 20. Corporation N is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. N was depreciating  
certain fixed assets over an erroneous  
recovery period and, effective for its  
current tax year, N receives IRS consent  
to change its method of accounting for  
the depreciable fixed assets and begins  
using the proper recovery period. The  
change in method of accounting results  
in a positive section 481(a) adjustment  
of $100,000 that is required to be  
spread over 4 tax years, beginning with  
the current tax year. In its financial  
accounts for each transaction as a sale.  
For U.S. income tax purposes, each of  
M's transactions must be treated as a  
lease. In its financial statements, M  
treats the difference in the financial  
accounting and the U.S. income tax  
treatment of these transactions as  
Line 23a. Income Statement  
Gain/Loss on Sale, Exchange,  
Abandonment, Worthlessness,  
or Other Disposition of Assets  
Other Than Inventory and  
Pass-Through Entities  
statements, N treats the section 481(a)  
adjustment as a temporary difference. N  
must report on Part II, line 19, $25,000  
in columns (b) and (d) for its current tax  
year and each of the subsequent 3 tax  
years (unless N is otherwise required to  
temporary. During its current tax year, M recognize the remainder of the section  
reports in its financial statements $1,000 481(a) adjustment earlier). N must not  
Report on line 23a, column (a), all gains  
and losses on the disposition of assets  
except for (1) gains and losses on the  
disposition of inventory, and (2) gains  
and losses allocated to the corporation  
from a pass-through entity (for example,  
on Schedule K-1) that are included in  
the net income (loss) of includible  
corporations reported on Part I, line 11.  
Reverse the amount reported in column  
(a) in column (b) or (c), as applicable.  
The corresponding gains and losses for  
U.S. income tax purposes are reported  
on Part II, lines 23b through 23g, as  
applicable.  
of sales and $700 of cost of goods sold  
with respect to its current year lease  
transactions. M receives periodic  
payments of $500 in its current year with  
respect to these current year  
report the section 481(a) adjustment on  
Part III, line 31.  
Line 20. Unearned/Deferred  
Revenue  
transactions and similar transactions  
from prior years and treats $400 as  
principal and $100 as interest income.  
For financial accounting purposes, M  
reports gross profit of $300 ($1,000 -  
$700) and interest income of $100 from  
these transactions. For U.S. income tax  
purposes, M reports $500 of gross  
rental income (the periodic payments)  
and (based on other facts) $200 of  
depreciation deduction on the property.  
On its current year Schedule M-3, M  
must report on Part II, line 13, $100 in  
column (a), ($100) in column (b), and  
zero in column (d). In addition, M must  
report on Part II, line 18, $300 of gross  
profit in column (a), $200 in column (b),  
and $500 of gross rental income in  
column (d). Lastly, M must report on  
Part III, line 31, $200 in columns (b) and  
(d).  
Report on line 20, column (a), amounts  
of revenues included in Part I, line 11,  
that were deferred from a prior financial  
accounting year. Report on line 20,  
column (d), amounts of revenues  
recognizable for U.S. income tax  
purposes in the current tax year that are  
recognized for financial accounting  
purposes in a different year. Also, report  
on line 20, column (d), any amount of  
revenues reported on line 20, column  
(a), that are recognizable for U.S.  
income tax purposes in the current tax  
year. Use columns (b) and (c) of line 20,  
as applicable, to report the differences  
between columns (a) and (d).  
Line 23b. Gross Capital Gains  
From Schedule D, Excluding  
Amounts From Pass-Through  
Entities  
Report on line 23b gross capital gains  
reported on Schedule D (Form 1120),  
Capital Gains and Losses, excluding  
capital gains from pass-through entities,  
which must be reported on Part II, line 9,  
10, or 11, as applicable.  
Line 20 must not be used to report  
income recognized from long-term  
contracts. Instead, use line 21.  
Line 21. Income Recognition  
From Long-Term Contracts  
Line 23c. Gross Capital Losses  
From Schedule D, Excluding  
Amounts From Pass-Through  
Entities, Abandonment Losses,  
and Worthless Stock Losses  
Report on line 23c gross capital losses  
reported on Schedule D (Form 1120),  
excluding capital losses from (a)  
Line 19. Section 481(a)  
Adjustments  
A deduction for income attributable to  
domestic production activities is  
available for specified agricultural or  
horticultural cooperatives (specified  
cooperatives). See section 199A(g).  
Also, see the Instructions for Form  
8903.  
With the exception of a section 481(a)  
adjustment that is required to be  
reported on Part II, line 12, for  
reportable transactions, any difference  
between an income or expense item  
attributable to an authorized (or  
pass-through entities, which must be  
reported on Part II, line 9, 10, or 11, as  
applicable; (b) abandonment losses,  
which must be reported on Part II,  
line 23e; and (c) worthless stock losses,  
which must be reported on Part II,  
unauthorized) change in method of  
accounting made for U.S. income tax  
purposes that results in a section 481(a)  
adjustment must be reported on Part II,  
line 19, regardless of whether a  
Line 22. Original Issue Discount  
and Other Imputed Interest  
Report on line 22 any amounts of  
original issue discount (OID) and other  
imputed interest. The term “original  
Instructions for Schedule M-3 (Form 1120)  
-20-  
               
line 23f. Do not report on line 23c capital group, the Schedule M-3 adjustment for  
Accounting Standards (SFAS) No. 130,  
is reported on this line, describe the  
losses carried over from a prior tax year  
and utilized in the current tax year. See  
the instructions for Part II, line 24,  
the amount of the consolidated net  
capital loss that is disallowed should not item(s) in detail. Examples of sufficiently  
be made on the separate consolidating  
detailed descriptions include “foreign  
currency translation  
regarding the reporting requirements for Schedules M-3 of the includible  
capital loss carryovers utilized in the  
current tax year.  
corporations, but on the separate  
Schedule M-3 for consolidated  
eliminations (or on Form 8916 in the  
case of a mixed group) as described  
under Completing Schedule M-3 and  
Certain Allocations, Limitations, and  
Carryovers, earlier.  
adjustments—comprehensive income”  
and “gains and losses on  
available-for-sale  
Line 23d. Net Gain/Loss  
Reported on Form 4797,  
Line 17, Excluding Amounts  
From Pass-Through Entities,  
Abandonment Losses, and  
Worthless Stock Losses  
securities—comprehensive income.”  
Whether an item of income (loss) is  
reported on line 25, or is reported on  
Part II, line 28, is determined separately  
by each member of the U.S.  
If the corporation utilizes a capital  
loss carryforward on Schedule D in the  
current tax year, report the carryforward  
utilized as a negative amount on Part II,  
line 24, column (b) or (c), as applicable,  
and column (d). For a U.S. consolidated  
tax group, the Schedule M-3 adjustment  
for the amount of the consolidated  
capital loss carryforward should not be  
made on the separate consolidating  
Schedules M-3 of the includible  
consolidated tax group and not at the  
U.S. consolidated tax group level.  
Report on line 23d the net gain or loss  
reported on line 17 of Form 4797, Sales  
of Business Property, excluding  
Line 26. Total Income (Loss)  
Items  
Combine lines 1 through 25 and enter  
the total on line 26.  
amounts from (a) pass-through entities,  
which must be reported on Part II, line 9,  
10, or 11, as applicable; (b)  
abandonment losses, which must be  
reported on Part II, line 23e; and (c)  
worthless stock losses, which must be  
reported on Part II, line 23f.  
Note. Line 17, Cost of goods sold,  
columns (a) and (d), if applicable, are  
negative amounts which will affect the  
totals entered on line 26.  
corporations, but on the separate  
Schedule M-3 for consolidation  
eliminations (or on Form 8916 in the  
case of a mixed group) as described  
under Completing Schedule M-3 and  
Certain Allocations, Limitations, and  
Carryovers, earlier.  
Note. Traders in securities or  
Line 27. Total Expense/  
Deduction Items  
commodities that have made a valid  
election under section 475(f) to use the  
mark-to-market method to account for  
securities or commodities, see the  
instructions for Part II, line 16, earlier.  
Report on Part II, line 27, columns (a)  
through (d), as applicable, the negative  
of the amounts reported on Part III,  
line 39, columns (a) through (d), as  
applicable. Report positive amounts as  
negative and negative amounts as  
positive. For example, if Part III, line 39,  
column (a), reflects an amount of $1  
million, then report on Part II, line 27,  
column (a), ($1 million). Similarly, if Part  
III, line 39, column (b), reflects an  
Line 25. Other Income (Loss)  
Items With Differences  
Separately state and adequately  
Line 23e. Abandonment Losses  
Report on line 23e any abandonment  
losses, regardless of whether the loss is  
characterized as an ordinary loss or a  
capital loss.  
disclose on Part II, line 25, all items of  
income (loss) with differences that are  
not otherwise listed on Part II, lines 1  
through 24. Attach a statement that  
itemizes the type of income (loss) and  
the amount of each item and provides a  
description that states the income (loss)  
name for book purposes for the amount  
recorded in column (a) and describes  
the adjustment being recorded in  
Line 23f. Worthless Stock  
Losses  
amount of ($50,000), then report on Part  
II, line 27, column (b), $50,000.  
Report on line 23f any worthless stock  
loss, regardless of whether the loss is  
characterized as an ordinary loss or a  
capital loss. Attach a statement that  
separately states and adequately  
discloses each event that gives rise to a  
worthless stock loss and the amount of  
each loss.  
Line 28. Other Items With No  
Differences  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, gain, loss, expense, or  
column (b) or (c). The entire description  
completes the tax description for the  
amount included in column (d) for each  
item separately stated on this line.  
deduction and the item is not described  
or included in Part II, lines 1 through 25,  
or Part III, lines 1 through 38, report the  
entire amount of the item in columns (a)  
and (d) of line 28. If a portion of an item  
of income, loss, expense, or deduction  
has a difference and a portion of the  
item does not have a difference, do not  
report any portion of the item on line 28.  
Instead, report the entire amount of the  
item (that is, both the portion with a  
difference and the portion without a  
difference) on the applicable line of Part  
II, lines 1 through 25, or Part III, lines 1  
through 38. See Example 11, earlier.  
The attached statement should have  
five columns. The first column has the  
description for the next four columns.  
The second column is column (a)  
Line 23g. Other Gain/Loss on  
Disposition of Assets Other  
Than Inventory  
Report on line 23g any gains or losses  
from the sale or exchange of property  
other than inventory that are not  
income (loss) per income statement, the  
third column is column (b) temporary  
difference, the fourth column is column  
(c) permanent difference, and the fifth  
column is column (d) income (loss) per  
tax return. Every item listed on the  
attached statement for line 25 must  
always have columns (a) + (b) + (c) =  
(d). Each item with amounts in columns  
(a), (b), (c), and (d) will be totaled and  
included as one line on Part II, line 25.  
reported on lines 23b through 23f.  
Line 24. Capital Loss Limitation  
and Carryforward Used  
Report as a positive amount on line 24,  
column (b) or (c), as applicable, and (d)  
the excess of the net capital losses over  
the net capital gains reported on  
Schedule D (Form 1120) by the  
If any “comprehensive income,” as  
defined by Statement of Financial  
corporation. For a U.S. consolidated tax  
Instructions for Schedule M-3 (Form 1120)  
-21-  
           
financial statements (or its books and  
records, if applicable). If the current and  
deferred U.S., state, and foreign income  
tax expense for the U.S. consolidated  
tax group (income tax expense) is  
allocated among the members of the  
U.S. consolidated tax group in the  
group's financial statements (or its  
books and records, if applicable), then  
each member must report its allocated  
income tax expense on Part III, lines 1  
through 6, of that member's separate  
Schedule M-3. However, if the income  
tax expense is not shared or allocated  
among members of the U.S.  
columns (a) through (d), as applicable.  
Attach Form 8916-A.  
Line 29a. 1120 Subgroup  
Reconciliation Totals  
Do not report on Form 8916-A and  
this line 8 amounts reported in  
For filers other than a mixed group,  
combine lines 26 through 28 and skip  
lines 29b and 29c. On the  
accordance with the instructions for Part  
II, lines 9, 10, 11, and 12.  
sub-consolidated Schedule M-3 for a  
mixed group, combine lines 26 through  
28 and skip lines 29b and 29c. For the  
consolidated Schedule M-3 of a mixed  
group, complete only lines 29a through  
29c and line 30 of Part II. No Part III is  
required to be completed for the  
consolidated Schedule M-3 of a mixed  
group.  
Note. Any corporation that files Form  
1120 (or Form 1120-C) that (a) is  
required to file Schedule M-3 (Form  
1120) and has less than $50 million in  
total assets at the end of the tax year, or  
(b) is not required to file Schedule M-3  
and voluntarily files Schedule M-3, is not  
required to file Form 8916-A, but may  
voluntarily do so.  
consolidated tax group but is retained in  
the parent corporation's financial  
Line 29b. PC Insurance  
Subgroup Reconciliation Totals  
statements (or books and records, if  
applicable), then amounts are reported  
only on Part III, lines 1 through 6, of the  
parent's separate Schedule M-3.  
Line 9. Stock Option Expense  
Line 29b is only used by mixed groups.  
See Schedule M-3 Consolidation for  
Mixed Groups (1120/L/PC), earlier.  
Report on line 9, column (a), amounts  
expensed on Part I, line 11, net income  
per the income statement, that are  
attributable to all stock options. Report  
on line 9, column (d), deduction  
Line 29c. Life Insurance  
Line 7. Foreign Withholding  
Taxes  
Subgroup Reconciliation Totals  
amounts attributable to all stock options.  
Line 29c is only used by mixed groups.  
See Schedule M-3 Consolidation for  
Mixed Groups (1120/L/PC), earlier.  
Report on line 7, column (a), the amount  
of foreign withholding taxes included in  
financial accounting net income on Part  
I, line 11. If the corporation is deducting  
foreign tax, use column (b) or (c), as  
applicable, to correct for any difference  
between foreign withholding tax  
Line 10. Other Equity-Based  
Compensation  
Report on line 10 any amounts for  
equity-based compensation or  
Line 30. Reconciliation Totals  
Mixed groups, see Schedule M-3  
Consolidation for Mixed Groups  
(1120/L/PC), earlier.  
consideration that are reflected as  
expense for financial accounting  
included in financial accounting net  
income and the amount of foreign  
withholding taxes being deducted on  
the return. If the corporation is crediting  
foreign withholding taxes against the  
U.S. income tax liability, use column (b)  
or (c), as applicable, to negate the  
amount reported in column (a).  
purposes (column (a)) or deducted in  
the U.S. income tax return (column (d))  
other than amounts reportable  
Part III. Reconciliation of  
Net Income (Loss) per  
Income Statement of  
Includible Corporations  
With Taxable Income per  
Return—Expense/  
elsewhere on Schedule M-3, Parts II  
and III (for example, on Part III, line 9,  
for stock options expense). Examples of  
amounts reportable on line 10 include  
payments attributable to employee  
stock purchase plans (ESPPs),  
Line 8. Interest Expense  
Report on Part III, line 8, column (a), the  
total amount of interest expense  
phantom stock options, phantom stock  
units, stock warrants, stock appreciation  
rights, qualified equity grants, and  
restricted stock, regardless of whether  
such payments are made to employees  
or nonemployees, or as payment for  
property or compensation for services.  
Deduction Items  
Note. Expense amounts that reduce  
financial accounting income must be  
reported on Part III, column (a), as  
positive amounts. Deduction amounts  
that reduce taxable income must be  
reported on Part III, column (d), as  
positive amounts. Amounts reported on  
Part II, line 27, must be the negative of  
the amounts reported on Part III, line 39.  
included on Part I, line 11, and report on  
Part III, line 8, column (d), the total  
amount of interest deduction included  
on Form 1120, page 1, line 28, that is  
not required to be reported elsewhere  
on Schedule M-3. In column (b) or (c),  
as applicable, include any adjustments  
for any amounts treated for U.S. income  
tax purposes as interest deduction that  
are treated as some other form of  
expense for financial accounting  
Line 11. Meals and  
Entertainment  
Report on line 11, column (a), any  
amounts paid or accrued by the  
Lines 1 Through 6. Income Tax  
Expense  
corporation during the tax year for  
meals, beverages, and entertainment  
that are accounted for in financial  
accounting income, regardless of the  
classification, nomenclature, or  
purposes, or vice versa. For example,  
adjustments to interest expense/  
If the corporation does not distinguish  
between current and deferred income  
tax expense in its financial statements  
(or its books and records, if applicable),  
report income tax expense as current  
income tax expense using lines 1, 3,  
and 5, as applicable.  
deduction resulting from adjustments  
made in accordance with the  
terminology used for such amounts, and  
regardless of how or where such  
amounts are classified in the  
instructions for Part III, line 34, Purchase  
versus lease (for purchasers and/or  
lessees), should be made in columns  
(b) and (c), as applicable, on this line 8.  
corporation's financial income statement  
or the income and expense accounts  
maintained in the corporation's books  
and records. Report only amounts not  
otherwise reportable elsewhere on  
A U.S. consolidated tax group must  
complete lines 1 through 6 in  
Complete Part III of Form 8916-A.  
Enter the amounts from Form 8916-A,  
Part III, line 5, columns (a) through (d),  
on Schedule M-3, Part III, line 8,  
accordance with the allocation of tax  
expense among the members of the  
U.S. consolidated tax group in the  
Instructions for Schedule M-3 (Form 1120)  
-22-  
                     
Schedule M-3, Parts II and III (for  
example, Part II, line 17).  
in taxable income, regardless of the  
financial accounting period in which  
such amounts were or are included in  
financial accounting net income.  
Complete columns (b) and (c) as  
appropriate.  
and life insurance coverage, dental  
coverage, etc.).  
Line 12. Fines and Penalties  
Line 18. Deferred  
Compensation  
Report on line 12 any fines or similar  
penalties paid to a government or other  
authority for the violation of any law for  
which fines or penalties are assessed.  
All fines and penalties expensed in  
financial accounting income (paid or  
accrued) must be included on this  
line 12, column (a), regardless of the  
government or other authority that  
imposed the fines or penalties;  
Report on line 18, column (a), any  
compensation expense included in the  
net income (loss) amount reported in  
Part I, line 11, that is not deductible for  
U.S. income tax purposes in the current  
tax year and that was not reported  
elsewhere on Schedule M-3, in column  
(a). Report on line 18, column (d), any  
compensation deductible in the current  
tax year that was not included in the net  
income (loss) amount reported in Part I,  
line 11, for the current tax year and that  
is not reportable elsewhere on  
Do not report on line 13 amounts  
required to be reported in accordance  
with the instructions for Part III, line 12.  
Do not report on line 13 amounts  
recovered from insurers or any other  
indemnitors for any judgments,  
damages, awards, or similar costs  
described above.  
regardless of whether the fines and  
penalties are civil or criminal; regardless  
of the classification, nomenclature, or  
terminology used for the fines or  
penalties by the imposing authority in its  
actions or documents; and regardless of  
how or where the fines or penalties are  
classified in the corporation's financial  
income statement or the income and  
expense accounts maintained in the  
corporation's books and records. Also  
report on line 12, column (a), the  
reversal of any overaccrual of any  
amount described in this paragraph.  
See section 162(f) for additional  
Line 14. Parachute Payments  
Report on line 14, column (a), the total  
expense included in financial  
Schedule M-3. For example, report  
originations and reversals of deferred  
compensation subject to section 409A  
on line 18.  
accounting net income on Part I, line 11,  
that is subject to section 280G. Report  
in column (b) or (c), as applicable, the  
amount of nondeductible parachute  
payments pursuant to section 280G,  
and report in column (d) the deductible  
amount of compensation after any  
excess parachute payment limitations  
under section 280G. If a payment is  
subject to limitation under both sections  
162(m) and 280G, report the total  
payment on this line 14.  
Line 20. Charitable  
Contribution of Intangible  
Property  
Report on line 20 any charitable  
contribution of intangible property, for  
example, contributions of:  
guidance.  
Intellectual property, patents  
Report on line 12, column (d), any  
such amounts as described in the  
preceding paragraph that are includible  
in taxable income, regardless of the  
financial accounting period in which  
such amounts were or are included in  
financial accounting net income.  
Complete columns (b) and (c) as  
appropriate.  
Do not report on line 12 amounts  
required to be reported in accordance  
with the instructions for Part III, line 13.  
Do not report on line 12 amounts  
recovered from insurers or any other  
indemnitors for any fines and penalties  
described above.  
(including any amounts of additional  
contributions allowable by virtue of  
income earned by donees subsequent  
to the year of donation), copyrights, and  
trademarks;  
Line 15. Compensation With  
Section 162(m) Limitation  
Report on line 15, column (a), the total  
amount of current compensation  
Securities (including stocks and their  
derivatives, stock options, and bonds);  
Conservation easements (including  
expense for the corporate officers to  
whom section 162(m) applies. Report in  
column (b) or (c), as applicable, the  
nondeductible amount of current  
scenic easements or air rights);  
Railroad rights of way;  
Mineral rights; and  
compensation in excess of $1 million  
($500,000 if the corporation receives or  
has received financial assistance under  
the Treasury Troubled Asset Relief  
Program (TARP)). Report the deductible  
compensation in column (d). If a  
Other intangible property.  
Line 21. Charitable  
Contribution Limitation/  
Carryforward  
Report as a negative amount on line 21,  
columns (b), (c), and (d), as applicable,  
the excess of charitable contributions  
made during the tax year over the  
amount of the charitable contribution  
limitation amount.  
payment is subject to limitation under  
both sections 162(m) and 280G, report  
the total payment on Part III, line 14,  
Parachute payments. See Regulations  
section 1.162-27(g) for the interaction  
between sections 162(m) and 280G.  
Line 13. Judgments, Damages,  
Awards, and Similar Costs  
Report on line 13, column (a), the  
amount of any estimated or actual  
judgments, damages, awards,  
settlements, and similar costs, however  
named or classified, included in  
financial accounting income, regardless  
of whether the amount deducted was  
attributable to an estimate of future  
anticipated payments or actual  
payments. Also report on line 13,  
column (a), the reversal of any  
overaccrual of any amount described in  
this paragraph.  
Line 16. Pension and  
Profit-Sharing  
Report on line 16 any amounts  
attributable to the corporation's pension  
plans, profit-sharing plans, and any  
other retirement plans.  
If the corporation utilizes a  
contribution carryforward in the current  
tax year, report the carryforward utilized  
as a positive amount in columns (b), (c),  
and (d), as applicable.  
When a consolidated income tax  
return is being filed, Schedule M-3  
adjustments for the amount of charitable  
contributions in excess of the limitation,  
or for charitable contribution  
Line 17. Other Post-Retirement  
Benefits  
Report on line 17 any amounts  
attributable to other post-retirement  
benefits not otherwise includible on Part  
III, line 16 (for example, retiree health  
Report on line 13, column (d), any  
such amounts as are described in the  
preceding paragraph that are includible  
carryforward utilized, should not be  
made on the separate consolidating  
Schedules M-3 of the includible  
Instructions for Schedule M-3 (Form 1120)  
-23-  
               
corporations, but on the separate  
consolidating Schedule M-3 for  
consolidation eliminations (or on Form  
8916 in the case of a mixed group). See  
Completing Schedule M-3 and Certain  
Allocations, Limitations, and Carryovers,  
earlier.  
legal and accounting fees incurred in  
connection with the liquidation of a  
subsidiary, a spin-off of a subsidiary, or  
an initial public stock offering.  
actual write-offs of accounts receivable  
included on Part I, line 11. Report in  
column (d) the amount of bad debt  
expense deductible for federal income  
tax purposes under section 166.  
Line 25. Current Year  
Acquisition/Reorganization  
Other Costs  
Line 33. Corporate Owned Life  
Insurance Premiums  
Report on line 33 all amounts of  
Line 22. Domestic Production  
Activities Deduction  
Report on line 25 any other fees paid or  
incurred in connection with a taxable or  
tax-free acquisition of property (for  
example, stock or assets) or a tax-free  
reorganization not otherwise reportable  
on Schedule M-3 (for example, Part III,  
line 23 or 24). Report on this line any  
fees paid or incurred at any stage of the  
acquisition or reorganization process  
including, for example, fees paid or  
incurred to evaluate whether to  
insurance premiums attributable to any  
life insurance policy if the corporation is  
directly or indirectly a beneficiary under  
the policy or if the policy has a cash  
value. Report in column (d) the amount  
of the premiums that are deductible for  
federal income tax purposes.  
A deduction for income attributable to  
domestic production activities is  
available for specified agricultural or  
horticultural cooperatives (specified  
cooperatives). See section 199A(g).  
Also, see the Instructions for Form  
8903.  
Line 34. Purchase Versus  
Lease (for Purchasers and/or  
Lessees)  
Report on line 22, column (d), the  
cooperative's section 199A(g)  
deduction that is reported on Form  
1120-C. Complete columns (b) and (c)  
as appropriate. Do not report any  
portion of the cooperative’s section  
199A(g) deduction on any other line of  
Schedule M-3.  
investigate an acquisition, fees to  
conduct an actual investigation, and  
fees to consummate the acquisition.  
Also include on this line other  
Note. Also see the instructions for  
sellers and/or lessors in the instructions  
for Part II, line 18.  
Asset transfer transactions with  
periodic payments characterized for  
financial accounting purposes as either  
a purchase or a lease may, under some  
circumstances, be characterized as the  
opposite for tax purposes.  
acquisition/reorganization costs  
incurred in connection with the  
liquidation of a subsidiary, a spin-off of a  
subsidiary, or an initial public stock  
offering.  
Line 23. Current Year  
Acquisition or Reorganization  
Investment Banking Fees  
Line 26. Amortization/  
Impairment of Goodwill  
Report on line 26 amortization of  
goodwill or amounts attributable to the  
impairment of goodwill.  
Report on line 23 any investment  
banking fees paid or incurred in  
If a transaction is treated as a lease,  
the purchaser/lessee reports the  
periodic payments as gross rental  
expense. If the transaction is treated as  
a purchase, the purchaser/lessee  
reports the periodic payments as  
payments of principal and interest and  
also reports depreciation expense or  
deduction with respect to the purchased  
asset.  
connection with a taxable or tax-free  
acquisition of property (for example,  
stock or assets) or a tax-free  
reorganization. Report on this line any  
investment banking fees incurred at any  
stage of the acquisition or  
Line 27. Amortization of  
Acquisition, Reorganization,  
and Start-Up Costs  
reorganization process including, for  
example, fees paid or incurred to  
evaluate whether to investigate an  
acquisition, fees to conduct an actual  
investigation, and fees to consummate  
the acquisition. Also include on this line  
investment banking fees incurred in  
connection with the liquidation of a  
subsidiary, a spin-off of a subsidiary, or  
an initial public stock offering.  
Report on line 27 amortization of  
acquisition, reorganization, and start-up  
costs. For purposes of columns (b), (c),  
and (d), include amounts amortizable  
under section 167, 195, or 248.  
Report in column (a) gross rent  
expense for a transaction treated as a  
lease for financial accounting purposes  
but as a sale for U.S. income tax  
Line 28. Other Amortization or  
Impairment Write-Offs  
Report on line 28 any amortization or  
impairment write-offs not otherwise  
includible on Schedule M-3.  
purposes. Report in column (d) gross  
rental deductions for a transaction  
treated as a lease for U.S. income tax  
purposes but as a purchase for financial  
accounting purposes. Report interest  
expense for such transactions on Part  
III, line 8, column (a) or (d), as  
Line 24. Current Year  
Acquisition or Reorganization  
Legal and Accounting Fees  
Line 29. Reserved  
When using this line to figure amounts  
on other tax forms or worksheets, this  
line should be considered to be zero.  
Report on line 24 any legal and  
applicable. Report depreciation  
accounting fees paid or incurred in  
connection with a taxable or tax-free  
acquisition of property (for example,  
stock or assets) or tax-free  
expense or deductions for such  
transactions on Part III, line 31, column  
(a) or (d), as applicable. Use columns  
(b) and (c) of Part III, lines 8, 31, and 34,  
as applicable, to report the differences  
between columns (a) and (d) for such  
recharacterized transactions.  
Line 31. Depreciation  
Report on line 31 any depreciation  
expense that is not required to be  
reported elsewhere on Schedule M-3  
(for example, on Part II, line 9, 10, 11, or  
17).  
reorganization. Report on this line any  
legal and accounting fees incurred at  
any stage of the acquisition or  
reorganization process including, for  
example, fees paid or incurred to  
evaluate whether to investigate an  
acquisition, fees to conduct an actual  
investigation, and fees to consummate  
the acquisition. Also include on this line  
Example 21. U.S. corporation X  
acquired property in a transaction that,  
for financial accounting purposes, X  
treats as a lease. X is a calendar year  
taxpayer that files and entirely  
Line 32. Bad Debt Expense  
Report on line 32, column (a), any  
amounts attributable to an allowance for  
uncollectible accounts receivable or  
completes Schedule M-3 for its current  
Instructions for Schedule M-3 (Form 1120)  
-24-  
                       
tax year. Because of its terms, the  
transaction is treated for U.S. income  
tax purposes as a purchase and X must  
treat the periodic payments it makes  
partially as payment of principal and  
partially as payment of interest. In its  
financial statements, X treats the  
difference between the financial  
accounting and U.S. income tax  
treatment of this transaction as a  
temporary difference. For its current tax  
year, X reports in its financial  
attributable to obtaining a patent, and  
(5) research in social sciences.  
research and experimental  
expenditures for U.S. income tax  
purposes. Because payments made to  
acquire rights to a product or technology  
are excluded costs from the definition of  
research and experimental  
For tax years beginning after  
December 31, 2021, for U.S. income tax  
purposes, research and experimental  
expenditures paid or incurred by a  
taxpayer in connection with the  
expenditures, X must report $75,000 in  
column (a), ($75,000) in column (c), and  
$0 in column (d). X must report any  
amortization otherwise allowable related  
to the payments on Part III, line 28,  
Other amortization or impairment  
write-offs.  
taxpayer's trade or business must be  
amortized. The expenditures must be  
amortized ratably over the 5-year period  
(15-year period for specified  
expenditures attributable to foreign  
research), beginning with the midpoint  
of the tax year in which the expenses  
are paid or incurred. See section 174. If  
properly adopted or elected under  
section 174(b) and section 174(f) prior  
to amendment by P.L. 115-97 and  
section 59(e), any amortization  
statements $1,000 of gross rental  
expense that, for U.S. income tax  
purposes, is recharacterized as a $700  
payment of principal and a $300  
payment of interest, accompanied by a  
depreciation deduction of $1,200  
(based on other facts). On its  
Line 36. Section 118 Exclusion  
Report on line 36 any inducements  
received in the current year and treated  
as contributions to the capital of a  
corporation by a nonshareholder.  
Report in column (a) any income  
amount as a negative number and any  
expense amount as a positive number.  
Schedule M-3, X must report the  
following on Part III, line 34: column (a)  
$1,000, its financial accounting gross  
rental expense; column (b), ($1,000);  
and column (d), zero. On Part III, line 8,  
X reports zero in column (a) and $300 in  
columns (b) and (d) for the interest  
deduction. On Part III, line 31, X reports  
zero in column (a) and $1,200 in  
columns (b) and (d) for the depreciation  
deduction.  
otherwise allowable related to such  
costs is reported in column (b).  
Example 22. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, X incurred $100,000 of research  
and development costs that X  
Under the general rule, any  
contribution in aid of construction or any  
contribution by a governmental entity to  
the capital of a corporation is not eligible  
for exclusion from income under section  
118. The following nonshareholder  
contributions to capital are not eligible  
for exclusion under section 118.  
recognized as an expense in its  
financial statements. In compliance with  
section 174, X amortizes research and  
experimental expenditures for U.S.  
income tax purposes. Accordingly, X  
must report $100,000 in column (a),  
($90,000) in column (b), and $10,000  
(($100,000/5 years) x 1/2) in column (d).  
Any contribution in aid of construction  
Line 35. Research and  
Development Costs  
Report in column (a) the amount of  
research and development  
or any other contribution as a customer  
or potential customer.  
Any contribution by any civic group.  
Any contribution by any governmental  
expenditures reported as a deduction in  
your financial statements (or its books  
and records, if applicable), on Part I,  
line 11. Report in column (d) the amount  
of amortization deductions of specified  
research or experimental expenditures  
and research or experimental  
entity, except any contribution made  
after December 22, 2017, and made  
pursuant to a master development plan  
that was approved prior to December  
22, 2017, by a governmental entity.  
Example 23. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, X incurred $10,000 of research  
and development costs related to social  
sciences that it recognized as an  
expense in its financial statements. X  
amortizes research and experimental  
expenditures for U.S. income tax  
purposes. Because such costs are not  
allowable costs under section 174, X  
must report $10,000 in column (a),  
permanent difference ($10,000) in  
column (c), and $0 in column (d). If such  
costs are otherwise deductible for U.S.  
income tax purposes, X must report this  
item of expense on Part III, line 38,  
Other expense/deduction items with  
differences.  
Corporations must identify on an  
accompanying statement referencing  
line 36 the fair market value of land or  
other property (including cash) provided  
to the corporation by any  
expenditures included on Form 4562,  
Part VI, line 44, and in total deductions  
on Form 1120, page 1, line 27. In  
column (c), as applicable, include any  
adjustments for any amounts treated for  
U.S. income tax purposes as research  
or experimental expenditures that are  
treated as some other form of expense  
for financial accounting purposes, or  
vice versa. Report any difference in  
timing recognition in column (b). For  
example, if the taxpayer's financial  
accounting method does not specify  
otherwise, column (b) adjustments  
include adjustments for timing  
nonshareholder, including a  
governmental unit, as an inducement, or  
for any other purpose. Include  
inducements for the corporation to  
locate its business in a particular state,  
municipality, community, or locality for  
the purpose of enabling the corporation  
to expand its existing operating  
facilities, including corporate  
headquarters, distribution center(s), or  
factory(ies) (“inducements”).  
Example 24. Corporation X is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. During its current tax  
year, X paid $75,000 to acquire or  
in-license intangible assets under a  
collaborative arrangement with another  
company that X recognized as a  
differences between financial and tax  
accounting for (1) deferral and  
On the accompanying statement,  
also identify any inducements that  
include refundable or transferable tax  
credits, including transferable credits  
that were sold.  
amortization of research expenditures  
that began in your 2022 tax year, (2) a  
section 59(e) election that began before  
your 2022 tax year, (3) reduction of  
section 174 expenditures under section  
280C or section 482, (4) costs  
The statement must separately state,  
adequately disclose, and identify all of  
the dollar amounts summarized by this  
line. An accompanying statement is  
research and development expense in  
its financial statements. X amortizes  
Instructions for Schedule M-3 (Form 1120)  
-25-  
   
required even if there are no dollar  
amounts reported on line 36.  
the expense/deduction name for book  
purposes for the amount recorded in  
column (a) and describes the  
Reserves and contingent liabilities.  
Report on line 38 amounts related to the  
change in each reserve or contingent  
liability that is not required to be  
Contributions in aid of construction  
for regulated water and sewerage  
disposal utility companies. Under a  
special rule, any amount of money or  
property received after December 31,  
2020, as a contribution in aid of  
adjustment being recorded in column  
(b) or (c). The entire description  
reported elsewhere on Schedule M-3.  
For example, (1) amounts relating to  
changes in reserves for litigation must  
be reported on Part III, line 13,  
completes the tax description for the  
amount included in column (d) for each  
item separately stated on this line.  
Judgments, damages, awards, and  
similar costs; and (2) amounts relating  
to changes in reserves for uncollectible  
accounts receivable must be reported  
on Part III, line 32, Bad debt expense.  
See Example 9, earlier.  
Report on line 38 the amortization of  
various items of prepaid expense, such  
as prepaid subscriptions and license  
fees, prepaid insurance, etc.  
construction or a contribution to the  
capital of a regulated public utility which  
provides water or sewerage disposal  
services is eligible for exclusion from  
income under section 118. Include  
amounts treated as contribution in aid of  
construction under this provision on  
line 36. For more information, see  
section 118.  
The statement attached to the  
Schedule M-3 for line 38 must  
separately state and adequately  
disclose the nature and amount of the  
expense related to each reserve and/or  
contingent liability. The appropriate level  
of disclosure depends upon each  
taxpayer’s operational activity and the  
nature of its accounting records. For  
example, if a corporation’s net income  
amount reported in the income  
Line 37. Section 162(r)—FDIC  
Premiums Paid by Certain  
Large Financial Institutions  
Report on line 38, column (a),  
expenses included in net income  
reported on Part I, line 11, that are  
related to reserves and contingent  
liabilities. Report on line 38, column (d),  
amounts related to liabilities for reserves  
and contingent liabilities that are  
deductible in the current tax year for  
U.S. income tax purposes. Examples of  
reserves that are allowed for book  
purposes, but not for tax purposes,  
include warranty reserves, restructuring  
reserves, reserves for discontinued  
operations, and reserves for  
statement includes anticipated  
expenses for a discontinued operation  
as a single amount, and its general  
ledger or other books, records, and  
workpapers provide details for the  
anticipated expenses under more  
explanatory and defined categories  
such as employee termination costs,  
lease cancellation costs, loss on sale of  
equipment, etc., a supporting statement  
that lists those categories of expenses  
and their details will satisfy the  
Report on line 37, column (a), the total  
amount paid or accrued as FDIC  
premiums included on Part I, line 11.  
Report on line 37, column (c), any  
disallowed amounts, subject to the  
applicable percentage, of any FDIC  
premiums paid or included by the large  
financial institution. For this purpose, the  
large financial institution includes  
members of its expanded affiliated  
group, as defined in section 162(r)(6)  
(B). The disallowance does not apply if  
the institution’s (including members of  
its expanded affiliated group’s) total  
consolidated assets (determined as of  
the close of the tax year) do not exceed  
$10 billion.  
requirement to separately state and  
adequately disclose. In order to  
separately state and adequately  
disclose the employee termination  
costs, it is not required that an  
acquisitions and dispositions. Only  
report on line 38 items that are not  
required to be reported elsewhere on  
Schedule M-3, Parts II and III.  
anticipated termination cost amount be  
listed for each employee, or that each  
asset (or category of asset) be listed  
along with the anticipated loss on  
disposition.  
Example 26. Corporation Q is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
current tax year. On July 1 of each year,  
Q has a fixed liability for its annual  
insurance premiums on its home office  
building that provides a 12-month  
coverage period beginning July 1  
through June 30. In addition, Q  
The applicable percentage is the  
excess of the corporation’s total  
consolidated assets over $10 billion,  
divided by $40 billion. For taxpayers  
with total consolidated assets of $50  
billion or more, the applicable  
The attached statement should have  
five columns. The first column has the  
description for the next four columns.  
The second column is column (a)  
percentage is 100%. See section 162(r).  
historically prepays 12 months of  
expense per income statement, the third  
column is column (b) temporary  
Example 25. Corporation X has  
total consolidated assets of $20 billion.  
Under section 162(r), no deduction is  
allowed for 25% (($20,000,000,000 –  
$10,000,000,000) / $40,000,000,000) of  
FDIC premiums.  
advertising expenses on July 1. On July  
1, Q prepays its insurance premium of  
$500,000 and advertising expenses of  
$800,000. For statutory accounting  
purposes, Q capitalizes and amortizes  
the prepaid insurance and advertising  
over 12 months. For U.S. income tax  
purposes, Q deducts the insurance  
premium when paid and amortizes the  
advertising over the 12-month period. In  
its annual statement, Q treats the  
difference, the fourth column is column  
(c) permanent difference, and the fifth  
column is column (d) deduction per tax  
return. Every item listed on the attached  
statement for line 38 must always have  
columns (a) + (b) + (c) = (d). Each item  
with amounts in columns (a), (b), (c),  
and (d) will be totaled and included as  
one line on Part III, line 38.  
Line 38. Other Expense/  
Deduction Items With  
Differences  
Separately state and adequately  
disclose on Part III, line 38, all items of  
expense/deduction that are not  
otherwise listed on Part III, lines 1  
through 37.  
Comprehensive income. If any  
“comprehensive income,” as defined by  
SFAS No. 130, is reported on this line,  
describe the item(s) in detail as, for  
example, “Foreign currency translation  
adjustments—comprehensive income”  
and “Gains and losses on  
difference attributable to the annual  
statement treatment and U.S. income  
tax treatment of the prepaid insurance  
as a temporary difference. As there is  
no difference between the book and tax  
treatment of advertising expense, it  
should be included on Part II, line 28,  
Other items with no differences.  
Attach a statement that describes  
and itemizes the type of expense/  
deduction and the amount of each item,  
and provides a description that states  
available-for-sale  
securities—comprehensive income.”  
Instructions for Schedule M-3 (Form 1120)  
-26-  
       
Q also has a legal reserve where  
$300,000 was expensed for financial  
accounting purposes and a ($100,000)  
temporary difference was calculated to  
arrive at the income tax deduction of  
$200,000. The statement attached to  
Q's return for Part III, line 38, must be  
separately stated and adequately  
disclosed as follows.  
Line 38—Example 26  
Statement Concerning Other Expense/Deduction Items With Differences  
Column (a) Expense Column (b) Temporary  
Column (c)  
Permanent Difference  
Column (d) Deduction  
per Tax Return  
Description  
per Income Statement  
Difference  
Prepaid insurance premium  
expensed not capitalized  
$250,000  
$300,000  
$550,000  
$250,000  
($100,000)  
$150,000  
-0-  
-0-  
-0-  
$500,000  
$200,000  
$700,000  
Legal expense reserve  
Total line 38  
line 39, columns (a) through (d), as  
applicable. Report positive amounts as  
negative and negative amounts as  
positive. For example, if Part III, line 39,  
column (a), reflects an amount of $1  
million, then report on Part II, line 27,  
column (a), ($1 million). Similarly, if Part  
III, line 39, column (b), reflects an  
amount of ($50,000), then report on Part  
II, line 27, column (b), $50,000.  
Line 39. Total Expense/  
Deduction Items  
Report on Part II, line 27, columns (a)  
through (d), as applicable, the negative  
of the amounts reported on Part III,  
Instructions for Schedule M-3 (Form 1120)  
-27-  
 
Index  
Includible 9  
Reorganization:  
A
J
Entity considerations 4  
Equity method 16  
Amortization 24  
Investment banking fees 24  
Abandonment 20  
Judgments 23  
Equity method foreign  
Legal and accounting  
fees 24  
Accounting standards,  
corporations 15  
order of priority 7  
L
Equity-based  
Other costs 24  
Accrual to cash  
Lease vs. purchase 24  
Lease, sale vs. 19  
compensation 22  
Reportable transactions 17  
Reserved 24  
adjustment 18  
Exchange 20  
Acquisition:  
Life insurance premiums,  
Expense/deduction:  
Items with differences 26  
Expense/deduction items:  
Total 21, 27  
Reserves and contingent  
Amortization 24  
corporate owned 24  
liabilities 26  
Investment banking fees 24  
Life insurance subgroup  
Restatements 7  
Legal and accounting  
fees 24  
reconciliation totals 22  
Revenue, unearned/  
Life/non-life loss limitation  
deferred 20  
Other costs 24  
and carryforward 6  
F
Adequately disclosed,  
Limitations 3  
S
separately stated and 14  
FDIC premiums 26  
Long-term contracts 20  
Adjustments 10  
Sale vs. lease 19  
Schedule:  
Financial information and  
net income (loss)  
Allocations, limitations, and  
M
carryovers 3  
reconciliation 6  
Mark-to-market 19  
Meals and entertainment 22  
Minority interest 16  
Mixed group:  
Amortization of goodwill 24  
Amortization write-offs 24  
Awards 23  
Financial statements:  
Non-tax-basis 7  
Tax-basis 7  
M-2 4  
Section 481(a)  
adjustments 20  
Fines and penalties 23  
Foreign:  
Section 78 gross-up 16  
1120/L/PC 5  
B
Separately stated and  
Checkboxes 6  
adequately disclosed 14  
Corporations 15  
Distributions 16  
Dividends 15  
Bad debt expense 24  
Subgroup  
Start-up costs:  
sub-consolidation 6  
Amortization 24  
C
Statutory accounting  
Entities, nonincludible 8  
Partnerships 16  
Withholding taxes 22  
Form 4797 21  
Capital gains 20  
Capital loss 20, 21  
Carryovers 3  
N
adjustments 10  
Non-tax-basis financial  
statements and tax-basis  
financial statements 7  
Stock option expense 22  
Subgroup  
Charitable contribution 23  
Carryforward 23  
sub-consolidation: 1120  
subgroup, 1120-PC  
subgroup, and 1120-L  
subgroup 5  
Nonincludible:  
G
Limitation 23  
Foreign entities 8  
U.S. entities 8  
Gain/loss on disposition of  
Compensation with section  
assets 21  
162(m) limitation 23  
Nonincludible entities:  
Eliminations 9  
Gain/loss on sale 20  
General instructions 1  
Goodwill 24  
T
Comprehensive income 26  
Consolidated return 4  
Tax-basis financial  
Consolidated vs.  
statements 7  
O
consolidating 5  
Groups, consolidated vs.  
Original issue discount 20  
consolidating 5  
Consolidation 16  
U
U.S.:  
Consolidation for mixed  
P
groups:  
H
Dividends 16  
1120/L/PC 5  
Parachute payments 23  
Partnerships:  
Hedging transactions 18  
Entities, nonincludible 8  
Partnerships 16  
Unearned revenue 20  
Contingent liabilities,  
reserves and 26  
Foreign 16  
I
Corporate owned life  
U.S. 16  
Includible corporations 10,  
insurance premiums 24  
Pass-through entities 17  
W
Cost of goods sold 19  
PC insurance subgroup  
Includible entities:  
Eliminations 9  
Other 9  
Worldwide consolidated net  
reconciliation totals 22  
D
income (loss) 8  
Pension and  
Worthless stock losses 21  
Worthlessness 20  
profit-sharing 23  
Damages 23  
Inclusions 15  
Income:  
Post-retirement benefits 23  
Deferred compensation 23  
Deferred revenue 20  
Depreciation 24  
Publicly traded common  
Statement 7  
stock 7  
Statement period 7  
Income (loss):  
Differences 21  
Equity method 16  
Income statement period 10  
Interest:  
Purchase vs. lease 24  
Disposition of assets 20  
Disregarded entities 9  
Dividend adjustments 10  
Dividends 15  
R
Reconciliation:  
1120 subgroup 22  
Life insurance 22  
Domestic production  
activities deduction 24  
Expense 22  
Mixed group subgroup  
sub-consolidation 6  
Imputed 20  
E
Income 18  
PC insurance 22  
Totals 22  
Entities:  
Disregarded 9  
-28-