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payment of interest. In its annual include any adjustments for any amounts costs that X recognized as an expense in
statement, X treats the difference between treated for U.S. income tax purposes as its financial statements. Also, X incurred
the statutory accounting and U.S. income research or experimental expenditures $20,000 in attorney fees in obtaining a
tax treatment of this transaction as a that are treated as some other form of patent application that X capitalized and
temporary difference. During its current expense for financial accounting amortized in its financial statements. X
tax year, X reports in its annual statement purposes, or vice versa. Report any recognized a $2,000 amortization
$1,000 of gross rental expense that, for difference in timing recognition in column deduction. In compliance with its adopted
U.S. income tax purposes, is (b). For example, if the taxpayer's financial method of accounting under section 174,
recharacterized as a $700 payment of accounting method does not specify X deducts research and experimental
principal and a $300 payment of interest, otherwise, column (b) adjustments include expenditures for U.S. income tax
accompanied by a depreciation deduction adjustments for timing differences purposes. Accordingly, X must report
of $1,200 (based on other facts). On between financial and tax accounting for: $100,000 in column (a), $20,000 in
Schedule M-3, X must report the following 1. Deferral and amortization of column (b), and $120,000 in column (d). X
on Part III, line 35: column (a), $1,000, its research expenditures, must also report $2,000 in column (a),
statutory accounting gross rental expense; ($2,000) in column (b), and $0 in column
column (b), ($1,000); and column (d), 2. Section 59(e) election, (d) on Part III, line 28, Other amortization
zero. On Part III, line 36, X reports zero in 3. Reduction of section 174 or impairment write-offs.
column (a) and $300 in columns (b) and expenditures under section 280C or
Example 21. Assume the same facts
(d) for the interest deduction. On Part III, section 482,
as Example 20 except Corporation X
line 31, X reports zero in column (a) and 4. Costs attributable to obtaining a makes an annual election under section
$1,200 in columns (b) and (d) for the patent, 59(e) to deduct $80,000 of its $120,000 of
depreciation deduction. 5. Research in social sciences, and research and experimental expenditures
Line 36. Interest Expense 6. Cost elements for property of a over a 10-year period. Accordingly, X
Report on Part III, line 36, column (a), the character subject to depreciation. must report $100,000 in column (a), a
temporary difference of ($52,000)
total amount of interest expense included Section 174 provides two methods for ($20,000 less ($80,000/10 years x 9
on Part I, line 11, and report on Part III, the treatment of research and years)) in column (b), and $48,000 in
line 36, column (d), the total amount of experimental expenditures paid or column (d). X must report $2,000 in
interest expense included on Form incurred by a taxpayer in connection with column (a), ($2,000) in column (b), and $0
1120-PC, Schedule A, line 35 (or the taxpayer’s trade or business. These in column (d) on Part III, line 28, Other
Schedule B, line 19, if applicable), that is expenditures may be treated as expenses amortization or impairment write-offs.
not reported elsewhere on Schedule M-3. not chargeable to a capital account and Example 22. Assume the same facts
In column (b) or (c), as applicable, adjust deducted in the year in which they are as Example 21 except Corporation X
for any amounts treated for U.S. income paid or incurred, or they may be deferred elected to capitalize and amortize its
tax purposes as interest expense that are and amortized. Since the method for research and expenditures over 60
treated as some other form of expense for treatment of research and experimental months with respect to all its research
statutory accounting purposes, or vice expenditures is adopted at the subsidiary programs for U.S. tax purposes. X first
versa. For example, adjustments to level, the expense/deduction item is realized benefits from such expenditures
interest expense resulting from determined separately by each member of on August 1. Accordingly, X must report
adjustments made in accordance with a U.S. consolidated tax group and not at $100,000 in column (a), a temporary
instructions for Part III, line 35, Purchase the U.S. consolidated tax group level. For difference of ($90,000) ($20,000 less
versus lease (for purchasers and/or example, U.S. Corporation P has two ($120,000/60 months x 55 months)) in
lessees), should be made in columns (b) subsidiaries, A and B, which are included column (b), and $10,000 in column (d).
and (c), as applicable, on line 36. in P’s consolidated financial statements
Complete Part III of Form 8916-A. Enter and in P’s consolidated U.S. income tax Example 23. Corporation X is a
the amounts from Form 8916-A, Part III, return. For financial purposes, P, A, and B calendar year taxpayer that is required to
line 5, columns (a) through (d), on recognize research and development file Schedule M-3 for its current tax year. X
Schedule M-3, Part III, line 36, columns (a) costs as an expense when accrued. For adopted the current expense method for
through (d), as applicable. Attach Form U.S. income tax purposes, P and A research and experimental expenditures
8916-A. recognize such costs consistent with the for U.S. income tax purposes. During its
method used for financial purposes, current tax year, X incurred $50,000 of
Do not report on Form 8916-A and whereas B capitalizes and amortizes such research and development costs that X
line 36 amounts reported in accordance costs. P and A must report this expense in recognized as an expense in its financial
with the instructions for Part II, lines 9, 10, columns (a) and (d). B must report its statements. Also, X undertook to develop
11, and 12. expense recognized in the financial a new machine for its business. X
Line 37. Research and statements when accrued in column (a); in expended $30,000 on the project of which
column (d), B’s research and development $10,000 represents actual costs of
Development Costs material, labor and component cost to
expenditures recognized for U.S. income
Report in column (a) the amount of tax purposes; and in columns (b) and (c), construct the machine, and $20,000
expenses included in net income reported as applicable, the difference between B’s represents research costs not attributable
on Part I, line 11, that are related to research and development costs in its to the machine itself. X capitalized
research and development expense. financial statements and its research and $30,000 of costs related to the machine
Report in column (d) the amount of experimental expenditures for U.S. and recognized $6,000 of depreciation
deductions included in Form 1120-PC, taxable income purposes. expense in its financial statements. X’s
page 2, Schedule A, line 32, that are depreciation expense on the $10,000 of
recognized and reported as section 174 Example 20. Corporation X is a costs related to the machine itself was
research and experimental expenditures calendar year taxpayer that is required to $2,000 for U.S. income tax purposes.
consistent with the corporation’s adopted file Schedule M-3 for its current tax year. Accordingly, X must report $50,000 in
method of accounting for such During its current tax year, X incurred column (a), $20,000 (research costs which
expenditures. In column (c), as applicable, $100,000 of research and development
-22- Instructions for Schedule M-3 (Form 1120-PC)
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