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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 Where To File                              million must file Schedule M-3 (Form 
Code unless otherwise noted.                                                              1120).
                                               If the corporation is required to file (or 
                                               voluntarily files) Schedule M-3 (Form      • A corporation filing Form 1120 (or 
Future Developments                            1120), the corporation must file Form      Form 1120-C) that is not required to file 
For the latest information about               1120 (or Form 1120-C, if applicable)       Schedule M-3 may voluntarily file 
developments related to Schedule M-3           and all attachments and schedules,         Schedule M-3.
(Form 1120) and its instructions, such         including Schedule M-3 (Form 1120) at      • If a corporation was required to file 
as legislation enacted after they were         the following address.                     Schedule M-3 for the preceding tax 
published, go to IRS.gov/Form1120.                                                        year, but reports on Form 1120, page 1, 
                                                 Department of the Treasury               item D, and on Form 1120, Schedule L, 
What’s New                                       Internal Revenue Service Center          total consolidated assets at the end of 
                                                 Ogden, UT 84201-0012                     the current tax year of less than $10 
Contributions in aid of construction                                                      million, the corporation is not required to 
for regulated water and sewerage                                                          file Schedule M-3 for the current tax 
disposal utility companies.       For          Who Must File                              year.
contributions made after December 31,          Generally, the following apply.
2020, a special rule applies to                • A domestic corporation or group of         See Completing Schedule M-3, later.
contributions to the capital of water and      corporations required to file Form 1120,     In the case of a U.S. consolidated tax 
sewerage disposal utilities. See the           U.S. Corporation Income Tax Return,        group, total assets at the end of the tax 
instructions for Part III, line 36, later. For that reports on Form 1120, Schedule L,     year must be determined based on the 
additional information, see section 118.       Balance Sheets per Books, total assets     total year-end assets of all includible 
                                               at the end of the corporation's tax year   corporations listed on Form 851, net of 
Amortization of research and devel-            that equal or exceed $10 million must      eliminations for intercompany 
opment costs.    Specified research or         file Schedule M-3 instead of               transactions and balances between the 
experimental expenditures paid or              Schedule M-1, Reconciliation of Income     includible corporations. In addition, for 
incurred in tax years beginning in 2022        (Loss) per Books With Income per           purposes of determining whether the 
must be capitalized and amortized              Return.                                    corporation (or U.S. consolidated tax 
ratably over a 5-year period (15-year          • A corporation filing a                   group) has total assets at the end of the 
period for any expenditures related to         non-consolidated Form 1120 that            current tax year of $10 million or more, 
foreign research). See the instructions        reports on Schedule L total assets that    the corporation's total consolidated 
for Line 35. Research and Development          equal or exceed $10 million must           assets must be determined on an 
Costs, later.                                  complete and file Schedule M-3 and         overall accrual method of accounting 
                                               must check box (1) Non-consolidated        unless both of the following apply: (a) 
General Instructions                           return, at the top of page 1 of            the tax returns of all includible 
                                               Schedule M-3.                              corporations in the U.S. consolidated 
Purpose of Schedule                            • Any U.S. consolidated tax group          tax group are prepared using an overall 
Schedule M-3, Part I, asks certain             consisting of a U.S. parent corporation    cash method of accounting, and (b) no 
questions about the corporation's              and additional includible corporations     includible corporation in the U.S. 
financial statements and reconciles            listed on Form 851, Affiliations           consolidated tax group prepares or is 
financial statement net income (loss) for      Schedule, required to file Form 1120,      included in financial statements 
the corporation (or consolidated               that reports on Schedule L total           prepared on an accrual basis.
financial statement group, if applicable),     consolidated assets at the end of the tax 
as reported on Part I, line 4a, to net         year that equal or exceed $10 million      Special Filing Requirements for 
income (loss) of the corporation for U.S.      must file Schedule M-3 and must check      Certain Groups
taxable income purposes, as reported           box (2) Consolidated return (Form 1120 
on Part I, line 11.                            only), or box (3) Mixed 1120/L/PC          Mixed groups. If the parent 
                                               group, as applicable, at the top of        corporation of a U.S. consolidated tax 
Schedule M-3, Parts II and III,                page 1 of Schedule M-3.                    group files Form 1120 and files and 
reconcile financial statement net income       • Cooperatives filing Form 1120-C,         completes Schedule M-3, Parts II and 
(loss) for the U.S. corporation (or            U.S. Income Tax Return for Cooperative     III, then Schedule M-3, Parts II and III, 
consolidated tax group, if applicable),        Associations, that report total assets at  must be completed for each member of 
as reported on Schedule M-3, Part I,           tax year end that equal or exceed $10      the group. However, if the parent 
line 11, to taxable income on Form                                                        corporation of a U.S. consolidated tax 
1120, page 1, line 28.                                                                    group files Form 1120 and any member 

Nov 30, 2022                                           Cat. No. 38103Y

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of the group files Form 1120-PC, U.S.      intercompany dividends and statutory        by Schedule M-3 must be provided. Any 
Property and Casualty Insurance            accounting adjustments.                     statement required to support a line item 
Company Income Tax Return, or Form         No Schedule M-3 is required for             on Schedule M-3 must be attached at 
1120-L, U.S. Life Insurance Company        taxpayers filing Form 1120-REIT, U.S.       the time Schedule M-3 is filed and must 
Income Tax Return, that member must        Income Tax Return for Real Estate           provide the information required for that 
complete Parts II and III of               Investment Trusts; Form 1120-RIC, U.S.      line item.
Schedule M-3 (Form 1120-PC) or             Income Tax Return for Regulated             All detailed statements for Part II and 
Schedule M-3 (Form 1120-L),                Investment Companies; Form 1120-H,          Part III of Schedule M-3 must be 
respectively, and the group must           U.S. Income Tax Return for                  attached for each separate entity 
comply with the mixed group                Homeowners Associations; and Form           included in the consolidated Part II and 
consolidated Schedule M-3 instructions     1120-SF, U.S. Income Tax Return for         Part III, including those for the parent 
under Schedule M-3 Consolidation for       Settlement Funds.                           company and the eliminations entity, if 
Mixed Groups (1120/L/PC), later. A 
                                                                                       applicable. It is not required that the 
mixed group must also file Form 8916,      Completing Schedule M-3                     same supporting detailed information be 
Reconciliation of Schedule M-3 Taxable 
                                           A corporation (or any member of a U.S. 
Income With Tax Return Taxable                                                         presented for Part II and Part III of the 
                                           consolidated tax group) that is required 
Income for Mixed Groups, and, if                                                       consolidated Schedule M-3.
                                           to file Schedule M-3 and has at least 
applicable, Form 8916-A, Supplemental                                                  Example 1. 
                                           $50 million total assets at the end of the 
Attachment to Schedule M-3.                                                            1. U.S. corporation A owns U.S. 
                                           tax year must complete the schedule in 
If the parent company of a U.S.            its entirety. In particular, a corporation  subsidiary B and foreign subsidiary F. 
consolidated tax group files Form 1120     filing a non-consolidated return that has   For its current tax year, A prepares 
and any member of the group files Form     at least $50 million total assets at the    consolidated financial statements with B 
1120-PC or Form 1120-L and the             end of the tax year must complete Parts     and F that report total assets of $12 
consolidated Schedule L reported in the    I, II, and III. Such a corporation does not million. A files a consolidated U.S. 
return includes the assets of all of the   check any of the checkboxes at the top      income tax return with B and reports 
companies (the insurance companies         of Parts II and III. In the case of a U.S.  total consolidated assets on Schedule L 
as well as the non-insurance               consolidated tax group, Part I must be      of $8 million. A's U.S. consolidated tax 
companies), in order to determine if the   completed once, on the consolidated         group is not required to file 
group meets the $10 million threshold      Schedule M-3, by the parent                 Schedule M-3 for the current tax year.
test for the requirement to file           corporation. Parts II and III must be       2. U.S. corporation C owns U.S. 
Schedule M-3, use the amount of total      completed by the parent corporation,        subsidiary D. For its current tax year, C 
assets reported on Schedule L of the       each includible corporation, and a          prepares consolidated financial 
consolidated return. If the parent         consolidating eliminations entity.          statements with D, but C and D file 
company of a U.S. consolidated tax                                                     separate U.S. income tax returns. The 
group files Form 1120 and any member       Form 1120 and Form 1120-C filers            consolidated accrual basis financial 
of the group files Form 1120-PC or         that (a) are required to file               statements for C and D report total 
Form 1120-L and the consolidated           Schedule M-3 (Form 1120) and have           assets at the end of the tax year of $12 
Schedule L reported in the return does     less than $50 million total assets at the   million after intercompany eliminations. 
not include the assets of one or more of   end of the tax year, or (b) are not         C reports separate company total 
the insurance companies in the U.S.        required to file Schedule M-3 (Form         year-end assets on its Schedule L of $7 
consolidated tax group, in order to        1120) and voluntarily file Schedule M-3     million. D reports separate company 
determine if the group meets the $10       (Form 1120), must either (i) complete       total year-end assets on its Schedule L 
million threshold test, use the sum of the Schedule M-3 (Form 1120) entirely, or       of $6 million. Neither C nor D is required 
amount of total assets reported on the     (ii) complete Schedule M-3 (Form 1120)      to file Schedule M-3 for the current tax 
consolidated Schedule L plus the           through Part I, and complete                year.
amounts of all assets reported on Forms    Schedule M-1 of Form 1120 (or Form 
1120-PC and 1120-L that are included       1120-C, if applicable) instead of           3. Foreign corporation A owns 
in the consolidated return but not         completing Parts II and III of              100% of both U.S. corporation B and 
included on the consolidated               Schedule M-3 (Form 1120). If the filer      U.S. corporation C. C owns 100% of 
Schedule L.                                chooses to complete Schedule M-1            U.S. corporation D. For its current tax 
                                           instead of completing Parts II and III of   year, A prepares a consolidated 
Other entities. There are unique                                                       worldwide financial statement for the 
                                           Schedule M-3, line 1 of the applicable 
separate Schedules M-3 for taxpayers                                                   ABCD consolidated group. The ABCD 
                                           Schedule M-1 must equal line 11 of Part 
required to file Form 1065, U.S. Return                                                consolidated financial statement reports 
                                           I of Schedule M-3.
of Partnership Income; Form 1120-S,                                                    total year-end assets of $65 million. A is 
U.S. Income Tax Return for an S            Note. In the case of an 1120 mixed          not required to file a U.S. income tax 
Corporation; Form 1120-F, U.S. Income      group, Parts II and III of Schedule M-3     return. B files a separate U.S. income 
Tax Return of a Foreign Corporation;       (Form 1120) must be completed for all       tax return and reports separate 
and for Forms 1120-PC or 1120-L. For       members of the mixed group whether          company total year-end assets on its 
more information, see the instructions     Schedule M-3 (Form 1120) is required        Schedule L of $52 million. C files a 
for the applicable Schedule M-3.           or voluntarily filed.                       consolidated U.S. income tax return 
For insurance companies included in                                                    with D and, after eliminating 
the consolidated U.S. income tax return,   For any part of Schedule M-3 (Form          intercompany transactions between C 
see the instructions for Part I, lines 10  1120) that is completed, all applicable     and D, reports consolidated total 
and 11, and Part II, line 7, for guidance  questions must be answered on Part I,       year-end assets on Schedule L of $8 
on Schedule M-3 reporting of               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 

                                                             -2-                      Instructions for Schedule M-3 (Form 1120)

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year-end assets reported on Schedule L     and (3) no amounts to report on Part II      the tax year, and must be the same total 
exceed $50 million. The CD U.S.            and Part III of Schedule M-3 for the tax     assets reported by the corporation (or 
consolidated tax group is not required to  year, the parent corporation of the U.S.     by each member of the U.S. 
file Schedule M-3 because its total        consolidated tax group may attach to         consolidated tax group) in the non-tax 
year-end assets do not exceed $10          the consolidated Schedule M-3 a              basis financial statements, if any, used 
million.                                   statement that provides the name and         for Schedule M-3. If the corporation 
                                           employer identification number (EIN) of      prepares non-tax-basis financial 
Example 2.  At the end of                  the includible corporation in lieu of filing statements, Schedule L must equal the 
Corporation A's current tax year, A's      a blank Part II and Part III of              sum of the financial statement total 
total assets were less than $10 million.   Schedule M-3 for the entity. On Part I,      assets for each corporation listed on 
A is not required to file Schedule M-3 for check box (4) Dormant subsidiaries           Form 851 and included in the 
any reason. A may elect to file            schedule attached.                           consolidated U.S. income tax return 
Schedule M-3 instead of completing                                                      (includible corporation) net of 
Schedule M-1 of Form 1120. If A elects                                                  eliminations for intercompany 
to file Schedule M-3, A must either (i)    Other Form 1120 
complete Schedule M-3 entirely, or (ii)    Schedules Affected by                        transactions between includible 
                                                                                        corporations. If the corporation does not 
complete Schedule M-3 through Part I       Schedule M-3                                 prepare non-tax-basis financial 
and complete Schedule M-1 instead of                                                    statements, Schedule L must be based 
                                           Requirements
completing Parts II and III of                                                          on the corporation's books and records. 
Schedule M-3. If A elects to complete      Schedule B                                   The Schedule L balance sheet can 
Schedule M-3 entirely, A must complete     Generally, a corporation or group of         show tax-basis balance sheet amounts 
all columns of Parts II and III.           corporations that files a Form 1120 and      if the corporation is allowed to use 
Certain Allocations,                       is required to file Schedule M-3, must       books and records for Schedule M-3 
                                           also file Schedule B (Form 1120), 
Limitations, and Carryovers                                                             and the corporation's books and records 
                                           Additional Information for Schedule M-3      reflect only tax-basis amounts.
If an item attributable to an includible   Filers. In the case of a consolidated 
corporation is not shared by or allocated  group, a parent corporation files one        Generally, total assets at the 
to the appropriate member of the group     Schedule B (Form 1120) for the entire        beginning of the year (Schedule L, 
but is retained in the parent              consolidated group.                          line 15, column (b)) must equal total 
corporation's financial statements (or                                                  assets at the close of the prior year 
books and records, if applicable), then    Certain corporations or groups of            (Schedule L, line 15, column (d)). For 
the item must be reported by the parent    corporations filing Form 1120 that (a)       each Schedule L balance sheet item 
corporation in its separate                are required to file Schedule M-3 and        reported for which there is a difference 
Schedule M-3. For example, if the          have less than $50 million in total assets   between the current opening balance 
parent of a U.S. consolidated tax group    at the end of the tax year, or (b) are not   sheet amount and the prior closing 
prepares financial statements that         required to file Schedule M-3 and            balance sheet amount, attach a 
include all members of the U.S.            voluntarily file Schedule M-3, are not       statement that reports the balance sheet 
consolidated tax group and the parent      required to file Schedule B (Form 1120).     item, the prior closing amount, the 
does not allocate the group's income tax   See the instructions for Schedule B          current opening amount, and a short 
expense as reflected in the financial      (Form 1120).                                 explanation of the change. Reasons for 
                                                                                        these differences include mergers and 
statements among the members of the        Schedule L
group but retains it in the parent                                                      acquisitions.
corporation, the parent corporation must   If a non-tax-basis income statement and 
report on its separate Schedule M-3 the    related non-tax-basis balance sheet are      For purposes of measuring total 
U.S. consolidated tax group's income       prepared for any purpose for a period        assets at the end of the year, the 
tax expense as reflected in the financial  ending with or within the tax year,          corporation's assets may not be netted 
statements.                                Schedule L must be prepared showing          or reduced by the corporation's 
                                           non-tax-basis amounts. See the               liabilities. In addition, total assets may 
Any adjustments made at the                instructions for Part I, line 1, for the     not be reported as a negative amount. If 
consolidated group level that are not      discussion of non-tax-basis income           Schedule L is prepared on a 
attributable to any specific member of     statements and related non-tax-basis         non-tax-basis method, an investment in 
the U.S. consolidated tax group (for       balance sheets prepared for any              a partnership may be shown as 
example, disallowance of net capital       purpose and the impact on the selection      appropriate under the corporation's 
losses, contribution deduction             of the income statement used for             non-tax-basis method of accounting, 
carryovers, and limitation of contribution Schedule M-3 and the related                 including, if required by the 
deductions) must not be reported on the    non-tax-basis balance sheet amounts          corporation's reporting methodology, 
separate consolidating parent or           that must be used for Schedule L.            the equity method of accounting for 
subsidiary Schedules M-3 but rather on                                                  investments. If Schedule L is prepared 
the consolidated Schedule M-3 and on       Total assets shown on Schedule L,            on a tax basis, an investment by the 
the consolidating Schedule M-3 for         line 15, column (d) (or, for some            corporation in a partnership must be 
consolidation eliminations (or on Form     consolidated mixed groups with a Form        shown as an asset and measured by the 
8916 in the case of a mixed group).        1120 parent and an insurance                 corporation's adjusted basis in its 
                                           subsidiary, the assets reported on Form      partnership interest. Any liabilities 
If an includible corporation has (1) no    1120, page 1, item D), must equal the        contributing to such adjusted basis must 
activity for the tax year (for example,    total assets of the corporation (or, for a   be shown on Schedule L as corporate 
because the corporation is dormant or      U.S. consolidated tax group, the total       liabilities.
inactive); (2) no amount for the           assets of all members of the group 
corporation to include in Part I, line 11; listed on Form 851) as of the last day of 

Instructions for Schedule M-3 (Form 1120)               -3-

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Schedule M-2 tax return or return of income filed prior 8. The interest in the partnership it
The amount shown on Schedule M-2, to that day. owns or is deemed to own in the
partnership, directly or indirectly (as
line 2, Net income (loss) per books, For the purposes of these defined under these instructions), as of
must equal the amount shown on instructions, the following rules apply. the date with respect to which it is
Schedule M-3, Part I, line 11.
Schedule M-2 must reflect activity only 1. The parent corporation of a reporting.
of corporations included in the consolidated tax group is deemed to 9. Any change in that interest as of
consolidated U.S. income tax return. own all corporate and partnership the date with respect to which it is
interests owned or deemed to be owned reporting.
Consolidated Return under these instructions by any member
(Form 1120, Page 1) of the tax consolidated group. The reportable entity partner must
retain copies of required reports it
Report on Form 1120, page 1, each 2. The owner of a disregarded entity makes to partnerships under these
item of income, gain, loss, expense, or is deemed to own all corporate and instructions. Each partnership must
deduction net of elimination entries for partnership interests owned or deemed retain copies of the required reports it
intercompany transactions between to be owned under these instructions by receives under these instructions from
includible corporations. The corporation the disregarded entity. reportable entity partners.
must not report as dividends on Form 3. The owner of 50% or more of a
Example 3.
1120, Schedule C, any amounts corporation by vote on any day of the
received from an includible corporation. corporation’s tax year is deemed to own 1. A, limited liability company (LLC)
In general, dividends received from an all corporate and partnership interests filing a Form 1065 for 2022, is owned
includible corporation must be owned or deemed to be owned under 50% by U.S. corporation Z. A owns 50%
eliminated in consolidation rather than these instructions by the corporation of B, C, D, and E, which are also LLCs
offset by the dividends-received during its tax year. filing a Form 1065 for calendar year
deduction. 2022. Z was first required to file
4. The owner of 50% or more of
Schedule M-3 (Form 1120) for its
partnership income, loss, or capital on
corporate tax year ending December
Entity Considerations for any day of the partnership tax year is
31, 2021, and filed its Form 1120 with
Schedule M-3 deemed to own all corporate and
Schedule M-3 for 2021 on October 15,
For purposes of Schedule M-3, partnership interests owned or deemed
2022. As of October 16, 2022, Z was a
references to the classification of an to be owned under these instructions by
reportable entity partner with respect to
entity (for example, as a corporation, a the partnership during the partnership
A and, through A, with respect to B, C,
partnership, or a trust) are references to tax year.
D, and E. On November 5, 2022, Z
the treatment of the entity for U.S. 5. The beneficial owner of 50% or reports to A, B, C, D, and E, as it is
income tax purposes. An entity that is more of the beneficial interest of a trust required to do within 30 days of October
generally disregarded as separate from or nominee arrangement on any day of 16, that Z is a reportable entity partner
its owner for U.S. income tax purposes the trust or nominee arrangement tax directly owning (with respect to A) or
(disregarded entity) must not be year is deemed to own all corporate and deemed to own indirectly (with respect
separately reported on Schedule M-3 partnership interests owned or deemed to B, C, D, and E) a 50% interest.
except, if required, on Part I, line 7a or to be owned under these instructions by Therefore, because Z was a reportable
7b. On Schedule M-3, Parts II and III, the trust or nominee arrangement. entity partner for 2022, each of A, B, C,
any item of income, gain, loss,
deduction, or credit of a disregarded A reportable entity partner with D, and E is required to file Schedule M-3
entity must be reported as an item of its respect to a partnership (as defined (Form 1065) for 2022, regardless of
owner. In particular, the income or loss above) must report the following to the whether they would otherwise be
of a disregarded entity must not be partnership within 30 days of first required to file Schedule M-3 for that
reported on Part II, line 9, 10, or 11, as becoming a reportable entity partner year.
from a separate partnership or other and, after first reporting to the 2. P, a U.S. corporation, is the
pass-through entity. The financial partnership under these instructions, parent of a financial consolidation group
statement income or loss of a thereafter within 30 days of the date of with 50 domestic subsidiaries, DS1
disregarded entity is included on Part I, any change in the interest it owns or is through DS50, and 50 foreign
line 7a or 7b, only if its financial deemed to own, directly or indirectly, subsidiaries, FS1 through FS50, all
statement income or loss is included on under these instructions, in the 100% owned on October 16, 2022. On
Part I, line 11, but not on Part I, line 4a. partnership. October 15, 2022, P filed a consolidated
1. Name. tax return on Form 1120 and was
Reportable Entity Partner required to file Schedule M-3 for the tax
2. Mailing address.
Reporting Responsibilities year ending December 31, 2021. On
A reportable entity partner with respect 3. Taxpayer identification number October 16, 2022, DS1, DS2, DS3, FS1,
to a partnership filing Form 1065 is an (TIN) or EIN, if applicable. and FS2 each acquire a 10%
entity that: 4. Entity or organization type. partnership interest in partnership K,
• Owns or is deemed to own, directly or 5. State or country in which it is which files Form 1065 for the tax year
indirectly, under these instructions a organized. ending December 31, 2022. P is
deemed to own, directly or indirectly
50% or greater interest in the income, 6. Date on which it first became a (under these instructions), all corporate
loss, or capital of the partnership on any reportable entity partner. and partnership interests of DS1, DS2,
day of the tax year; and
• Was required to file Schedule M-3 7. Date with respect to which it is and DS3 as the parent of the tax
with its most recently filed U.S. income reporting a change in its ownership consolidation group and is therefore
interest in the partnership, if applicable. deemed to own 30% of K on October

-4- Instructions for Schedule M-3 (Form 1120)

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16, 2022. P is deemed to own, directly • Parts II and III of a separate sub-consolidations, there will generally
or indirectly (under these instructions), Schedule M-3 for each of the four be a total of six additional Schedules
all corporate and partnership interests includible corporations to reflect the M-3, Part II, and six additional
of FS1 and FS2 as the owner of 50% or activity of each includible corporation. Schedules M-3, Part III, for the
more of each corporation by vote and is • Parts II and III of a separate subgroup sub-consolidations.
therefore deemed to own 20% of K on Schedule M-3 to eliminate Specifically, there must be one Part II
September 16, 2022. P is therefore intercompany transactions between and one Part III for each subgroup's
deemed to own 50% of K on October includible corporations and to include sub-consolidated amounts and one Part
16, 2022. Since P owns or is deemed to limitations on deductions (charitable II and one Part III for each subgroup's
own, directly or indirectly (under these contribution limitations and capital loss sub-consolidation eliminations amounts.
instructions), 50% or more of K on limitations) and carryover amounts
October 16, 2022, and was required to (charitable contribution carryovers and At the mixed group consolidated
file Schedule M-3 on its most recently capital loss carryovers). level, there must be a consolidated
filed U.S. income tax return filed prior to See Completing Schedule M-3 and Schedule M-3, Part II, and, if applicable,
that date, P is a reportable entity partner Certain Allocations, Limitations, and a Part II for consolidation eliminations
of K as of October 16, 2022. On Carryovers, earlier. not includible in the subgroup
November 5, 2022, P reports to K, as it eliminations. At the consolidated level,
is required to do, that P is a reportable Note. Complete only one there must also be a consolidated
entity partner as of October 16, 2022, Schedule M-3, Part I, for each Schedule M-3, Part I, and a
deemed to own (under these consolidated group. A subsidiary of a consolidated Form 8916. For a mixed
instructions), a 50% interest in K. K is consolidated group does not complete group, there is no Schedule M-3, Part III,
therefore required to file Schedule M-3 Schedule M-3, Part I. Enter on at the consolidated level.
when it files its Form 1065 for its tax Schedule M-3, Part I, the name and EIN The corporation must check the
year ending December 31, 2022. of the common parent of the applicable mixed group checkboxes on
consolidated group. Indicate on all Schedules M-3, Parts I, II, and III, as
Consolidated Schedule M-3, Parts II and III, on the discussed below.
line after the common parent's name
Schedule M-3 Versus and EIN, whether the Schedule M-3,
Consolidating Schedules Parts II and III, is for the (1) consolidated Subgroup Sub-Consolidation:
M-3 for Form 1120 Groups group, (2) parent corporation, (3) 1120 Subgroup, 1120-PC
A consolidated tax return group with a consolidation eliminations, or (4) Subgroup, and 1120-L Subgroup
parent corporation that files a Form subsidiary corporation, by checking the
1120 is a mixed group if any member is appropriate box. If Schedule M-3, Parts A subgroup Schedule M-3, Parts II and
a life insurance company (files using II and III, are for a subsidiary in a III, sub-consolidation must be prepared
Form 1120-L) or a property and casualty consolidated return, also enter the name with all necessary eliminations within
insurance company (files using Form and EIN of the subsidiary. the subgroup for each of the three
possible subgroups that are in fact
1120-PC). See Schedule M-3 Schedule M-3 Consolidation for present: one subgroup for those
Consolidation for Mixed Groups
Mixed Groups (1120/L/PC)
(1120/L/PC), later. corporations reporting on Form 1120,
Special Schedule M-3 consolidation one subgroup for those corporations
A U.S. consolidated tax group must rules apply to a mixed group, that is, a reporting on Form 1120-PC, and one
file a consolidated Schedule M-3. Parts consolidated tax group that includes (a) subgroup for those reporting on Form
I, II, and III of the consolidated both a corporation that is an insurance 1120-L. The parent corporation is
Schedule M-3 must reflect the activity of company and a corporation that is not included in the subgroup that
the entire U.S. consolidated tax group. an insurance company; or (b) both a life corresponds to the form on which it
The parent corporation must also insurance company and a property and reports and the entire consolidated
complete Parts II and III of a separate casualty insurance company; or (c) a life group files. For example, in the case of
Schedule M-3 to reflect the parent's own insurance company, a property and a Form 1120 parent and Form 1120
activity. In addition, Parts II and III of a casualty insurance company, and a consolidated group, the parent is
separate Schedule M-3 must be corporation that is not an insurance included in the Form 1120 subgroup
completed by each includible company. sub-consolidation. Each subgroup uses
corporation to reflect the activity of that its own Schedule M-3 (Form 1120,
includible corporation. Lastly, it will Mixed group consolidation for
generally be necessary to complete Schedule M-3, Parts II and III, requires 1120-PC, or 1120-L), Parts II and III, for
Parts II and III of a separate (a) subgroup sub-consolidation of the each corporation within the subgroup
Schedule M-3 for consolidation 1120 subgroup, the 1120-PC subgroup, and for the subgroup sub-consolidation
eliminations. and the 1120-L subgroup, each with its and the subgroup eliminations.

If a U.S. consolidated tax group that own sub-consolidated Schedule M-3, The three subgroup
is not a mixed group consists of four Parts II and III; and (b) consolidation of sub-consolidation taxable income
includible corporations (the parent and the subgroup sub-consolidation totals calculations on Schedule M-3 must
three subsidiaries) all filing Form 1120, on a consolidated Schedule M-3, Part II, follow the separate return requirements
the U.S. consolidated tax group must that ties to a consolidated of the regulation under section 1502 and
complete six Schedules M-3 as follows. Schedule M-3, Part I, and a all other applicable regulations, taking
• One consolidated Schedule M-3 with consolidated Form 8916. into account the amounts separately
Parts I, II, and III completed to reflect the In addition to one Schedule M-3, Part reported on Form 8916. Capital loss
activity of the entire U.S. consolidated II, and one Schedule M-3, Part III, for limitation and carryforward used and
tax group. each corporation in the three subgroup charitable deduction limitation and

Instructions for Schedule M-3 (Form 1120) -5-

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carryforward used are not taken into      For mixed groups, the consolidated         eliminations for the eliminations. The 
account in the determination of the three Part II, line 30, column (a), must equal   1120-L subgroup sub-consolidation 
subgroup sub-consolidated taxable         Part I, line 11, with appropriate          Schedule M-3 (Form 1120-L), Parts II 
incomes on Schedule M-3, but are          adjustments for statutory accounting       and III, must be indicated by checking 
reflected on Form 8916 and in the         requirements reflected on Part I, lines    box (5) Mixed 1120/L/PC group, and 
calculation of the life/non-life loss     10a and 10b. The consolidated taxable      box (6) 1120-L group for the 
limitation and carryforward used. See     income indicated on Part II, line 30,      sub-consolidation, and by checking box 
Life/Non-Life Loss Limitation and         column (d), must equal the amount          (5) Mixed 1120/L/PC group, and box (7) 
Carryforward Used Calculations, later.    shown on Form 8916, line 1. Form           1120-L eliminations for the eliminations.
                                          8916, line 8, must equal taxable income 
The reconciliation totals for book,       reported on the tax return.                A mixed group with a Form 1120 
temporary difference, permanent                                                      parent corporation completes a 
difference, and taxable income for each   Completion of Mixed Group                  consolidated level Schedule M-3 (Form 
subgroup are reported on Form 1120,                                                  1120), Parts I and II, and a consolidated 
1120-PC, or 1120-L, as applicable,        Checkboxes for Schedule M-3,               Form 8916. The mixed group 
Schedule M-3, Part II, line 29a, columns  Part II and Part III                       consolidated Schedule M-3, Part II, 
(a), (b), (c), and (d), and equal the sum                                            must be indicated by checking box (1) 
of the line amounts on Part II, lines 26  Note. The following discussion of          Consolidated group, and box (5) Mixed 
through 28. For a mixed group,            checkboxes will assume that the 1120       1120/L/PC group. (If a consolidated 
Schedule M-3, Part II, lines 29b, 29c,    subgroup includes the corporate parent     level Part II for consolidation 
and 30 are blank on the Form 1120,        of the mixed group.                        eliminations not includible in the 
1120-PC, or 1120-L, as applicable, for                                               subgroup eliminations is applicable, that 
the separate corporations (parent and     Forms 1120, 1120-PC, and 1120-L,           Part II must be indicated by checking 
subsidiary) and for the three subgroup    Schedule M-3, Parts II and III, each       box (3) Consolidated eliminations, and 
sub-consolidations.                       have a checkbox (5) at the top             box (5) Mixed 1120/L/PC group.)
                                          indicating a mixed group. Checkbox (5) 
Note. A sub-consolidation is required     and one or more other applicable           Life/Non-Life Loss Limitation and 
for every subgroup, even if the           checkboxes must be checked.
subgroup consists of only one                                                        Carryforward Used Calculations
corporation. In addition, Form 8916-A, if For example, an 1120 parent 
                                                                                     The applicable life/non-life loss 
applicable, is required at the            corporation included in the 1120 
                                                                                     limitation and all carryforward used 
sub-consolidated level and the            subgroup must check Schedule M-3 
                                                                                     calculations are made using the 
sub-consolidated elimination level.       (Form 1120), Parts II and III, box (2) 
                                                                                     amounts determined for taxable income 
                                          Parent corporation, and box (5) Mixed 
                                                                                     in the three subgroup 
Reconciliation of Mixed Group             1120/L/PC group. An 1120 subsidiary 
                                                                                     sub-consolidations and other applicable 
Subgroup Sub-Consolidation                corporation within the 1120 subgroup 
                                                                                     amounts separately reported on Form 
                                          must check Schedule M-3 (Form 1120), 
                                                                                     8916. The calculated life/non-life loss 
Amounts to Schedule M-3, Part I,          Parts II and III, box (4) Subsidiary 
                                                                                     limitation or carryforward used amounts, 
Line 11, and to Tax Return Taxable        corporation, and box (5) Mixed 
                                                                                     if any, are not entered on Schedule M-3. 
Income                                    1120/L/PC group. An 1120-PC 
                                                                                     The calculated amounts, if any, are 
                                          subsidiary corporation within the 
                                                                                     entered on Form 8916.
At the consolidated level, use the        1120-PC subgroup must check 
Schedule M-3 (Form 1120, 1120-PC, or      Schedule M-3 (Form 1120-PC), Parts II 
1120-L), Parts I and II, that matches the and III, box (4) Subsidiary corporation,   Specific Instructions 
form on which the parent corporation      and box (5) Mixed 1120/L/PC group. An 
                                                                                     for Part I
reports and the entire consolidated       1120-L subsidiary corporation within the 
group files. For a mixed group, on the    1120-L subgroup must check 
consolidated Schedule M-3, Part II,       Schedule M-3 (Form 1120-L), Parts II       Part I. Financial 
lines 29a, 29b, and 29c, report the       and III, box (4) Subsidiary corporation, 
                                                                                     Information and Net 
applicable amounts from the three         and box (5) Mixed 1120/L/PC group.
subgroup sub-consolidation Part II,                                                  Income (Loss) 
line 29a, amounts. (If a consolidated     The 1120 subgroup                          Reconciliation
level Part II for consolidation           sub-consolidation Schedule M-3 (Form 
eliminations not includible in the        1120), Parts II and III, must be indicated When To Complete Part I
subgroup eliminations is applicable, the  by checking box (5) Mixed 1120/L/PC        Part I must be completed for any tax 
applicable amounts must be adjusted by    group, and box (6) 1120 group for the      year for which the corporation files 
the applicable elimination amounts.)      sub-consolidation, and by checking box     Schedule M-3. Check either box (1) 
The consolidated Schedule M-3, Part II,   (5) Mixed 1120/L/PC group, and box (7)     Non-consolidated return, (2) 
line 30, amounts are the sum of the       1120 eliminations for the eliminations.    Consolidated return (Form 1120 only), 
applicable amounts on the consolidated    The 1120-PC subgroup                       or (3) Mixed 1120/L/PC group, as 
Part II, lines 29a, 29b, and 29c. For a   sub-consolidation Form 1120-PC,            applicable. In addition, check box (4) 
mixed group, the consolidated Part II,    Schedule M-3, Parts II and III, must be    Dormant subsidiaries schedule 
lines 1 through 28, are blank and no      indicated by checking box (5) Mixed        attached, if applicable.
consolidated Part III is required to be   1120/L/PC group, and box (6) 1120-PC 
completed.                                group for the sub-consolidation, and by 
                                          checking box (5) Mixed 1120/L/PC 
                                          group, and box (7) 1120-PC 

                                                -6-                                Instructions for Schedule M-3 (Form 1120)

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Line 1. Questions Regarding tax year, the corporation must check U.S. corporation (or U.S. consolidated
the Type of Income Statement “Yes” for Part I, line 1a, and use that tax group) on Part I, line 4a.
income statement for Schedule M-3. If
Prepared Form 10-K is not filed and a If no non-tax-basis financial
For Part I, lines 1 through 12, use only non-tax-basis income statement is statements are prepared for a U.S.
the financial statements of the U.S. prepared that is a certified non-tax-basis corporation (or, in the case of a U.S.
corporation filing the U.S. income tax income statement for the period ending consolidated tax group, for the U.S.
return (or the consolidated financial with or within the tax year, the parent corporation's consolidated
statements for the U.S. parent corporation must check “Yes” for Part I, group) filing Schedule M-3 (Form 1120)
corporation of a U.S. consolidated tax line 1b, and use that income statement and the U.S. corporation is owned by a
group). If the U.S. corporation filing a for Schedule M-3. If Form 10-K is not foreign corporation that prepares
U.S. income tax return (or the U.S. filed and no certified non-tax-basis financial statements that includes the
parent corporation of a U.S. income statement is prepared but an U.S. corporation (or the U.S. parent
consolidated tax group) prepares its unaudited non-tax-basis income corporation's consolidated group), the
own financial statements but is statement is prepared for the period U.S. corporation (or the U.S. parent
controlled by another corporation (U.S. ending with or within the tax year, the corporation of the U.S. consolidated tax
or foreign) that prepares financial corporation must check “Yes” for Part I, group) must check “No” on questions
statements that include the U.S. line 1c, and use that income statement 1a, 1b, and 1c; skip Part I, lines 2a
corporation, the U.S. corporation (or the for Schedule M-3. through 3c; and enter the net income
U.S. parent corporation of a U.S. (loss) per the books and records of the
consolidated tax group) must use for its Order of priority in accounting
Schedule M-3, Part I, its own financial standards. If no Form 10-K is filed and U.S. corporation (or U.S. consolidated
statements and not the financial two or more non-tax-basis income tax group) on Part I, line 4a.
statements of the controlling statements are both certified Line 2. Questions Regarding
corporation. non-tax-basis income statements for the
Income Statement Period and
period, the income statement prepared
If a non-publicly traded U.S. parent according to the following order of Restatements
corporation of a U.S. consolidated tax priority in accounting standards must be Enter the beginning and ending dates
group prepares financial statements and used. on line 2a for the corporation's annual
that group includes a publicly traded 1. U.S. Generally Accepted income statement period ending with or
subsidiary that files financial statements Accounting Principles (GAAP). within the current tax year.
with the Securities and Exchange
Commission (SEC), the consolidated 2. International Financial Reporting The questions on Part I, lines 2b and
financial statements of the parent Standards (IFRS). 2c, regarding income statement
corporation are the appropriate financial 3. Any other International restatements refer to the worldwide
statements for purposes of completing Accounting Standards (IAS). consolidated income statement issued
Part I. Do not use any separate 4. Statutory accounting for by the corporation filing the U.S. income
company financial statements that might insurance companies. tax return (the consolidated financial
be prepared for publicly traded statements for the U.S. parent
5. Other regulatory accrual
subsidiaries. corporation of a U.S. consolidated tax
accounting. group) and used to prepare
6. Any other accrual accounting
Non-Tax-Basis Financial Schedule M-3. Answer “Yes” on lines 2b
standard. and/or 2c if the corporation's annual
Statements and Tax-Basis income statement has been restated for
7. Any fair market value standard.
Financial Statements any reason. Attach a short explanation
8. Any cash basis standard.
of the reasons for the restatement in net
A tax-basis income statement is allowed If no non-tax-basis income statement income for each annual income
for Schedule M-3, and a tax-basis is certified and two or more statement period that is restated,
balance sheet for Schedule L, only if no non-tax-basis income statements are including the original amount and
non-tax-basis income statement and no prepared, the income statement restated amount of each annual
non-tax-basis balance sheet were prepared according to the first listed of statement period's net income. The
prepared for any purpose and the books the accounting standards listed above attached statement is not required to
and records of the corporation reflect must be used. report restatements on an
only tax-basis amounts. The corporation entity-by-entity basis.
is deemed to have non-tax-basis If no non-tax-basis financial
income statements and the related statements are prepared for a U.S. Line 3. Questions Regarding
non-tax-basis balance sheets for the corporation (or, in the case of a U.S. Publicly Traded Voting
current tax year for purposes of consolidated tax group, for the U.S. Common Stock
Schedule M-3 and Schedule L if such parent corporation's consolidated The primary U.S. publicly traded voting
non-tax-basis financial statements were group) filing Schedule M-3 (Form 1120), common stock class is the most widely
prepared for and presented to the U.S. corporation (or the U.S. parent held or most heavily traded within the
management, creditors, shareholders, corporation of a U.S. consolidated tax United States as determined by the
government regulators, or any other group) must check “No” on questions corporation. If the corporation has more
third parties for a period ending with or 1a, 1b, and 1c; skip Part I, lines 2a than one class of publicly traded voting
within the tax year. through 3c; and enter the net income common stock, attach a list of the
(loss) per the books and records of the
If a Form 10-K is filed with the SEC classes of publicly traded voting
for the period ending with or within the common stock and the trading symbol

Instructions for Schedule M-3 (Form 1120) -7-

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and the nine-digit CUSIP number of line 4a (whether from financial between any nonincludible foreign entity
each class. statements or books and records), to and any includible corporation. Do not
net income (loss) of includible remove in Part I the financial net income
Line 4a. Worldwide corporations that must be reported on (loss) of any nonincludible foreign entity
Consolidated Net Income Part I, line 11. accounted for on line 4a using the
(Loss) per Income Statement equity method.
Report on line 12a the worldwide
Report on Part I, line 4a, the worldwide consolidated total assets and total Attach a supporting statement that
consolidated net income (loss) per the liabilities amounts for the corporation provides the name, EIN (if applicable),
income statement (or books and using the same financial statements (or and net income (loss) included on
records, if applicable) of the books and records) used for the line 4a that is removed on this line 5 for
corporation. A corporation filing a worldwide consolidated income (loss) each separate nonincludible foreign
non-consolidated Form 1120 for itself amount reported on Part I, line 4a. entity. Also state the total assets and
must report its worldwide income on total liabilities for each such separate
Part I, line 4a. If a U.S. corporation (a) has net nonincludible foreign entity and include
income (loss) included on Part I, line 4a, those assets and liabilities amounts in
In completing Schedule M-3, the and removed on Part I, line 6a or 6b, on the total assets and total liabilities
corporation must use financial another U.S. corporation's reported on Part I, line 12b. The
statement amounts from the financial Schedule M-3; (b) files its own Form amounts of income (loss) detailed on
statement type checked “Yes” on Part I, 1120 (separate or consolidated); (c) the supporting statement should be
line 1, or from its books and records if does not have a separate non-tax-basis reported for each separate
Part I, line 1c, is checked “No.” If Part I, financial statement (certified or nonincludible foreign entity without
line 1a, is checked “Yes,” report on Part otherwise) of its own; and (d) reports on regard to the effect of consolidation or
I, line 4a, the net income amount Schedule L of its own Form 1120 total elimination entries. If there are
reported in the income statement consolidated assets that equal or consolidation or elimination entries
presented to the SEC on the exceed $10 million at the end of the relating to nonincludible foreign entities
corporation's Form 10-K (the Form 10-K corporation's tax year, the corporation whose income (loss) is reported on the
for the security identified on Part I, must answer questions 1a, 1b, and 1c attached statement that are not
line 3b, if applicable). of Part I as appropriate for its own Form reportable on Part I, line 8, the net
If a corporation prepares 1120 and must report on Part I, line 4a, amounts of all such consolidation and
non-tax-basis financial statements, the the amount for the corporation's net elimination entries must be reported on
amount on line 4a must equal the income (loss) that is removed on Part I, a separate line on the attached
financial statement net income (loss) for line 6a or 6b, of the other corporation's statement, so that the separate financial
the income statement period ending Schedule M-3. However, if in the accounting income (loss) of each
with or within the tax year as indicated circumstances described immediately nonincludible foreign entity remains
on Part I, line 2a. above, the corporation does have separately stated.
separate non-tax-basis financial
If the corporation prepares statements (certified or otherwise) of its For example, if the net income (after
non-tax-basis financial statements and own, independent of the amount of the consolidation and elimination entries) of
the income statement period differs corporation's net income included in a nonincludible foreign
from the corporation's tax year, the Part I, line 4a, of the other U.S. sub-consolidated group is being
income statement period indicated on corporation, the corporation must reported on line 5a, the attached
Part I, line 2a, applies for purposes of answer questions 1a, 1b, and 1c of Part supporting statement should report the
Part I, lines 4a through 8. I, as appropriate, for its own Form 1120, income (loss) of each separate
If the corporation does not prepare based on its own separate income nonincludible foreign legal entity from
non-tax-basis financial statements and statement, and must report on Part I, each such entity's own financial
has checked “No” on Part I, line 1c, line 4a, the net income amounts shown accounting net income statement or
enter the net income (loss) per the on its separate income statement. books and records, and any
consolidation or elimination entries (for
books and records of the U.S. If line 4a includes net income (loss) intercompany dividends, minority
corporation or the U.S. consolidated tax for a corporation that files Form interests, etc.) not reportable on Part I,
group on Part I, line 4a. 1120-PC or Form 1120-L, see the line 8, should be reported on the
Indicate on Part I, line 4b, which of instructions for Part I, line 10, for attached supporting statement as a net
the following accounting standards were adjustments that may be necessary to amount on a line separate and apart
used for line 4a. reconcile financial statement income to from lines that report each nonincludible
1. U.S. Generally Accepted statutory income. foreign entity's separate net income
(loss).
Accounting Principles (GAAP). Line 5. Net Income (Loss) of
2. International Financial Reporting Nonincludible Foreign Entities Line 6. Net Income (Loss) of
Standards (IFRS). Remove the financial net income Nonincludible U.S. Entities
3. Statutory. (line 5a) or loss (line 5b) of each foreign Remove the financial net income
4. Tax-basis. entity that is included on line 4a and is (line 6a) or loss (line 6b) of each U.S.
5. Other (specify). not an includible corporation in the U.S. entity that is included on line 4a and is
consolidated tax group (nonincludible not an includible corporation in the U.S.
Report on Part I, lines 5a through 10, foreign entity). In addition, on Part I, consolidated tax group (nonincludible
as instructed below, all adjustment line 8, adjust for consolidation U.S. entity). In addition, on Part I, line 8,
amounts required to adjust worldwide eliminations and correct for minority adjust for consolidation eliminations and
net income (loss) reported on this Part I, interest and intercompany dividends correct for minority interest and

-8- Instructions for Schedule M-3 (Form 1120)

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intercompany dividends between any income reported on Part I, line 4a. Line 8. Adjustment to
nonincludible U.S. entity and any Include on line 7a or 7b financial income Eliminations of Transactions
includible corporation. Do not remove in of any disregarded entity that is not
Part I the financial net income (loss) of included in the income reported on Part Between Includible Entities and
any nonincludible U.S. entity accounted I, line 4a, but is included in Part I, line 11 Nonincludible Entities
for on line 4a using the equity method. (other disregarded entities). Include on Adjustments on Part I, line 8, to reverse
line 7c the financial income of any entity certain financial accounting
Attach a supporting statement that not a disregarded entity that is not consolidation or elimination entries are
provides the name, EIN, and net income included in the income reported on necessary to ensure that transactions
(loss) included on line 4a that is line 4a, but is included on line 11 (other between includible entities and
removed on this line 6 for each separate includible entities). In addition, on Part I, nonincludible U.S. or foreign entities are
nonincludible U.S. entity. Also state the line 8, adjust for consolidation not eliminated, in order to report the
total assets and total liabilities for each eliminations and correct for minority correct total amount on Part I, line 11.
such separate nonincludible U.S. entity interest and intercompany dividends for Also, additional consolidation entries
and include those assets and liabilities any other disregarded entity or other and elimination entries may be
amounts in the total assets and total includible entities. necessary on Part I, line 8, related to
liabilities reported on Part I, line 12c. transactions between includible entities
The amounts of income (loss) detailed Attach a supporting statement that that are in the consolidated financial
on the supporting statement should be provides the name, EIN, and net income group and other disregarded entities
reported for each separate (loss) per the financial statement or and other includible entities that are not
nonincludible U.S. entity without regard books and records on lines 7a, 7b, and in the consolidated financial group but
to the effect of consolidation or 7c, for each separate other U.S. that are reported on Part I, line 7a, 7b, or
elimination entries. If there are disregarded entity or other includible 7c, in order to report the correct total
consolidation or elimination entries entity. Also, state the total assets and amount on Part I, line 11.
relating to nonincludible U.S. entities total liabilities for each such separate
whose income (loss) is reported on the includible entity and include those asset Include on Part I, line 8, the total of
attached statement that are not and liability amounts in the total assets the following: (a) amounts of any
reportable on Part I, line 8, the net and total liabilities reported on Part I, adjustments to consolidation entries
amounts of all such consolidation and line 12d. The amounts of income (loss) and elimination entries that are
elimination entries must be reported on detailed on the supporting statement contained in the amount reported on
a separate line on the attached should be reported for each separate Part I, line 4a, required as a result of
statement, so that the separate financial other disregarded entity or other removing amounts on Part I, line 5 or 6;
accounting income (loss) of each includible entity without regard to the and (b) amounts of any additional
nonincludible U.S. entity remains effect of consolidation or elimination consolidation entries and elimination
separately stated. For example, if the entries solely between or among the entries that are required as a result of
net income (after consolidation and entities listed. If there are consolidation including amounts on Part I, line 7a, 7b,
elimination entries) of a nonincludible or elimination entries relating to such or 7c. This is necessary in order that the
U.S. sub-consolidated group is being disregarded entity or other includible consolidation entries and intercompany
reported on line 6a, the attached entities whose income (loss) is reported elimination entries included in the
supporting statement should report the on the attached statement that are not amount reported on Part I, line 11, are
income (loss) of each separate reportable on Part I, line 8, the net only those applicable to the financial net
nonincludible U.S. legal entity from each amounts of all such consolidation and income (loss) of includible entities for
such entity's own financial accounting elimination entries must be reported on the financial statement period. For
net income statement or books and a separate line on the attached example, adjustments must be reported
records, and any consolidation or statement, so that the separate financial on line 8 to remove minority interest and
elimination entries (for intercompany accounting income (loss) of each other to reverse the elimination of
dividends, minority interests, etc.) not disregarded entity or other includible intercompany dividends included on
reportable on Part I, line 8, should be entity remains separately stated. For Part I, line 4a, that relate to the net
reported on the attached supporting example, if the net income (after income of entities removed on Part I,
statement as a net amount on a line consolidation and elimination entries) of line 5 or 6, because the income to which
separate and apart from lines that report a sub-consolidated group of other U.S. the consolidation or elimination entries
each nonincludible U.S. entity's disregarded entities is being reported relate has been removed. Also, for
separate net income (loss). on line 7b, the attached supporting example, consolidation or elimination
statement should report the income entries must be reported on line 8 to
Line 7. Net Income (Loss) of (loss) of each separate other U.S. reflect any minority interest ownership in
Other Includible Foreign disregarded entity from each entity's the net income of other disregarded
Disregarded Entities, Other own financial accounting net income entities or other includible entities
Includible U.S. Disregarded statement or books and records, and reported on Part I, line 7a, 7b, or 7c.
any consolidation or elimination entries Consolidation and elimination entries
Entities, and Other Includible
(for intercompany dividends, minority must also be reported on line 8 to
Entities interests, etc.) not reportable on Part I, eliminate any intercompany dividends
Include on Part I, line 7a, 7b, or 7c, the line 8, should be reported on the between entities whose income is
financial net income or (loss) of each attached supporting statement as a net included on Part I, line 7a, 7b, or 7c, and
foreign or U.S. disregarded entity or amount on a line separate and apart other entities included in the
other includible entity that is not from lines that report each other consolidated U.S. income tax return.
included in the consolidated financial includible corporation's or entity's See Examples 4, 5, and in the 6
group and therefore not included in the separate net income (loss). instructions for line 11.

Instructions for Schedule M-3 (Form 1120) -9-

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If a corporate owner of an interest in        Line 10a. Intercompany                     net income included on Part I, line 11; 
another entity (a) accounts for the           Dividend Adjustments To                    the amount of the net adjustment that is 
interest in the entity in the owner                                                      attributable to intercompany dividend 
corporation's separate general ledger         Reconcile to Line 11,                      adjustments required to be reported by 
on the equity method, and (b) fully           Line 10b. Other Statutory                  statutory accounting and included on 
consolidates the entity in the owner          Accounting Adjustments To                  Part I, line 10a; the amount of the net 
corporation's consolidated financial          Reconcile to Line 11, and                  adjustment attributable to other 
statements, but the entity is not             Line 10c. Other Adjustments To             statutory accounting requirements and 
includible in the owner corporation's                                                    included on Part I, line 10b; and the 
consolidated U.S. income tax return,          Reconcile to Amount on Line 11             amount of the remainder of the net 
then, as part of reversing all                Include on lines 10a, 10b, and 10c any     adjustment not required because of 
consolidation and elimination entries for     other adjustments to reconcile net         statutory accounting and included on 
the nonincludible entity, the corporate       income (loss) on Part I, line 4a, through  Part I, line 10c. If any net adjustment is 
owner must reverse on Schedule M-3,           Part I, line 9, with net income (loss) on  included for the corporation on Part I, 
Part I, line 8, the elimination of the equity Part I, line 11. Include on line 10a the   line 10b or 10c, attach a supplemental 
income inclusion from the entity. If the      amount of any intercompany dividend        supporting statement identifying the line 
owner corporation does not account for        adjustment required by statutory           (10b or 10c), the type, and the amount 
the entity on the equity method on its        accounting. Include on line 10b the        of each adjustment included in the net 
own general ledger, it will not have          amount of any other required statutory     adjustment.
eliminated the equity income for              accounting adjustment. Include on 
consolidated financial statement              line 10c the amount of any other           Line 11. Net Income (Loss) per 
purposes and therefore will have no           adjustment not required by statutory       Income Statement of Includible 
elimination of equity income to reverse.      accounting.                                Corporations
The attached supporting statement             Normally, all intercompany dividends       Report on line 11 the net income (loss) 
for Part I, line 8, must identify the type    will have been eliminated or excluded      per the income statement (or books and 
(for example, minority interest,              from the financial accounting              records, if applicable) of the 
intercompany dividends, etc.) and             consolidated net income (loss) reported    corporation. In the case of a U.S. 
amount of consolidation or elimination        on Part I, line 4a. However, an            consolidated tax group, report the 
entries reported, as well as the names        insurance company may be required to       consolidated income statement net 
of the entities to which they pertain. It is  include certain intercompany dividends     income (loss) of all corporations listed 
not necessary, but it is permitted, to        on Part I, line 11, so that the amount     on Form 851 and included in the 
report intercompany eliminations that         reported on Part I, line 11, agrees with   consolidated U.S. income tax return for 
net to zero on Part I, line 8, such as        statutory accounting net income (Annual    the tax year. Amounts reported in 
intercompany interest income and              Statement). If the net income (loss) of a  column (a) of Parts II and III (see 
expense.                                      corporation that files Form 1120-PC or     instructions, later) must be reported on 
                                              Form 1120-L is included on Part I,         the same accounting method used to 
Line 9. Adjustment To                         line 4a or line 7, and is computed on a    report the amount of net income (loss) 
Reconcile Income Statement                    basis other than statutory accounting,     per income statement of includible 
Period to Tax Year                            include on line 10a the adjustments        corporations on Part I, line 11, which for 
Include on line 9 any adjustments             necessary such that Part I, line 11,       insurance companies is statutory 
necessary to the income (loss) of             includes intercompany dividends in the     accounting. If an insurance company is 
includible corporations to reconcile          net income (loss) for the corporation to   included in a consolidated Form 1120, 
differences between the corporation's         the extent required by statutory           the amount of net income reported on 
income statement period reported on           accounting principles. (For insurance      Part I, line 11, will include the statutory 
line 2a and the corporation's tax year.       companies included in the consolidated     accounting net income for the insurance 
Attach a statement describing the             U.S. income tax return, see the            corporation and the GAAP net income 
adjustment.                                   instructions for Part I, line 11, and Part for the non-insurance corporations 
                                              II, line 7.)                               included in the U.S. consolidated tax 
Statutory accounting for an insurance                                                    group. (For insurance companies 
company subsidiary acquired or merged         Statutory accounting for an insurance      included in the consolidated U.S. 
may require the use of a financial            company subsidiary acquired or merged      income tax return, see the instructions 
statement period for income reported on       may require the use of a financial         for Part I, line 10, and Part II, line 7.)
Part I, line 11, that differs from the        statement period for income reported on 
period reported on Part I, line 4a or         Part I, line 11, that differs from the     Do not, in any event, report on this 
line 7. Report on Part I, line 10b,           period reported on Part I, line 4a or      line 11 the net income of entities not 
adjustments to income because of the          line 7. Report on Part I, line 10b,        listed on Form 851 and not included in 
differences in accounting period.             adjustments to income because of such      the consolidated U.S. income tax return 
                                              differences in accounting period.          for the tax year. For example, it is not 
                                                                                         permissible to remove the income of 
                                              For any adjustments reported on Part       nonincludible entities on lines 5 and/or 
                                              I, lines 10a, 10b, and 10c, attach a       6, discussed earlier, then add back such 
                                              supporting statement that provides, for    income on lines 7 through 10, such that 
                                              each corporation to which an               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         in the consolidated U.S. income tax 
                                              income included in Part I before any       return. A principal purpose of 
                                              adjustments on line 10; the amount of      Schedule M-3 is to report on this Part I, 

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line 11, only the financial accounting net includible corporations. Intercompany 2. U.S. corporation C owns 60% of
income of only the corporations transactions between the includible the capital and profits interests in U.S.
included in the consolidated U.S. corporations that had been eliminated in LLC N. C does not account for N in C's
income tax return. the net income amount on line 4a separate general ledger on the equity
remain eliminated in the net income method. N has net income of $100
Whether or not the corporation amount on line 11. Transactions (before minority interests) and makes no
prepares financial statements, Part I, between the includible corporations and distributions during the tax year. C
line 11, must include all items that the nonincludible entities that are treats N as a corporation for financial
impact the net income (loss) of the eliminated in the net income amount on statement purposes and as a
corporation even if they are not line 4a are included in the net income partnership for U.S. income tax
recorded in the profit and loss accounts amount on line 11 since the elimination purposes. In its financial statements, C
in the corporation's general ledger, of those transactions was reversed on consolidates N and includes $60 of net
including, for example, all post-closing line 8. income ($100 less the minority interest
adjusting entries (including workpaper 2. Foreign corporation F owns 100% of $40) on Part I, line 4a.
adjustments) and dividend income or of the stock of U.S. corporation P. P C must remove the $100 net income
other income received from owns 100% of the stock of DS1, 60% of 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
1. U.S. corporation P is publicly financial statements. P does not prepare result is that C includes no income for N
traded and files Form 10-K with the any financial statements. P files a either on Part I, line 11, or on Part II,
SEC. P owns 80% or more of the stock consolidated U.S. income tax return line 9, column (a). C's taxable income
of 75 U.S. corporations, DS1 through with DS1. from N must be reported by C on Part II,
DS75, between 51% and 79% of the P must not complete Schedule M-3, line 9, column (d).
stock of 25 U.S. corporations DS76 Part I, with reference to the financial 3. U.S. corporation P owns 60% of
through DS100, and 100% of the stock statements of its foreign parent F. P corporation DS1, which is fully
of 50 foreign subsidiaries FS1 through must check “No” on Part I, lines 1a, 1b, consolidated in P's financial statements.
FS50. P eliminates all dividend income and 1c; skip lines 2a through 3c of Part P accounts for DS1 in P's separate
from DS1 through DS100, and FS1 I; and enter worldwide net income (loss) general ledger on the equity method.
through FS50 in financial statement per the books and records of the DS1 has net income of $100 (before
consolidation entries. Furthermore, P includible corporations (P and DS1) on minority interests) and pays dividends of
eliminates the minority interest Part I, line 4a. P must enter any $50, of which P receives $30. The
ownership, if any, of DS1 through necessary adjustments on lines 5a dividend reduces P's investment in DS1
DS100 in financial statement through 10 in order for Part I, line 11, to for equity method reporting on P's
consolidation entries. P's SEC Form report the net income (loss) of includible separate general ledger where P
10-K includes P, DS1 through DS100, corporations P and DS1, net of includes its 60% equity share of DS1
and FS1 through FS50 on a fully eliminations for transactions between P income, which is $60. In its financial
consolidated basis. P files a and DS1. statements, P eliminates the DS1 equity
consolidated U.S. income tax return method income of $60 and consolidates
with DS1 through DS75. Example 5. DS1, including $60 of net income ($100
P must check “Yes” on Part I, line 1a. 1. U.S. corporation P owns 60% of less the minority interest of $40) on Part
On Part I, line 4a, P must report the corporation DS1 which is fully I, line 4a.
consolidated net income from the SEC consolidated in P's financial statements. P must remove the $100 net income
Form 10-K for the consolidated financial P does not account for DS1 in P's of DS1 on Part I, line 6a. P must reverse
statement group of P, DS1 through separate general ledger on the equity on Part I, line 8, the elimination of the
DS100, and FS1 through FS50. P must method. DS1 has net income of $100 $40 minority interest net income of DS1
remove the net income (loss) of FS1 (before minority interests) and pays and the elimination of the $60 of DS1
through FS50 on Part I, line 5a or 5b, as dividends of $50, of which P receives equity income. The net result is that P
applicable. P must remove the net $30. The dividend is eliminated in the includes the $60 of equity method
income (loss) before minority interests consolidated financial statements. In its income from DS1 on Part I, line 11, and
of DS76 through DS100 on Part I, financial statements, P consolidates on Part II, line 6, column (a). P's
line 6a or 6b, as applicable. P must DS1 and includes $60 of net income dividend income included on the tax
reverse on Part I, line 8: ($100 less the minority interest of $40) return from its investment in DS1 must
on Part I, line 4a.
a. The elimination of dividends be reported on Part II, line 7, column (d).
received by P and DS1 through DS75 P must remove the $100 net income 4. U.S. corporation C owns 60% of
from DS76 through DS100 and FS1 of DS1 on Part I, line 6a. P must reverse the capital and profits interests in U.S.
through FS50; and on Part I, line 8, the elimination of the LLC N. C accounts for N in C's separate
$40 minority interest net income of DS1. general ledger on the equity method. N
b. The recognition of minority In addition, P reverses its elimination of has net income of $100 (before minority
interests' share of the net income (loss) the $30 intercompany dividend in its interests) and makes no distributions
of DS76 through DS100. Note. The financial statements on Part I, line 8. during the tax year. C treats N as a
minority interests' share, if any, of the The net result is that P includes the $30 corporation for financial statement
income of DS1 through DS75 must be dividend from DS1 on Part I, line 11, purposes and as a partnership for U.S.
reported in Part II, line 8. and on Part II, line 7, column (a). P's income tax purposes. For equity method
P reports on Part I, line 11, the dividend income included on the tax reporting on C's separate general
consolidated financial statement net return from DS1 must be reported on ledger, C includes its 60% equity share
income (loss) attributable to the Part II, line 7, column (d).

Instructions for Schedule M-3 (Form 1120) -11-

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of N income, which is $60. In its consolidated U.S. income tax return, of the entities removed in completing
financial statements, C eliminates the and the intercompany interest income Part I, line 5. On line 12c, enter the total
$60 of N equity method income and and expense must be removed by assets and total liabilities removed in
consolidates N, including $60 of net consolidation elimination entries. completing Part I, line 6. On line 12d,
income ($100 less the minority interest P must report its financial statement enter total assets and total liabilities
of $40) on Part I, line 4a. net income of $1,040 on Part I, line 4a, included in completing Part I, line 7.
C must remove the $100 net income and reports DS1's net income of $100
of N on Part I, line 6a. C must reverse on on Part I, line 7c. Then, in order to
Specific Instructions for
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 Parts II and III
elimination of the $60 of N equity and DS1 on Part I, line 11, the following For consolidated U.S. income tax
method income. The result is that C consolidation and elimination entries are returns, attach supporting statements
includes the $60 of equity method reported on Part I, line 8: (a) offsetting for each includible corporation. See the
income for N on Part I, line 11, and on entries to remove the $40 of interest instructions for consolidated returns in
Part II, line 9, column (a). C's taxable income received from DS1 included by the Instructions for Form 1120.
income from N must be reported by C P on line 4a, and to remove the $40 of
on Part II, line 9, column (d). interest expense of DS1 included in General Format of Parts II
5. U.S. corporation C owns 60% of line 7c for a net change of zero; and (b) and III
the capital and profits interests in U.S. an entry to reflect the $20 minority
Check the applicable box(es) at the top
LLC N. C accounts for N in C's separate interest in the net income of DS1 (DS1
of pages 2 and 3 of Schedule M-3 to
general ledger on the equity method. N net income of $100 times 20% minority
indicate whether the Schedule M-3 is for
has net income of $100 (before minority interest). The result is that Part I, line 11,
the:
interests) and pays a $50 cash reports $1,120: $1,040 from line 4a,
distribution, of which C receives $30. $100 from line 7c, and ($20) from line 8. 1. Consolidated group,
The distribution reduces C's investment Stated another way, Part I, line 11, 2. Parent corporation,
in N for equity method reporting on C's includes the entire $1,000 net income of 3. Consolidated eliminations,
separate general ledger. C treats N as a P, measured before recognition of the
corporation for financial statement intercompany interest income from DS1 4. Subsidiary corporation, or
purposes and as a partnership for U.S. and the consolidation of DS1 5. Mixed 1120/L/PC group.
income tax purposes. For equity method operations, plus the entire $140 net Also check the applicable box to
reporting on C's separate general income of DS1, measured before indicate whether the Schedule M-3 is for
ledger, C includes its 60% equity share interest expense to P, less the minority a sub-consolidated (6) 1120 group, or
of N income, which is $60. In its interest ownership of $20 in DS1's (7) 1120 eliminations. See Consolidated
financial statements, C eliminates the separate net income ($100). The Schedule M-3 Versus Consolidating
$60 of N equity method income and consolidated U.S. income tax group is Schedules M-3 for Form 1120 Groups
consolidates N and includes $60 of net required to include on the attached and Schedule M-3 Consolidation for
income ($100 less the minority interest supporting statement for Part I, line 8, Mixed Groups (1120/L/PC), earlier.
of $40) on Part I, line 4a. the details of the adjustment to the
minority interest in the net income of For each line item in Parts II and III,
C must remove the $100 net income DS1, but is not required to report the report in column (a) the amount of net
of N on Part I, line 6a. C must reverse on offsetting adjustment to the income (loss) included in Part I, line 11,
Part I, line 8, the elimination of the $40 intercompany elimination of interest and report in column (d) the amount
minority interest net income of N and the income and interest expense (though it included in taxable income on Form
elimination of the $60 of N equity is permitted to do so). 1120, page 1, line 28.
method income. The result is that C
includes the $60 of equity method Line 12. Total Assets and For any item of income, gain, loss,
expense, or deduction for which there is
income for N on Part I, line 11, and on Liabilities of Entities Included a difference between columns (a) and
Part II, line 9, column (a). C's taxable
or Removed on Part I, Lines 4,
income from N must be reported by C (d), the portion of the difference that is
on Part II, line 9, column (d). 5, 6, and 7 temporary must be entered in column
Line 12 must be completed by all (b) and the portion of the difference that
Example 6. U.S. corporation P corporations that file Schedule M-3. is permanent must be entered in column
owns 80% of the stock of corporation Report on lines 12a, 12b, 12c, and 12d (c).
DS1. DS1 is included in P's the total amount (not just the
consolidated income tax return, even corporation's share) of assets and Note. A statement or explanation may
though DS1 is not included in P's liabilities of entities included or removed be attached to any line item even if none
consolidated financial statements on on Part I, lines 4, 5, 6, and 7. All assets is required.
either a consolidated basis or on the and liabilities reported for If financial statements are prepared
equity method. DS1 has current year Schedule M-3, Part I, lines 12a, 12b, by the corporation in accordance with
net income of $100 after taking into 12c, and 12d, must be entered as generally accepted accounting
account its $40 interest payment to P. P positive amounts. principles (GAAP), differences that are
has net income of $1,040 after treated as temporary for GAAP must be
recognition of the interest income from On line 12a, enter the worldwide reported in column (b) and differences
DS1. Because DS1 is an includible consolidated total assets and total that are permanent (that is, not
corporation, 100% of the net income of liabilities of all of the entities included in temporary for GAAP) must be reported
both P and DS1 must be reported on completing Part I, line 4a. On line 12b, in column (c). Generally, pursuant to
Form 1120, page 1, of the PDS enter the total assets and total liabilities GAAP, a temporary difference affects

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(creates, increases, or decreases) a                                                    regardless of the classification, 
deferred tax asset or liability.            Reporting Requirements                      nomenclature, or terminology attached 
If the corporation does not prepare         for Parts II and III                        to the fines or penalties by the imposing 
financial statements, or the financial      Except for mixed group consolidation,       authority in its actions or documents.
statements are not prepared in              the number of Parts II must equal the       If a corporation would be required to 
accordance with GAAP, report in             number of Parts III filed by the            report in Parts II and III, column (a), the 
column (b) any difference that the          corporation. Mixed groups should see        amount of any item specifically listed on 
corporation believes will reverse in a      Schedule M-3 Consolidation for Mixed        Schedule M-3 in accordance with the 
future tax year (that is, have an opposite  Groups (1120/L/PC), earlier.                preceding paragraph, except that the 
effect on taxable income in a future tax    General Reporting                           corporation has capitalized the item of 
year (or years) due to the difference in                                                income or expense and reports the 
timing of recognition for financial         Requirements                                amount in its financial statement 
accounting and U.S. income tax              If an amount is attributable to a           balance sheet or in asset and liability 
purposes) or is the reversal of such a      reportable transaction described in         accounts maintained in the 
difference that arose in a prior tax year.  Regulations section 1.6011-4(b), the        corporation's books and records, the 
Report in column (c) any difference that    amount must be reported in columns          corporation must report the proper tax 
the corporation believes will not reverse   (a), (b), (c), and (d), as applicable, of   treatment of the item in columns (b), (c), 
in a future tax year (and is not the        Part II, line 12, regardless of whether the and (d), as applicable.
reversal of such a difference that arose    amount would otherwise be reported on 
in a prior tax year).                       Part II or Part III of Schedule M-3. Thus,  Furthermore, in applying the two 
                                            if a taxpayer files Form 8886,              preceding paragraphs, a corporation is 
If the corporation is unable to             Reportable Transaction Disclosure           required to report in Parts II and III, 
determine whether a difference between      Statement, the amounts attributable to      column (a), the amount of any item 
column (a) and column (d) for an item       that reportable transaction must be         specifically listed on Schedule M-3 that 
will reverse in a future tax year or is the entered on Part II, line 12.                is included in the corporation's financial 
reversal of a difference that arose in a                                                statements or exists in the corporation's 
prior tax year, report the difference for   A corporation is required to report in      books and records, regardless of the 
that item in column (c).                    column (a) of Parts II and III the amount   nomenclature associated with that item 
                                            of any item specifically listed on          in the financial statements or books and 
Example 7. Corporation B is a U.S.          Schedule M-3 that is in any manner          records. Accurate completion of 
publicly traded corporation that files a    included in the corporation's current       Schedule M-3 requires reporting 
consolidated U.S. income tax return and     year financial statement net income         amounts according to the substantive 
prepares consolidated GAAP financial        (loss) or in an income or expense           nature of the specific line items included 
statements. In prior years, B acquired      account maintained in the corporation's     in Schedule M-3 and consistent 
intellectual property (IP) and goodwill     books and records, even if there is no      reporting of all transactions of like 
through several corporate acquisitions.     difference between that amount and the      substantive nature that occurred during 
The IP is amortizable for both U.S.         amount included in taxable income           the tax year. For example, all expense 
income tax and financial statement          unless (a) otherwise provided in these      amounts that are included in the 
purposes. In the current year, B's annual   instructions, or (b) the amount is          financial statements or exist in the 
amortization expense for IP is $9,000 for   attributable to a reportable transaction    books and records that represent some 
U.S. income tax purposes and $6,000         described in Regulations section            form of “Bad debt expense” must be 
for financial statement purposes. In its    1.6011-4(b) and is therefore reported on    reported in Part III, line 32, column (a), 
financial statements, B treats the          Part II, line 12. For example, with the     regardless of whether the amounts are 
difference in IP amortization as a          exception of interest income reflected      recorded or stated under different 
temporary difference. The goodwill is       on a Schedule K-1 received by a             nomenclature in the financial 
not amortizable for U.S. income tax         corporation as a result of the              statements or the books and records 
purposes and is subject to impairment       corporation's investment in a               such as “Provision for doubtful 
for financial statement purposes. In the    partnership or other pass-through entity,   accounts,” “Expense for uncollectible 
current year, B records an impairment       all interest income, included on Part I,    notes receivable,” or “Impairment of 
charge on the goodwill of $5,000. In its    line 11, whether from unconsolidated        trade accounts receivable.” Likewise, as 
financial statements, B treats the          affiliated companies, third parties,        stated in the preceding paragraph, all 
goodwill impairment as a permanent          banks, or other entities; whether from      fines and penalties must be included on 
difference. B must report the               foreign or domestic sources; whether        Part III, line 12, column (a), regardless 
amortization attributable to the IP on      taxable or exempt from tax; and whether     of the terminology or nomenclature 
Part III, line 28, and report $6,000 in     classified as some other type of income     attached to them by the corporation in 
column (a), a temporary difference of       for U.S. income tax purposes (such as       its books and records or financial 
$3,000 in column (b), and $9,000 in         dividends), must be included on Part II,    statements.
column (d). B must report the goodwill      line 13, column (a). Likewise, all fines 
impairment on Part III, line 26, and        and penalties included in Part I, line 11,  With limited exceptions, Part II 
report $5,000 in column (a), a              paid to a government or other authority     includes lines for specific items of 
permanent difference of ($5,000) in         for the violation of any law for which      income, gain, or loss (income items). 
column (c), and $0 in column (d).           fines or penalties are assessed must be     See Part II, lines 1 through 24. If an 
                                            included on Part III, line 12, column (a),  income item is described in Part II, lines 
                                            regardless of the government authority      1 through 24, report the amount of the 
                                            that imposed the fines or penalties;        item on the applicable line, regardless of 
                                            regardless of whether the fines or          whether there is a difference for the 
                                            penalties are civil or criminal; and        item. If there is a difference for the 

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income item, or only a portion of the real estate tax expense in its financial reported in columns (b) and (c),
income item has a difference and a statements and its real estate tax including how the adjustment is
portion of the item does not have a deduction recognized for U.S. taxable identified in the accounting records. The
difference, and the item is not described income purposes. entire description is considered the tax
in Part II, lines 1 through 24, report and description for the amount reported in
Separately stated and adequately
describe the entire amount of the item column (d) for each item reported on
disclosed. Each difference reported in
on Part II, line 25. Part II, line 25, or Part III, line 38.
Parts II and III must be separately stated
With limited exceptions, Part III and adequately disclosed. In general, a Each description should adequately
includes lines for specific items of difference is adequately disclosed if the describe all four columns of Part II,
expense or deduction (expense items). difference is labeled in a manner that line 25, or Part III, line 38. If additional
See Part III, lines 1 through 37. If an clearly identifies the item or transaction information is required to provide an
expense item is described on Part III, from which the difference arises. See acceptable description, provide a
lines 1 through 37, report the amount of Regulations section 1.6662-4(f). If a supporting statement.
the item on the applicable line, specific item of income, gain, loss, Example 8. Corporation C is a
regardless of whether there is a expense, or deduction is described on calendar year taxpayer that placed in
difference for the item. If there is a Part II, lines 9 through 24, or Part III, service 10 depreciable fixed assets in a
difference for the expense item, or only lines 1 through 38, and the line does not previous tax year. C files and entirely
a portion of the expense item has a indicate to “attach statement” and the completes Schedule M-3 for its current
difference and a portion of the item does specific instructions for the line do not tax year. C's total depreciation expense
not have a difference and the item is not call for an attachment of a statement, for its current tax year for five of the
described in Part III, lines 1 through 37, then the item is considered separately assets is $50,000 for income statement
report and describe the entire amount of stated and adequately disclosed if the purposes and $70,000 for U.S. income
the item on Part III, line 38. item is entered on the applicable line tax purposes. C's total annual
and the amount(s) of the item(s) is depreciation expense for its current tax
If there is no difference between the entered in the applicable columns of the year for the other five assets is $40,000
financial accounting amount and the applicable line. See the instructions for for income statement purposes and
taxable amount of an entire item of Part II, lines 1 through 8, for specific $30,000 for U.S. income tax purposes.
income, loss, expense, or deduction additional information required to be In its financial statements, C treats the
and the item is not described or provided for these particular lines. differences between financial statement
included in Part II, lines 1 through 25, or and U.S. income tax depreciation
Part III, lines 1 through 38, report the Note. A statement or explanation may expense as giving rise to temporary
entire amount of the item in columns (a) be attached to any line even if none is differences that will reverse in future
and (d) of Part II, line 28. required. years. C must combine all of its
Special instructions for Part II, lines Except as otherwise provided, depreciation adjustments. Accordingly,
25 and 28, and Part III, line 38. differences for the same item must be C must report on Part III, line 31, for its
Whether a given income (loss) item is combined or netted together and current tax year income statement,
reported on Part II, line 25, or on Part II, reported as one amount on the depreciation expense of $90,000 in
line 28, or a given expense/deduction applicable line of Schedule M-3. column (a), a temporary difference of
item on Part III, line 38, or on Part II, However, differences for separate items $10,000 in column (b), and U.S. income
line 28, is determined separately by must not be combined or netted tax depreciation expense of $100,000 in
each member of the U.S. consolidated together. Each item (and corresponding column (d).
tax group and not at the U.S. amount attributable to that item) must Example 9. Corporation D is a
consolidated tax group level. For be separately stated and adequately calendar year taxpayer that files and
example, U.S. corporation P has two disclosed on the applicable line of entirely completes Schedule M-3 for its
subsidiaries, A and B, that are included Schedule M-3, or any statement current tax year. On December 31, D
in P's consolidated financial statements required to be attached, even if the establishes three reserve accounts in
and in P's consolidated U.S. income tax amounts are below a certain dollar the amount of $100,000 for each
return. For financial statement amount. account. One reserve account is an
purposes, P, A, and B recognize real Required statements for Part II, allowance for accounts receivable that
estate tax expense when accrued. For line 25, and Part III, line 38. A are estimated to be uncollectible. The
U.S. income tax purposes, P and A separate statement must be attached to second reserve is an estimate of
recognize such expense consistent with Schedule M-3 (Form 1120) that includes coupons outstanding that may have to
the method used for financial statement a detailed description of each item and be paid. The third reserve is an estimate
purposes, whereas B recognizes such adjustment entered on Part II, line 25, of future warranty expenses. In its
deduction based on a method different and Part III, line 38. financial statements, D treats the three
from that used for financial statement reserve accounts as giving rise to
The description for each amount
purposes. P and A must report this temporary differences that will reverse
entered in column (a) must be readily
expense/deduction in columns (a) and in future years. The three reserves are
identifiable to the name of the account
(d) on Part II, line 28. B must report the expenses in D's current financial
in the financial statements or books and
following on Part III, line 38: in column statements but are not deductions for
records of the taxpayer, under which the
(a), B's expense recognized in the U.S. income tax purposes in the current
amount in column (a) was recorded in
financial statements when accrued; in year. D must not combine the
the accounting records. Also, the
column (d), B's real estate tax expense Schedule M-3 differences for the three
description for each amount entered in
recognized for U.S. income tax reserve accounts. D must report the
column (a) must include detailed
purposes; and in column (b) or (c), as amounts attributable to the allowance
information supporting each adjustment
applicable, the difference between B's

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for uncollectible accounts receivable on expenses that F deducts in computing the amount (before any withholding tax)
Part III, line 32, Bad debt expense, and net income per the income statement. of any foreign dividends included in
must separately state and adequately All of the $200 of meal expenses are current year taxable income on Form
disclose the amounts attributable to subject to the 50% limitation under 1120, page 1, line 28, and report on
each of the other two reserves, coupons section 274(n). The $100 of line 2, column (a), the amount of
outstanding, and warranty costs, on a entertainment expenses are dividends from any foreign corporation
required, attached statement that nondeductible under section 274(a). In included in Part I, line 11. Do not report
supports the amounts on Part III, line 38. its financial statements, F treats the on line 2 any amounts that must be
D must also provide a description for limitation on deductions for meals and reported on Part II, line 3 or 4, or
each reserve that meets the entertainment as a permanent dividends that were previously taxed
requirements for Part III, line 38, difference. Because meals and and must be reported on Part II, line 5.
discussed earlier under Required entertainment expenses are specifically See the instructions below for Part II,
statements for Part II, line 25, and Part described in Part III, line 11, F must lines 3, 4, and 5.
III, line 38. In this example, an report all of its meals and entertainment
acceptable description would be expenses on this line, regardless of For any dividends reported on Part II,
“Coupon Issue Reserves—Rewards whether there is a difference. line 2, that are received on a class of
Expense” and “Future Warranty Accordingly, F must report $300 in voting stock of which the corporation
Expense Reserve.” column (a), $200 in column (c), and directly or indirectly owned 10% or more
$100 in column (d). All meals and of the outstanding shares of that class at
Note. There is no need to add the title entertainment expenses, whether any time during the tax year, report on
of the reserve account to the description allowed fully or subject to limitations, an attached supporting statement (1)
if the account name for the amount in must be reported on Part III, line 11. No the name of the dividend payer, (2) the
column (a) is already part of the amounts should be reported on Part II, payer's EIN (if applicable), (3) the class
adjustment description. line 28. of voting stock on which the dividend
Example 10. Corporation E is a was paid, (4) the percentage of the
calendar year taxpayer that files and class directly or indirectly owned, and
entirely completes Schedule M-3 for its Part II. Reconciliation of (5) the amounts for columns (a) through
current tax year. On January 2 of the Net Income (Loss) per (d).
current tax year, E establishes an Income Statement of Line 3. Subpart F, QEF, and
allowance for uncollectible accounts Similar Income Inclusions
Includible Corporations
receivable (bad debt reserve) of
$100,000. During the current tax year, E With Taxable Income per Report on line 3, column (d), the amount
increased the reserve by $250,000 for Return included in taxable income under
section 951, relating to Subpart F; the
additional accounts receivable that may Attach supporting statements for Parts amounts included under section 951A,
become uncollectible. Additionally, II, lines 1 through 12. For any item relating to global intangible low-taxed
during the current tax year, E decreases reported on lines 1, 3 through 6, or 8, income (GILTI); gains or other income
the reserve by $75,000 for accounts include in the supporting statement the inclusions resulting from elections under
receivable that were discharged in name of the entity for which the item is sections 1291(d)(2) and 1298(b)(1); and
bankruptcy during the current tax year. reported, the entity's EIN (if applicable), any amount included in taxable income
The balance in the reserve account on the type of entity (corporation, pursuant to section 1293, relating to a
December 31 of the current tax year is partnership, etc.), and the item amounts qualified electing fund (QEF). The
$275,000. The $100,000 amount to for columns (a) through (d). See the amount included under section 951
establish the reserve account and the instructions for Part II, lines 2, 7, and 9 corresponds to the total of the amounts
$250,000 to increase the reserve through 12, for the specific information reported on Form 1120, Schedule C,
account are expenses on E's current required for those particular lines. lines 16a, 16b, and 16c (or the
year financial statements but are not
deductible for U.S. income tax purposes Line 1. Income (Loss) From corresponding line on Form 1120-C,
in the current tax year. However, the Equity Method Foreign Schedule C, if applicable). The amount
of GILTI corresponds to the amount
$75,000 decrease to the reserve is Corporations reported on Form 1120, Schedule C,
deductible for U.S. income tax purposes
Report on line 1, column (a), the
in the current tax year. In its financial line 17 (or the corresponding line on
financial income (loss) included in Part I,
statements, E treats the reserve Form 1120-C, Schedule C, if
line 11, for any foreign corporation
account as giving rise to a temporary applicable). The amount of QEF income
accounted for on the equity method and
difference that will reverse in future tax corresponds to the total of the amounts
remove such amount in column (b) or
years. E must report on Part III, line 32, of income from a QEF reported by the
(c), as applicable. Report the amount of
for its current tax year income corporation on all Forms 8621,
dividends received and other taxable
statement, bad debt expense of Information Return by a Shareholder of
amounts received from or includible with
$350,000 in column (a), a temporary a Passive Foreign Investment Company
respect to foreign corporations on Part
difference of ($275,000) in column (b), or Qualified Electing Fund. See Form
II, lines 2 through 5, as applicable.
and U.S. income tax bad debt expense 8621 and the Instructions for Form
of $75,000 in column (d). Line 2. Gross Foreign 8621.
Example 11. Corporation F is a Dividends Not Previously Also include on line 3 passive foreign
calendar year taxpayer that files and Taxed investment company (PFIC)
entirely completes Schedule M-3 for its Except as otherwise provided in this mark-to-market gains and losses under
current tax year. F incurs $200 of meal paragraph, report on line 2, column (d), section 1296. Do not report such gains
expenses and $100 of entertainment and losses on Part II, line 16.

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Line 4. Gross-up for Foreign                   listed on Form 851) are eliminated or       report its equity interest in the income of 
Taxes Deemed Paid                              excluded for financial accounting           DS1 on its separate financial 
                                               purposes and eliminated for the             statements. DS1 has financial 
Report on line 4, column (d), the amount       calculation of U.S. taxable income. In      statement net income (before minority 
of any foreign taxes deemed paid not           the case of an insurance company            interests) and taxable income of $1,000 
included in column (d) of Part II, lines 9,    included in the consolidated U.S.           ($2,500 of revenue less $1,500 cost of 
10, and 11, Income (loss) from U.S.            income tax return required to report        goods sold).
partnerships, foreign partnerships, and        intercompany dividends as part of           On the consolidated Schedule M-3, 
other pass-through entities. The foreign       statutory accounting net income,            Part I, line 4, Worldwide consolidated 
taxes deemed paid amount on this               include such intercompany dividends on      net income (loss) per income statement, 
line 4 must correspond to the total            Part II, line 7, column (a), and the        and on line 11, Net income (loss) per 
foreign taxes deemed paid amounts              taxable amount of those dividends on        income statement of includible 
reported by the corporation on all Forms       Part II, line 7, column (d). (For insurance corporations, the U.S. consolidated tax 
1118, Foreign Tax                              companies included in the consolidated      group GDS1 must report $900 of 
Credit—Corporations, excluding the             U.S. income tax return, see the             financial statement net income ($1,000 
amounts reported in column (d) of Part         instructions for Part I, lines 10 and 11.)  net income less $100 minority interest).
II, lines 9, 10, and 11.
                                               For any intercompany dividends              The GDS1 group must prepare one 
Line 5. Gross Foreign                          (dividends received from includible         consolidated Schedule M-3, Parts II and 
Distributions Previously Taxed                 corporations listed on Form 851)            III, and three additional Schedules M-3, 
Report on line 5, column (a), any              included on Part II, line 7, report on an   Parts II and III: one for G, one for DS1, 
distributions received from foreign            attached supporting statement (1) the       and one for consolidation eliminations.
corporations that correspond to                name of the dividend payer; (2) the         On the Schedule M-3, Parts II and III, 
amounts included in Part I, line 11, and       payer's EIN; (3) the class of stock or      for DS1, $1,000 is reported on Part II, 
that were previously taxed for U.S.            security on which the dividends were        lines 28 and 30, in both columns (a) and 
income tax purposes. For example,              paid; (4) the amount of any net             (d). On G's Schedule M-3, Parts II and 
include in column (a) amounts that are         adjustment included on Part I, line 10a,    III, zero is reported on Part II, line 30, in 
excluded from taxable income under             for such dividends; and (5) the item        both columns (a) and (d). On the 
sections 959 and 1293(c). Remove               amounts for columns (a) through (d).        consolidation eliminations 
such amount in column (b) or (c), as                                                       Schedule M-3, Parts II and III, on Part II, 
applicable. Report the full amount of the      For any dividends included on Part II,      lines 8 and 30, the minority interest 
distribution before any withholding tax.       line 7, that are not intercompany           elimination for the U.S. consolidated tax 
Because previously taxed foreign               dividends (dividends received from          group is reported as ($100) in column 
distributions are not currently taxable,       includible corporations listed on Form      (a), $100 in column (c), and $0 in 
line 5, column (d), is shaded. Also, see       851) that are received on classes of        column (d).
the instructions for Part II, line 2, earlier. voting stock in which the corporation 
                                               directly or indirectly owned 10% or more    On the Schedule M-3, Parts II and III, 
Line 6. Income (Loss) From                     of the outstanding shares of that class at  for the U.S. consolidated tax group, on 
Equity Method U.S.                             any time during the tax year, report on     Part II, line 8, Minority interest for 
Corporations                                   an attached supporting statement for        includible corporations, ($100) is 
                                               Part II, line 7, (1) the name of the        reported in column (a), $100 in column 
Report on line 6, column (a), the              dividend payer, (2) the payer's EIN (if     (c), and $0 in column (d). On Part II, 
financial income (loss) included in Part I,    applicable), (3) the class of voting stock  line 28, the U.S. consolidated tax group 
line 11, for any U.S. corporation              on which the dividend was paid, (4) the     reports $1,000 in both columns (a) and 
accounted for on the equity method and         percentage of the class directly or         (d). As a result, financial statement net 
remove such amount in column (b) or            indirectly owned, and (5) the item          income on Part II, line 30, column (a), 
(c), as applicable. Report on Part II,         amounts for columns (a) through (d).        will total $900; net permanent 
line 7, dividends received from any U.S.                                                   differences on Part II, line 30, column 
corporation accounted for on the equity        Line 8. Minority Interest for               (c), will total $100; and taxable income 
method.                                        Includible Corporations                     on line 30, column (d), will total $1,000.
Line 7. U.S. Dividends Not                     Report on line 8, column (a), the           Line 9. Income (Loss) From 
Eliminated in Tax Consolidation                minority interest included in the financial 
                                                                                           U.S. Partnerships, and
                                               income (loss) on Part I, line 11, for any 
Report on line 7, column (a), the amount       member of the U.S. consolidated tax         Line 10. Income (Loss) From 
of dividends included in Part I, line 11,      group that is less than 100% owned.         Foreign Partnerships
that were received from any U.S. 
corporation. Report on line 7, column          Example 12. Corporation G is a              For any interest owned by the 
(d), the amount of any U.S. dividends          calendar year taxpayer that files and       corporation or a member of the U.S. 
included in taxable income on Form             entirely completes Schedule M-3 for its     consolidated tax group that is treated as 
1120, page 1, line 28.                         current tax year. G owns 90% of the         an investment in a partnership for U.S. 
                                               stock of U.S. corporation DS1. G files a    income tax purposes (other than an 
Usually, the amounts included on               consolidated U.S. income tax return         interest in a disregarded entity), report 
line 7, columns (a) and (d), include only      with DS1 as the GDS1 U.S.                   amounts on Part II, line 9 or 10, as 
dividends received from U.S.                   consolidated group. G prepares certified    described below.
corporations that are not included in the      GAAP financial statements for the           1. In column (a), report the sum of 
U.S. consolidated tax group because            consolidated financial statement group      the corporation's distributive share of 
intercompany dividends (dividends              consisting of G and DS1. G has no net       income or loss from a U.S. or foreign 
received from includible corporations          income of its own, and G does not 

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partnership that is included in Part I, $3,910 ($4,000–$900) on Part II, line 9. disclosed. A corporation will be
line 11. H must report the limitation on Part III, considered to have separately stated
2. In column (b) or (c), as line 21, and report the disallowed and adequately disclosed a reportable
applicable, report the sum of all charitable contributions of ($3,910) in transaction on line 12 if the corporation
differences, if any, attributable to the columns (b) and (d). sequentially numbers each Form 8886
and lists by identifying number on the
corporation's distributive share of Line 11. Income (Loss) From supporting statement for Part II, line 12,
income or loss from a U.S. or foreign
partnership. Other Pass-Through Entities each sequentially numbered reportable
For any interest in a pass-through entity transaction and the amounts required
3. In column (d), report the sum of for Part II, line 12, columns (a) through
(other than an interest in a partnership
all amounts of income, gain, loss, or (d).
reportable on Part II, line 9 or 10, as
deduction attributable to the
applicable) owned by a member of the
corporation's distributive share of In lieu of the requirements of the
U.S. consolidated tax group (other than
income or loss from a U.S. or foreign preceding paragraph, a corporation will
an interest in a disregarded entity),
partnership (that is, the sum of all be considered to have separately stated
report the following on line 11.
amounts reportable on the corporation's and adequately disclosed a reportable
Schedule(s) K-1 received from the 1. In column (a), report the sum of
transaction if the corporation attaches a
partnership (if applicable)), without the corporation's distributive share of
supporting statement that provides the
regard to any limitations computed at income or loss from the pass-through
following for each reportable
the partner level (for example, entity that is included in Part I, line 11.
transaction.
limitations on utilization of charitable 2. In column (b) or (c), as
1. A description of the reportable
contributions, capital losses, and applicable, report the sum of all
transaction disclosed on Form 8886 for
interest expense). differences, if any, attributable to the
which amounts are reported on Part II,
pass-through entity.
For each partnership reported on line 12.
line 9 or 10, attach a supporting 3. In column (d), report the sum of
2. The name and tax shelter
statement that provides the name and all taxable amounts of income, gain,
registration number, if applicable, as
EIN (if applicable); end of year loss, or deduction reportable on the
reported on lines 1a and 1c,
profit-sharing percentage (if applicable); corporation's Schedule(s) K-1 received
respectively, of Form 8886.
end of year loss-sharing percentage (if from the pass-through entity (if
applicable); and the amount reported in applicable). 3. The type of reportable transaction
(that is, listed transaction, confidential
column (a), (b), (c), or (d) of line 9 or 10, For each pass-through entity transaction, transaction with contractual
as applicable. reported on line 11, attach a supporting protection, etc.) as reported on line 2 of
Example 13. U.S. corporation H is a statement that provides that entity's Form 8886.
calendar year taxpayer that files and name and EIN (if applicable); the
entirely completes Schedule M-3. H has corporation's end of year profit-sharing If a transaction is a listed transaction
an investment in a U.S. partnership, percentage (if applicable; the described in Regulations section
USP. H prepares financial statements in corporation's end of year loss-sharing 1.6011-4(b)(2), the description must
accordance with GAAP. In its financial percentage (if applicable); and the also include the description provided on
statements, H treats the difference amounts reported by the corporation in line 3 of Form 8886. In addition, if the
between financial statement net income column (a), (b), (c), or (d) of line 11, as reportable transaction involves an
and taxable income from its investment applicable. investment in the transaction through
in USP as a permanent difference. For another entity such as a partnership, the
its current tax year, H's financial Line 12. Items Relating to description must include the name and
statement net income includes $10,000 Reportable Transactions EIN (if applicable) of that entity as
of income attributable to its share of Any amounts attributable to any reported on line 5 of Form 8886.
USP's net income. H's Schedule K-1 reportable transactions (as described in Example 15. Corporation J is a
from USP reports $5,000 of ordinary Regulations section 1.6011-4) must be calendar year taxpayer that files and
income, $7,000 of long-term capital included on Part II, line 12, regardless of entirely completes Schedule M-3 for its
gains, $4,000 of charitable whether the difference, or differences, current tax year. J incurred seven
contributions, and $200 of section 179 would otherwise be reported elsewhere different abandonment losses during its
expense. H must report on Part II, line 9, in Part II or Part III. Thus, if a taxpayer current tax year. One loss of $12 million
$10,000 in column (a), a permanent files Form 8886 for any reportable results from a reportable transaction
difference of ($2,200) in column (c), and transaction described in Regulations described in Regulations section
$7,800 in column (d). section 1.6011-4, the amounts 1.6011-4(b)(5), another loss of $5
Example 14. The facts are the same attributable to that reportable million results from a reportable
as in Example 13, except that transaction must be reported on Part II, transaction described in Regulations
corporation H's charitable contribution line 12. In addition, all income and section 1.6011-4(b)(4), and the
deduction is wholly attributable to its expense amounts attributable to a remaining five abandonment losses are
partnership interest in USP and is reportable transaction must be reported not reportable transactions. J discloses
limited to $90 pursuant to section 170(b) on Part II, line 12, columns (a) and (d), the reportable transactions giving rise to
(2) due to other investment losses even if there is no difference between the $12 million and $5 million losses on
incurred by H. In its financial the financial amounts and the taxable separate Forms 8886 and sequentially
statements, H treated this limitation as a amounts. numbers them X1 and X2, respectively.
temporary difference. H must not report Each difference attributable to a J must separately state and adequately
the charitable contribution limitation of reportable transaction must be disclose the $12 million and $5 million
separately stated and adequately losses on Part II, line 12. The $12 million

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loss and the $5 million loss will be Schedule M-3. In column (b) or (c), as current tax year. L prepares financial
adequately disclosed if J attaches a applicable, adjust for any amounts statements in accordance with GAAP
supporting statement for line 12 that treated for U.S. income tax purposes as using an overall accrual method of
lists each of the sequentially numbered interest income that are treated as some accounting. L uses an overall cash
forms, Form 8886-X1 and Form other form of income for financial method of accounting for U.S. income
8886-X2, and with respect to each accounting purposes, or vice versa. For tax purposes. L's financial statements
reportable transaction reports the example, adjustments to interest for the year ending December 31 report
appropriate amounts required for Part II, income resulting from adjustments accounts receivable of $35,000, an
line 12, columns (a) through (d). made in accordance with the allowance for bad debts of $10,000, and
Alternatively, J's disclosures will be instructions for Part II, line 18, should be accounts payable of $17,000 related to
adequate if the description provided for made in columns (b) and (c) of this current year acquisition and
each loss on the supporting statement line 13. reorganization legal and accounting
includes the names and tax shelter fees. In addition, for L's year ending
registration numbers, if any, disclosed Complete Part II of Form 8916-A. December 31, L reported financial
on the applicable Form 8886, identifies Enter the amounts from line 6, columns statement depreciation expense of
the type of reportable transaction for the (a) through (d) of Form 8916-A, on $15,000 and depreciation for U.S.
loss, and reports the appropriate Schedule M-3, Part II, line 13, columns income tax purposes of $25,000. For L's
amounts required for Part II, line 12, (a) through (d), as applicable. Attach current tax year using an overall cash
columns (a) through (d). J must report Form 8916-A. method of accounting, L does not
the losses attributable to the other five recognize the $35,000 of revenue
abandonment losses on Part II, line 23e, Do not report on this line 13 or attributable to the accounts receivable,
regardless of whether a difference include on Form 8916-A amounts cannot deduct the $10,000 allowance
exists for any or all of those reported in accordance with the for bad debt, and cannot deduct the
abandonment losses. instructions for Part II, lines 9, 10, 11, $17,000 of accounts payable. In its
12, and 22.
Example 16. Corporation K is a financial statements, L treats both the
calendar year taxpayer that files and Note. Any corporation that files Form difference in overall accounting
entirely completes Schedule M-3 for its 1120 (or Form 1120-C) that (a) is methods used for financial statement
current tax year. K enters into a required to file Schedule M-3 (Form and U.S. income tax purposes and the
transaction with contractual protection 1120) and has less than $50 million in difference in depreciation expense as
that is a reportable transaction total assets at the end of the tax year, or temporary differences. L must combine
described in Regulations section (b) is not required to file Schedule M-3 all adjustments attributable to the
1.6011-4(b)(4). This reportable and voluntarily files Schedule M-3, is not differences related to the overall
transaction is the only reportable required to file Form 8916-A, but may accounting methods on Part II, line 14.
transaction for K's current tax year and voluntarily do so. As a result, L must report on Part II,
results in a $7 million capital loss for line 14, $8,000 in column (a) ($35,000 -
both financial accounting purposes and Line 14. Total Accrual to Cash $10,000 - $17,000), ($8,000) in column
U.S. income tax purposes. Although the Adjustment (b), and zero in column (d). L must not
transaction does not result in a This line is completed by a corporation report the accrual to cash adjustment
difference, K is required to report on that prepares financial statements (or attributable to the legal and accounting
Part II, line 12, the following amounts: books and records, if permitted) using fees on Part III, line 24, Current year
($7 million) in column (a), zero in an overall accrual method of accounting acquisition or reorganization legal and
columns (b) and (c), and ($7 million) in and uses an overall cash method of accounting fees. Because the difference
column (d). The transaction will be accounting for U.S. income tax in depreciation expense does not relate
adequately disclosed if K attaches a purposes, or vice versa. With the to the use of the cash or accrual method
supporting statement for line 12 that (a) exception of amounts required to be of accounting, L must report the
sequentially numbers the Form 8886 reported on Part II, line 12, the depreciation difference on Part III,
and refers to the sequentially numbered corporation must report on Part II, line 31, Depreciation, and report
Form 8886-X1, and (b) reports the line 14, a single amount net of all $15,000 in column (a), $10,000 in
applicable amounts required for line 12, adjustments attributable solely to the column (b), and $25,000 in column (d).
columns (a) through (d). Alternatively, use of the different overall methods of Line 15. Hedging Transactions
the transaction will be adequately accounting (for example, adjustments Report on line 15, column (a), the net
disclosed if the supporting statement for related to accounts receivable, gain or loss from hedging transactions
line 12 includes a description of the accounts payable, compensation, included on Part I, line 11. Report in
transaction; the name and tax shelter accrued liabilities, etc.), regardless of column (d) the amount of taxable
registration number, if any; and the type whether a separate line on income from hedging transactions as
of reportable transaction disclosed on Schedule M-3 corresponds to an item defined in section 1221(b)(2). Use
Form 8886. within the accrual to cash reconciliation. columns (b) and (c) to report all
Differences not attributable to the use of differences caused by treating hedging
Line 13. Interest Income the different overall methods of transactions differently for financial
Report on Part II, line 13, column (a), accounting must be reported on the accounting purposes and for U.S.
the total amount of interest income appropriate lines of Schedule M-3 (for income tax purposes. For example, if a
included on Part I, line 11, and report on example, a depreciation difference must portion of a hedge is considered
Part II, line 13, column (d), the total be reported on Part III, line 31). ineffective under GAAP but is still a valid
amount of interest income included on
Form 1120, page 1, line 28, that is not Example 17. Corporation L is a hedge under section 1221(b)(2), the
required to be reported elsewhere on calendar year taxpayer that files and difference must be reported on line 15.
entirely completes Schedule M-3 for its

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The hedge of a capital asset, which is     be reported elsewhere in Part II or Part    current tax year for the other five assets 
not a valid hedge for U.S. income tax      III.                                        is $40,000 for financial accounting 
purposes but may be considered a                                                       purposes and $30,000 for U.S. income 
hedge for GAAP purposes, must also be        Examples of amounts that must be          tax purposes. In addition, C incurs $200 
reported here.                             included as cost of goods sold items are    of meals expenses that C deducts in 
                                           amounts attributable to inventory           computing net income for financial 
Report hedging gains and losses            valuation, such as amounts attributable     accounting purposes. All $200 of the 
computed under the mark-to-market          to cost-flow assumptions, additional        meals expenses are subject to the 50% 
method of accounting on line 15 and not    costs required to be capitalized            limitation under section 274(n). In its 
on Part II, line 16.                       (including depreciation) such as section    financial statements, C treats the 
Report any gain or loss from               263A costs, inventory shrinkage             $50,000 depreciation and $100 of the 
inventory hedging transactions on          accruals, inventory obsolescence            meals as other costs in computing cost 
line 15 and not on Part II, line 17.       reserves, and lower of cost or market       of goods sold. C must include on Form 
                                           (LCM) write-downs.                          8916-A and on Schedule M-3, Part II, 
Line 16. Mark-to-Market Income                                                         line 17, column (a), the $50,000 of 
                                             Complete Part I of Form 8916-A. 
(Loss)                                     Enter the amounts from line 8, columns      depreciation and $100 of meals. C must 
Report on line 16 any amount               (a) through (d) of Form 8916-A, on          also include a temporary difference of 
representing the mark-to-market income     Schedule M-3, Part II, line 17, columns     $20,000 in column (b), a permanent 
or loss for any securities held by a       (a) through (d), as applicable. Attach      difference of ($50) in column (c), and 
dealer in securities, a dealer in          Form 8916-A, if applicable.                 $70,050 in column (d) ($70,000 
commodities having made a valid                                                        depreciation and $50 meals expenses). 
election under section 475(e), or a        Note. The entries in columns (a) and        In addition, C must report on Part III, 
trader in securities or commodities        (d) of Schedule M-3, line 17, are           line 31, for its current tax year income 
having made a valid election under         negative amounts.                           statement, depreciation expense of 
section 475(f). “Securities” for these                                                 $40,000 in column (a), a temporary 
purposes are securities described in         Do not report on line 17 or on Form       difference of ($10,000) in column (b), 
section 475(c)(2) and commodities          8916-A amounts such as:                     and $30,000 in column (d); and on Part 
described in section 475(e)(2).            • Amounts reportable on Part II, line 12;   III, line 11, meals expenses of $100 in 
“Securities” do not include any items      • Any gain or loss from inventory           column (a), a permanent difference of 
specifically excluded from sections        hedging transactions reportable on Part     ($50) in column (c), and $50 in column 
475(c)(2) and 475(e)(2), such as certain   II, line 15;                                (d). All other cost of goods sold items 
contracts to which section 1256(a)         • Amounts reportable on Part II, line 18;   would be added to the amounts 
applies.                                   • Amounts reportable on Part II, line 21;   included on Part II, line 17, detailed in 
                                           • Mark-to-market income or (loss)           this example and reported on Form 
Report hedging gains and losses            associated with the inventories of          8916-A and on Part II, line 17, in the 
computed under the mark-to-market          dealers in securities under section 475,    appropriate columns.
method of accounting on Part II, line 15,  reportable on Part II, line 16;
and not on line 16.                        • Section 481(a) adjustments related to     Line 18. Sale Versus Lease (for 
Traders in securities and commodi-         cost of goods sold or inventory             Sellers and/or Lessors)
ties. For a trader in securities or        valuation, reportable on Part II, line 19;
commodities that made a valid election     • Fines and penalties reportable on         Note. Also see the instructions for 
under section 475(f) to use the            Part III, line 12;                          purchasers and lessees in Part III, 
mark-to-market method to account for       • Judgments, damages, awards, and           line 34.
securities or commodities held in          similar costs, reportable on Part III,      Asset transfer transactions with 
connection with a trading business that    line 13; and                                periodic payments characterized for 
files Form 4797, any Schedule M-3          • Amounts included on Part III, line 34.    financial accounting purposes as either 
entries required as a result of marking to                                             a sale or a lease may, under some 
                                           Note. Any corporation that files Form 
market these securities or commodities                                                 circumstances, be characterized as the 
                                           1120 (or Form 1120-C) that (a) is 
are reported as follows: (a)                                                           opposite for tax purposes. If the 
                                           required to file Schedule M-3 (Form 
mark-to-market gains and losses from                                                   transaction is treated as a lease, the 
                                           1120) and has less than $50 million in 
Form 4797, line 10, are included on Part                                               seller/lessor reports the periodic 
                                           total assets at the end of the tax year, or 
II, line 16, of Schedule M-3 (Form 1120);                                              payments as gross rental income and 
                                           (b) is not required to file Schedule M-3 
(b) any other Schedule M-3 entries                                                     also reports depreciation expense. If the 
                                           and voluntarily files Schedule M-3, is not 
required based on other results                                                        transaction is treated as a sale, the 
                                           required to file Form 8916-A, but may 
(non-mark-to-market gains and losses)                                                  seller/lessor computes gain from the 
                                           voluntarily do so.
included in the total reported on Form                                                 sale of assets and reports the periodic 
4797, line 17, should be reported on         Example 18.      Corporation C is a       payments as payments of principal and 
Part II, line 23d, of Schedule M-3 (Form   calendar year taxpayer that placed in       interest income.
1120), unless the instructions for         service 10 depreciable fixed assets in a 
Schedule M-3 require the amounts to be     prior tax year. C is required to file and   On Part II, line 18, column (a), report 
reported on another line.                  entirely complete Schedule M-3 for its      the gross profit or gross rental income 
                                           current tax year. C's total depreciation    for financial accounting purposes for all 
Line 17. Cost of Goods Sold                expense for its current tax year for five   sale or lease transactions that must be 
Report on line 17 any amounts              of the assets is $50,000 for financial      given the opposite characterization for 
deducted as part of cost of goods sold     accounting purposes and $70,000 for         U.S. income tax purposes. On Part II, 
during the tax year, regardless of         U.S. income tax purposes. C's total         line 18, column (d), report the gross 
whether the amounts would otherwise        annual depreciation expense for its         profit or gross rental income for federal 

Instructions for Schedule M-3 (Form 1120)                     -19-

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income tax purposes. Interest income separate line for that income or expense issue discount and other imputed
amounts for such transactions must be item exists in Part II or Part III. interest” includes, but is not limited to:
reported on Part II, line 13, in column (a) Example 20. Corporation N is a 1. The excess of a debt instrument's
or (d), as applicable. Depreciation calendar year taxpayer that files and stated redemption price at maturity over
expense for such transactions must be entirely completes Schedule M-3 for its its issue price, as determined under
reported on Part III, line 31, in column current tax year. N was depreciating section 1273;
(a) or (d), as applicable. Use columns certain fixed assets over an erroneous 2. Amounts that are imputed interest
(b) and (c) of Part II, lines 13 and 18, recovery period and, effective for its on a deferred sales contract under
and Part III, line 31, as applicable to current tax year, N receives IRS consent section 483;
report the differences between columns to change its method of accounting for
3. Amounts treated as interest or
(a) and (d). the depreciable fixed assets and begins
OID under the stripped bond rules under
Example 19. Corporation M sells using the proper recovery period. The
section 1286; and
and leases property to customers. M is change in method of accounting results
a calendar year taxpayer that files and in a positive section 481(a) adjustment 4. Amounts treated as OID under
entirely completes Schedule M-3. For of $100,000 that is required to be the below-market interest rate rules
financial accounting purposes, M spread over 4 tax years, beginning with under section 7872.
accounts for each transaction as a sale. the current tax year. In its financial
Line 23a. Income Statement
For U.S. income tax purposes, each of statements, N treats the section 481(a)
M's transactions must be treated as a adjustment as a temporary difference. N Gain/Loss on Sale, Exchange,
lease. In its financial statements, M must report on Part II, line 19, $25,000 Abandonment, Worthlessness,
treats the difference in the financial in columns (b) and (d) for its current tax or Other Disposition of Assets
accounting and the U.S. income tax year and each of the subsequent 3 tax Other Than Inventory and
treatment of these transactions as years (unless N is otherwise required to
temporary. During its current tax year, M recognize the remainder of the section Pass-Through Entities
reports in its financial statements $1,000 481(a) adjustment earlier). N must not Report on line 23a, column (a), all gains
of sales and $700 of cost of goods sold report the section 481(a) adjustment on and losses on the disposition of assets
with respect to its current year lease Part III, line 31. except for (1) gains and losses on the
transactions. M receives periodic disposition of inventory, and (2) gains
payments of $500 in its current year with Line 20. Unearned/Deferred and losses allocated to the corporation
respect to these current year Revenue from a pass-through entity (for example,
transactions and similar transactions Report on line 20, column (a), amounts on Schedule K-1) that are included in
from prior years and treats $400 as of revenues included in Part I, line 11, the net income (loss) of includible
principal and $100 as interest income. that were deferred from a prior financial corporations reported on Part I, line 11.
For financial accounting purposes, M accounting year. Report on line 20, Reverse the amount reported in column
reports gross profit of $300 ($1,000 - column (d), amounts of revenues (a) in column (b) or (c), as applicable.
$700) and interest income of $100 from recognizable for U.S. income tax The corresponding gains and losses for
these transactions. For U.S. income tax purposes in the current tax year that are U.S. income tax purposes are reported
purposes, M reports $500 of gross recognized for financial accounting on Part II, lines 23b through 23g, as
rental income (the periodic payments) purposes in a different year. Also, report applicable.
and (based on other facts) $200 of on line 20, column (d), any amount of Line 23b. Gross Capital Gains
depreciation deduction on the property. revenues reported on line 20, column
On its current year Schedule M-3, M (a), that are recognizable for U.S. From Schedule D, Excluding
must report on Part II, line 13, $100 in income tax purposes in the current tax Amounts From Pass-Through
column (a), ($100) in column (b), and year. Use columns (b) and (c) of line 20, Entities
zero in column (d). In addition, M must as applicable, to report the differences Report on line 23b gross capital gains
report on Part II, line 18, $300 of gross between columns (a) and (d). reported on Schedule D (Form 1120),
profit in column (a), $200 in column (b), Capital Gains and Losses, excluding
and $500 of gross rental income in Line 20 must not be used to report
column (d). Lastly, M must report on income recognized from long-term capital gains from pass-through entities,
Part III, line 31, $200 in columns (b) and contracts. Instead, use line 21. which must be reported on Part II, line 9,
10, or 11, as applicable.
(d). Line 21. Income Recognition
Line 23c. Gross Capital Losses
Line 19. Section 481(a) From Long-Term Contracts
From Schedule D, Excluding
Adjustments A deduction for income attributable to
With the exception of a section 481(a) domestic production activities is Amounts From Pass-Through
adjustment that is required to be available for specified agricultural or Entities, Abandonment Losses,
reported on Part II, line 12, for horticultural cooperatives (specified and Worthless Stock Losses
reportable transactions, any difference cooperatives). See section 199A(g). Report on line 23c gross capital losses
between an income or expense item Also, see the Instructions for Form reported on Schedule D (Form 1120),
attributable to an authorized (or 8903. excluding capital losses from (a)
unauthorized) change in method of Line 22. Original Issue Discount pass-through entities, which must be
reported on Part II, line 9, 10, or 11, as
accounting made for U.S. income tax and Other Imputed Interest applicable; (b) abandonment losses,
purposes that results in a section 481(a)
adjustment must be reported on Part II, Report on line 22 any amounts of which must be reported on Part II,
line 19, regardless of whether a original issue discount (OID) and other line 23e; and (c) worthless stock losses,
imputed interest. The term “original which must be reported on Part II,

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line 23f. Do not report on line 23c capital group, the Schedule M-3 adjustment for Accounting Standards (SFAS) No. 130,
losses carried over from a prior tax year the amount of the consolidated net is reported on this line, describe the
and utilized in the current tax year. See capital loss that is disallowed should not item(s) in detail. Examples of sufficiently
the instructions for Part II, line 24, be made on the separate consolidating detailed descriptions include “foreign
regarding the reporting requirements for Schedules M-3 of the includible currency translation
capital loss carryovers utilized in the corporations, but on the separate adjustments—comprehensive income”
current tax year. Schedule M-3 for consolidated and “gains and losses on
eliminations (or on Form 8916 in the available-for-sale
Line 23d. Net Gain/Loss case of a mixed group) as described securities—comprehensive income.”
Reported on Form 4797, under Completing Schedule M-3 and
Line 17, Excluding Amounts Certain Allocations, Limitations, and Whether an item of income (loss) is
From Pass-Through Entities, Carryovers, earlier. reported on line 25, or is reported on
Part II, line 28, is determined separately
Abandonment Losses, and If the corporation utilizes a capital by each member of the U.S.
Worthless Stock Losses loss carryforward on Schedule D in the consolidated tax group and not at the
Report on line 23d the net gain or loss current tax year, report the carryforward U.S. consolidated tax group level.
reported on line 17 of Form 4797, Sales utilized as a negative amount on Part II,
of Business Property, excluding line 24, column (b) or (c), as applicable, Line 26. Total Income (Loss)
amounts from (a) pass-through entities, and column (d). For a U.S. consolidated Items
which must be reported on Part II, line 9, tax group, the Schedule M-3 adjustment Combine lines 1 through 25 and enter
10, or 11, as applicable; (b) for the amount of the consolidated the total on line 26.
abandonment losses, which must be capital loss carryforward should not be
reported on Part II, line 23e; and (c) made on the separate consolidating Note. Line 17, Cost of goods sold,
worthless stock losses, which must be Schedules M-3 of the includible columns (a) and (d), if applicable, are
reported on Part II, line 23f. corporations, but on the separate negative amounts which will affect the
Schedule M-3 for consolidation totals entered on line 26.
Note. Traders in securities or eliminations (or on Form 8916 in the
Line 27. Total Expense/
commodities that have made a valid case of a mixed group) as described
election under section 475(f) to use the under Completing Schedule M-3 and Deduction Items
mark-to-market method to account for Certain Allocations, Limitations, and Report on Part II, line 27, columns (a)
securities or commodities, see the Carryovers, earlier. through (d), as applicable, the negative
of the amounts reported on Part III,
instructions for Part II, line 16, earlier. Line 25. Other Income (Loss) line 39, columns (a) through (d), as
Line 23e. Abandonment Losses Items With Differences applicable. Report positive amounts as
Report on line 23e any abandonment Separately state and adequately negative and negative amounts as
losses, regardless of whether the loss is disclose on Part II, line 25, all items of positive. For example, if Part III, line 39,
characterized as an ordinary loss or a income (loss) with differences that are column (a), reflects an amount of $1
capital loss. not otherwise listed on Part II, lines 1 million, then report on Part II, line 27,
through 24. Attach a statement that column (a), ($1 million). Similarly, if Part
Line 23f. Worthless Stock itemizes the type of income (loss) and III, line 39, column (b), reflects an
Losses the amount of each item and provides a amount of ($50,000), then report on Part
Report on line 23f any worthless stock description that states the income (loss) II, line 27, column (b), $50,000.
loss, regardless of whether the loss is name for book purposes for the amount
Line 28. Other Items With No
characterized as an ordinary loss or a recorded in column (a) and describes
capital loss. Attach a statement that the adjustment being recorded in Differences
separately states and adequately column (b) or (c). The entire description If there is no difference between the
discloses each event that gives rise to a completes the tax description for the financial accounting amount and the
worthless stock loss and the amount of amount included in column (d) for each taxable amount of an entire item of
each loss. item separately stated on this line. income, gain, loss, expense, or
deduction and the item is not described
Line 23g. Other Gain/Loss on The attached statement should have or included in Part II, lines 1 through 25,
Disposition of Assets Other five columns. The first column has the or Part III, lines 1 through 38, report the
description for the next four columns.
Than Inventory entire amount of the item in columns (a)
The second column is column (a) and (d) of line 28. If a portion of an item
Report on line 23g any gains or losses income (loss) per income statement, the of income, loss, expense, or deduction
from the sale or exchange of property third column is column (b) temporary has a difference and a portion of the
other than inventory that are not difference, the fourth column is column item does not have a difference, do not
reported on lines 23b through 23f. (c) permanent difference, and the fifth report any portion of the item on line 28.
Line 24. Capital Loss Limitation column is column (d) income (loss) per Instead, report the entire amount of the
tax return. Every item listed on the item (that is, both the portion with a
and Carryforward Used attached statement for line 25 must difference and the portion without a
Report as a positive amount on line 24, always have columns (a) + (b) + (c) = difference) on the applicable line of Part
column (b) or (c), as applicable, and (d) (d). Each item with amounts in columns II, lines 1 through 25, or Part III, lines 1
the excess of the net capital losses over (a), (b), (c), and (d) will be totaled and through 38. See Example 11, earlier.
the net capital gains reported on included as one line on Part II, line 25.
Schedule D (Form 1120) by the
corporation. For a U.S. consolidated tax If any “comprehensive income,” as
defined by Statement of Financial

Instructions for Schedule M-3 (Form 1120) -21-

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Line 29a. 1120 Subgroup financial statements (or its books and columns (a) through (d), as applicable.
Reconciliation Totals records, if applicable). If the current and Attach Form 8916-A.
deferred U.S., state, and foreign income
For filers other than a mixed group, tax expense for the U.S. consolidated Do not report on Form 8916-A and
combine lines 26 through 28 and skip tax group (income tax expense) is this line 8 amounts reported in
lines 29b and 29c. On the allocated among the members of the accordance with the instructions for Part
sub-consolidated Schedule M-3 for a U.S. consolidated tax group in the II, lines 9, 10, 11, and 12.
mixed group, combine lines 26 through group's financial statements (or its Note. Any corporation that files Form
28 and skip lines 29b and 29c. For the books and records, if applicable), then 1120 (or Form 1120-C) that (a) is
consolidated Schedule M-3 of a mixed each member must report its allocated required to file Schedule M-3 (Form
group, complete only lines 29a through income tax expense on Part III, lines 1 1120) and has less than $50 million in
29c and line 30 of Part II. No Part III is through 6, of that member's separate total assets at the end of the tax year, or
required to be completed for the Schedule M-3. However, if the income (b) is not required to file Schedule M-3
consolidated Schedule M-3 of a mixed tax expense is not shared or allocated and voluntarily files Schedule M-3, is not
group. among members of the U.S. required to file Form 8916-A, but may
Line 29b. PC Insurance consolidated tax group but is retained in voluntarily do so.
Subgroup Reconciliation Totals the parent corporation's financial
statements (or books and records, if Line 9. Stock Option Expense
Line 29b is only used by mixed groups. applicable), then amounts are reported Report on line 9, column (a), amounts
See Schedule M-3 Consolidation for only on Part III, lines 1 through 6, of the expensed on Part I, line 11, net income
Mixed Groups (1120/L/PC), earlier. parent's separate Schedule M-3. per the income statement, that are
Line 29c. Life Insurance Line 7. Foreign Withholding attributable to all stock options. Report
on line 9, column (d), deduction
Subgroup Reconciliation Totals Taxes amounts attributable to all stock options.
Line 29c is only used by mixed groups. Report on line 7, column (a), the amount
See Schedule M-3 Consolidation for of foreign withholding taxes included in Line 10. Other Equity-Based
Mixed Groups (1120/L/PC), earlier. financial accounting net income on Part Compensation
Line 30. Reconciliation Totals I, line 11. If the corporation is deducting Report on line 10 any amounts for
foreign tax, use column (b) or (c), as
Mixed groups, see Schedule M-3 equity-based compensation or
applicable, to correct for any difference
Consolidation for Mixed Groups consideration that are reflected as
between foreign withholding tax
(1120/L/PC), earlier. expense for financial accounting
included in financial accounting net purposes (column (a)) or deducted in
income and the amount of foreign the U.S. income tax return (column (d))
Part III. Reconciliation of withholding taxes being deducted on other than amounts reportable
the return. If the corporation is crediting elsewhere on Schedule M-3, Parts II
Net Income (Loss) per foreign withholding taxes against the and III (for example, on Part III, line 9,
Income Statement of U.S. income tax liability, use column (b) for stock options expense). Examples of
Includible Corporations or (c), as applicable, to negate the amounts reportable on line 10 include
amount reported in column (a).
With Taxable Income per payments attributable to employee
Return—Expense/ Line 8. Interest Expense stock purchase plans (ESPPs),
phantom stock options, phantom stock
Deduction Items Report on Part III, line 8, column (a), the units, stock warrants, stock appreciation
Note. Expense amounts that reduce total amount of interest expense rights, qualified equity grants, and
financial accounting income must be included on Part I, line 11, and report on restricted stock, regardless of whether
reported on Part III, column (a), as Part III, line 8, column (d), the total such payments are made to employees
positive amounts. Deduction amounts amount of interest deduction included or nonemployees, or as payment for
that reduce taxable income must be on Form 1120, page 1, line 28, that is property or compensation for services.
reported on Part III, column (d), as not required to be reported elsewhere
positive amounts. Amounts reported on on Schedule M-3. In column (b) or (c), Line 11. Meals and
Part II, line 27, must be the negative of as applicable, include any adjustments Entertainment
the amounts reported on Part III, line 39. for any amounts treated for U.S. income Report on line 11, column (a), any
tax purposes as interest deduction that amounts paid or accrued by the
Lines 1 Through 6. Income Tax are treated as some other form of corporation during the tax year for
Expense expense for financial accounting meals, beverages, and entertainment
If the corporation does not distinguish purposes, or vice versa. For example, that are accounted for in financial
between current and deferred income adjustments to interest expense/ accounting income, regardless of the
tax expense in its financial statements deduction resulting from adjustments classification, nomenclature, or
(or its books and records, if applicable), made in accordance with the terminology used for such amounts, and
report income tax expense as current instructions for Part III, line 34, Purchase regardless of how or where such
income tax expense using lines 1, 3, versus lease (for purchasers and/or amounts are classified in the
and 5, as applicable. lessees), should be made in columns corporation's financial income statement
(b) and (c), as applicable, on this line 8.
A U.S. consolidated tax group must or the income and expense accounts
complete lines 1 through 6 in Complete Part III of Form 8916-A. maintained in the corporation's books
accordance with the allocation of tax Enter the amounts from Form 8916-A, and records. Report only amounts not
expense among the members of the Part III, line 5, columns (a) through (d), otherwise reportable elsewhere on
U.S. consolidated tax group in the on Schedule M-3, Part III, line 8,

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Schedule M-3, Parts II and III (for          in taxable income, regardless of the         and life insurance coverage, dental 
example, Part II, line 17).                  financial accounting period in which         coverage, etc.).
                                             such amounts were or are included in 
Line 12. Fines and Penalties                 financial accounting net income.             Line 18. Deferred 
Report on line 12 any fines or similar       Complete columns (b) and (c) as              Compensation
penalties paid to a government or other      appropriate.                                 Report on line 18, column (a), any 
authority for the violation of any law for                                                compensation expense included in the 
which fines or penalties are assessed.       Do not report on line 13 amounts             net income (loss) amount reported in 
All fines and penalties expensed in          required to be reported in accordance        Part I, line 11, that is not deductible for 
financial accounting income (paid or         with the instructions for Part III, line 12. U.S. income tax purposes in the current 
accrued) must be included on this                                                         tax year and that was not reported 
line 12, column (a), regardless of the       Do not report on line 13 amounts             elsewhere on Schedule M-3, in column 
government or other authority that           recovered from insurers or any other         (a). Report on line 18, column (d), any 
imposed the fines or penalties;              indemnitors for any judgments,               compensation deductible in the current 
regardless of whether the fines and          damages, awards, or similar costs            tax year that was not included in the net 
penalties are civil or criminal; regardless  described above.                             income (loss) amount reported in Part I, 
of the classification, nomenclature, or      Line 14. Parachute Payments                  line 11, for the current tax year and that 
terminology used for the fines or                                                         is not reportable elsewhere on 
penalties by the imposing authority in its   Report on line 14, column (a), the total 
actions or documents; and regardless of      expense included in financial                Schedule M-3. For example, report 
                                                                                          originations and reversals of deferred 
how or where the fines or penalties are      accounting net income on Part I, line 11, 
                                                                                          compensation subject to section 409A 
classified in the corporation's financial    that is subject to section 280G. Report 
                                                                                          on line 18.
income statement or the income and           in column (b) or (c), as applicable, the 
expense accounts maintained in the           amount of nondeductible parachute            Line 20. Charitable 
corporation's books and records. Also        payments pursuant to section 280G,           Contribution of Intangible 
report on line 12, column (a), the           and report in column (d) the deductible 
reversal of any overaccrual of any           amount of compensation after any             Property
amount described in this paragraph.          excess parachute payment limitations         Report on line 20 any charitable 
See section 162(f) for additional            under section 280G. If a payment is          contribution of intangible property, for 
guidance.                                    subject to limitation under both sections    example, contributions of:
                                             162(m) and 280G, report the total            • Intellectual property, patents 
Report on line 12, column (d), any           payment on this line 14.                     (including any amounts of additional 
such amounts as described in the                                                          contributions allowable by virtue of 
preceding paragraph that are includible      Line 15. Compensation With                   income earned by donees subsequent 
in taxable income, regardless of the         Section 162(m) Limitation                    to the year of donation), copyrights, and 
financial accounting period in which         Report on line 15, column (a), the total     trademarks;
such amounts were or are included in         amount of current compensation               • Securities (including stocks and their 
financial accounting net income.             expense for the corporate officers to        derivatives, stock options, and bonds);
Complete columns (b) and (c) as              whom section 162(m) applies. Report in       • Conservation easements (including 
appropriate.                                 column (b) or (c), as applicable, the        scenic easements or air rights);
Do not report on line 12 amounts             nondeductible amount of current              • Railroad rights of way;
required to be reported in accordance        compensation in excess of $1 million         • Mineral rights; and
with the instructions for Part III, line 13. ($500,000 if the corporation receives or     • Other intangible property.
                                             has received financial assistance under      Line 21. Charitable 
Do not report on line 12 amounts             the Treasury Troubled Asset Relief 
recovered from insurers or any other         Program (TARP)). Report the deductible       Contribution Limitation/
indemnitors for any fines and penalties      compensation in column (d). If a             Carryforward
described above.                             payment is subject to limitation under       Report as a negative amount on line 21, 
Line 13. Judgments, Damages,                 both sections 162(m) and 280G, report        columns (b), (c), and (d), as applicable, 
                                             the total payment on Part III, line 14,      the excess of charitable contributions 
Awards, and Similar Costs
                                             Parachute payments. See Regulations          made during the tax year over the 
Report on line 13, column (a), the           section 1.162-27(g) for the interaction      amount of the charitable contribution 
amount of any estimated or actual            between sections 162(m) and 280G.            limitation amount.
judgments, damages, awards, 
settlements, and similar costs, however      Line 16. Pension and                           If the corporation utilizes a 
named or classified, included in             Profit-Sharing                               contribution carryforward in the current 
financial accounting income, regardless      Report on line 16 any amounts                tax year, report the carryforward utilized 
of whether the amount deducted was           attributable to the corporation's pension    as a positive amount in columns (b), (c), 
attributable to an estimate of future        plans, profit-sharing plans, and any         and (d), as applicable.
anticipated payments or actual               other retirement plans.                        When a consolidated income tax 
payments. Also report on line 13, 
column (a), the reversal of any              Line 17. Other Post-Retirement               return is being filed, Schedule M-3 
                                                                                          adjustments for the amount of charitable 
overaccrual of any amount described in       Benefits                                     contributions in excess of the limitation, 
this paragraph.                              Report on line 17 any amounts                or for charitable contribution 
Report on line 13, column (d), any           attributable to other post-retirement        carryforward utilized, should not be 
such amounts as are described in the         benefits not otherwise includible on Part    made on the separate consolidating 
preceding paragraph that are includible      III, line 16 (for example, retiree health    Schedules M-3 of the includible 

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corporations, but on the separate legal and accounting fees incurred in actual write-offs of accounts receivable
consolidating Schedule M-3 for connection with the liquidation of a included on Part I, line 11. Report in
consolidation eliminations (or on Form subsidiary, a spin-off of a subsidiary, or column (d) the amount of bad debt
8916 in the case of a mixed group). See an initial public stock offering. expense deductible for federal income
Completing Schedule M-3 and Certain tax purposes under section 166.
Allocations, Limitations, and Carryovers, Line 25. Current Year
earlier. Acquisition/Reorganization Line 33. Corporate Owned Life
Other Costs Insurance Premiums
Line 22. Domestic Production Report on line 33 all amounts of
Report on line 25 any other fees paid or
Activities Deduction incurred in connection with a taxable or insurance premiums attributable to any
A deduction for income attributable to tax-free acquisition of property (for life insurance policy if the corporation is
domestic production activities is example, stock or assets) or a tax-free directly or indirectly a beneficiary under
available for specified agricultural or reorganization not otherwise reportable the policy or if the policy has a cash
horticultural cooperatives (specified on Schedule M-3 (for example, Part III, value. Report in column (d) the amount
cooperatives). See section 199A(g). line 23 or 24). Report on this line any of the premiums that are deductible for
Also, see the Instructions for Form fees paid or incurred at any stage of the federal income tax purposes.
8903. acquisition or reorganization process Line 34. Purchase Versus
Report on line 22, column (d), the including, for example, fees paid or
cooperative's section 199A(g) incurred to evaluate whether to Lease (for Purchasers and/or
deduction that is reported on Form investigate an acquisition, fees to Lessees)
1120-C. Complete columns (b) and (c) conduct an actual investigation, and
as appropriate. Do not report any fees to consummate the acquisition. Note. Also see the instructions for
portion of the cooperative’s section Also include on this line other sellers and/or lessors in the instructions
199A(g) deduction on any other line of acquisition/reorganization costs for Part II, line 18.
Schedule M-3. incurred in connection with the Asset transfer transactions with
liquidation of a subsidiary, a spin-off of a periodic payments characterized for
Line 23. Current Year subsidiary, or an initial public stock financial accounting purposes as either
Acquisition or Reorganization offering. a purchase or a lease may, under some
circumstances, be characterized as the
Investment Banking Fees Line 26. Amortization/ opposite for tax purposes.
Report on line 23 any investment Impairment of Goodwill
If a transaction is treated as a lease,
banking fees paid or incurred in Report on line 26 amortization of
the purchaser/lessee reports the
connection with a taxable or tax-free goodwill or amounts attributable to the
periodic payments as gross rental
acquisition of property (for example, impairment of goodwill.
stock or assets) or a tax-free expense. If the transaction is treated as
reorganization. Report on this line any Line 27. Amortization of a purchase, the purchaser/lessee
investment banking fees incurred at any Acquisition, Reorganization, reports the periodic payments as
stage of the acquisition or payments of principal and interest and
and Start-Up Costs
reorganization process including, for also reports depreciation expense or
example, fees paid or incurred to Report on line 27 amortization of deduction with respect to the purchased
evaluate whether to investigate an acquisition, reorganization, and start-up asset.
acquisition, fees to conduct an actual costs. For purposes of columns (b), (c),
investigation, and fees to consummate and (d), include amounts amortizable Report in column (a) gross rent
the acquisition. Also include on this line under section 167, 195, or 248. expense for a transaction treated as a
lease for financial accounting purposes
investment banking fees incurred in Line 28. Other Amortization or but as a sale for U.S. income tax
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or Impairment Write-Offs purposes. Report in column (d) gross
an initial public stock offering. Report on line 28 any amortization or rental deductions for a transaction
impairment write-offs not otherwise treated as a lease for U.S. income tax
Line 24. Current Year includible on Schedule M-3. purposes but as a purchase for financial
Acquisition or Reorganization accounting purposes. Report interest
Line 29. Reserved expense for such transactions on Part
Legal and Accounting Fees
When using this line to figure amounts III, line 8, column (a) or (d), as
Report on line 24 any legal and on other tax forms or worksheets, this applicable. Report depreciation
accounting fees paid or incurred in line should be considered to be zero. expense or deductions for such
connection with a taxable or tax-free transactions on Part III, line 31, column
acquisition of property (for example, Line 31. Depreciation (a) or (d), as applicable. Use columns
stock or assets) or tax-free Report on line 31 any depreciation (b) and (c) of Part III, lines 8, 31, and 34,
reorganization. Report on this line any expense that is not required to be as applicable, to report the differences
legal and accounting fees incurred at reported elsewhere on Schedule M-3 between columns (a) and (d) for such
any stage of the acquisition or (for example, on Part II, line 9, 10, 11, or recharacterized transactions.
reorganization process including, for 17). Example 21. U.S. corporation X
example, fees paid or incurred to
evaluate whether to investigate an Line 32. Bad Debt Expense acquired property in a transaction that,
acquisition, fees to conduct an actual Report on line 32, column (a), any for financial accounting purposes, X
investigation, and fees to consummate amounts attributable to an allowance for treats as a lease. X is a calendar year
the acquisition. Also include on this line uncollectible accounts receivable or taxpayer that files and entirely
completes Schedule M-3 for its current

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tax year. Because of its terms, the attributable to obtaining a patent, and research and experimental
transaction is treated for U.S. income (5) research in social sciences. expenditures for U.S. income tax
tax purposes as a purchase and X must purposes. Because payments made to
treat the periodic payments it makes For tax years beginning after acquire rights to a product or technology
partially as payment of principal and December 31, 2021, for U.S. income tax are excluded costs from the definition of
partially as payment of interest. In its purposes, research and experimental research and experimental
financial statements, X treats the expenditures paid or incurred by a expenditures, X must report $75,000 in
difference between the financial taxpayer in connection with the column (a), ($75,000) in column (c), and
accounting and U.S. income tax taxpayer's trade or business must be $0 in column (d). X must report any
treatment of this transaction as a amortized. The expenditures must be amortization otherwise allowable related
temporary difference. For its current tax amortized ratably over the 5-year period to the payments on Part III, line 28,
year, X reports in its financial (15-year period for specified Other amortization or impairment
statements $1,000 of gross rental expenditures attributable to foreign write-offs.
expense that, for U.S. income tax research), beginning with the midpoint
purposes, is recharacterized as a $700 of the tax year in which the expenses Line 36. Section 118 Exclusion
payment of principal and a $300 are paid or incurred. See section 174. If Report on line 36 any inducements
payment of interest, accompanied by a properly adopted or elected under received in the current year and treated
depreciation deduction of $1,200 section 174(b) and section 174(f) prior as contributions to the capital of a
(based on other facts). On its to amendment by P.L. 115-97 and corporation by a nonshareholder.
Schedule M-3, X must report the section 59(e), any amortization Report in column (a) any income
following on Part III, line 34: column (a) otherwise allowable related to such amount as a negative number and any
$1,000, its financial accounting gross costs is reported in column (b). expense amount as a positive number.
rental expense; column (b), ($1,000); Example 22. Corporation X is a Under the general rule, any
and column (d), zero. On Part III, line 8, calendar year taxpayer that files and contribution in aid of construction or any
X reports zero in column (a) and $300 in entirely completes Schedule M-3 for its contribution by a governmental entity to
columns (b) and (d) for the interest current tax year. During its current tax the capital of a corporation is not eligible
deduction. On Part III, line 31, X reports year, X incurred $100,000 of research for exclusion from income under section
zero in column (a) and $1,200 in and development costs that X 118. The following nonshareholder
columns (b) and (d) for the depreciation recognized as an expense in its contributions to capital are not eligible
deduction. financial statements. In compliance with for exclusion under section 118.
section 174, X amortizes research and • Any contribution in aid of construction
Line 35. Research and experimental expenditures for U.S. or any other contribution as a customer
Development Costs income tax purposes. Accordingly, X or potential customer.
Report in column (a) the amount of must report $100,000 in column (a), • Any contribution by any civic group.
research and development ($90,000) in column (b), and $10,000 • Any contribution by any governmental
expenditures reported as a deduction in (($100,000/5 years) x 1/2) in column (d). entity, except any contribution made
your financial statements (or its books Example 23. Corporation X is a after December 22, 2017, and made
and records, if applicable), on Part I, calendar year taxpayer that files and pursuant to a master development plan
line 11. Report in column (d) the amount entirely completes Schedule M-3 for its that was approved prior to December
of amortization deductions of specified current tax year. During its current tax 22, 2017, by a governmental entity.
research or experimental expenditures year, X incurred $10,000 of research Corporations must identify on an
and research or experimental and development costs related to social accompanying statement referencing
expenditures included on Form 4562, sciences that it recognized as an line 36 the fair market value of land or
Part VI, line 44, and in total deductions expense in its financial statements. X other property (including cash) provided
on Form 1120, page 1, line 27. In amortizes research and experimental to the corporation by any
column (c), as applicable, include any expenditures for U.S. income tax nonshareholder, including a
adjustments for any amounts treated for purposes. Because such costs are not governmental unit, as an inducement, or
U.S. income tax purposes as research allowable costs under section 174, X for any other purpose. Include
or experimental expenditures that are must report $10,000 in column (a), inducements for the corporation to
treated as some other form of expense permanent difference ($10,000) in locate its business in a particular state,
for financial accounting purposes, or column (c), and $0 in column (d). If such municipality, community, or locality for
vice versa. Report any difference in costs are otherwise deductible for U.S. the purpose of enabling the corporation
timing recognition in column (b). For income tax purposes, X must report this to expand its existing operating
example, if the taxpayer's financial item of expense on Part III, line 38, facilities, including corporate
accounting method does not specify Other expense/deduction items with headquarters, distribution center(s), or
otherwise, column (b) adjustments differences. factory(ies) (“inducements”).
include adjustments for timing
differences between financial and tax Example 24. Corporation X is a
On the accompanying statement,
accounting for (1) deferral and calendar year taxpayer that files and
also identify any inducements that
amortization of research expenditures entirely completes Schedule M-3 for its
include refundable or transferable tax
that began in your 2022 tax year, (2) a current tax year. During its current tax
credits, including transferable credits
section 59(e) election that began before year, X paid $75,000 to acquire or
that were sold.
your 2022 tax year, (3) reduction of in-license intangible assets under a
section 174 expenditures under section collaborative arrangement with another The statement must separately state,
280C or section 482, (4) costs company that X recognized as a adequately disclose, and identify all of
research and development expense in the dollar amounts summarized by this
its financial statements. X amortizes line. An accompanying statement is

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required even if there are no dollar the expense/deduction name for book Reserves and contingent liabilities.
amounts reported on line 36. purposes for the amount recorded in Report on line 38 amounts related to the
column (a) and describes the
Contributions in aid of construction change in each reserve or contingent
adjustment being recorded in column
for regulated water and sewerage liability that is not required to be
(b) or (c). The entire description
disposal utility companies. Under a reported elsewhere on Schedule M-3.
completes the tax description for the
special rule, any amount of money or For example, (1) amounts relating to
amount included in column (d) for each
property received after December 31, changes in reserves for litigation must
item separately stated on this line.
2020, as a contribution in aid of be reported on Part III, line 13,
construction or a contribution to the The statement attached to the Judgments, damages, awards, and
capital of a regulated public utility which Schedule M-3 for line 38 must similar costs; and (2) amounts relating
provides water or sewerage disposal separately state and adequately to changes in reserves for uncollectible
services is eligible for exclusion from disclose the nature and amount of the accounts receivable must be reported
income under section 118. Include expense related to each reserve and/or on Part III, line 32, Bad debt expense.
amounts treated as contribution in aid of contingent liability. The appropriate level See Example 9, earlier.
construction under this provision on of disclosure depends upon each Report on line 38 the amortization of
line 36. For more information, see taxpayer’s operational activity and the various items of prepaid expense, such
section 118. nature of its accounting records. For as prepaid subscriptions and license
Line 37. Section 162(r)—FDIC example, if a corporation’s net income fees, prepaid insurance, etc.
amount reported in the income Report on line 38, column (a),
Premiums Paid by Certain statement includes anticipated expenses included in net income
Large Financial Institutions expenses for a discontinued operation reported on Part I, line 11, that are
Report on line 37, column (a), the total as a single amount, and its general related to reserves and contingent
amount paid or accrued as FDIC ledger or other books, records, and liabilities. Report on line 38, column (d),
premiums included on Part I, line 11. workpapers provide details for the amounts related to liabilities for reserves
Report on line 37, column (c), any anticipated expenses under more and contingent liabilities that are
disallowed amounts, subject to the explanatory and defined categories deductible in the current tax year for
applicable percentage, of any FDIC such as employee termination costs, U.S. income tax purposes. Examples of
premiums paid or included by the large lease cancellation costs, loss on sale of reserves that are allowed for book
financial institution. For this purpose, the equipment, etc., a supporting statement purposes, but not for tax purposes,
large financial institution includes that lists those categories of expenses include warranty reserves, restructuring
members of its expanded affiliated and their details will satisfy the reserves, reserves for discontinued
group, as defined in section 162(r)(6) requirement to separately state and operations, and reserves for
(B). The disallowance does not apply if adequately disclose. In order to acquisitions and dispositions. Only
the institution’s (including members of separately state and adequately report on line 38 items that are not
its expanded affiliated group’s) total disclose the employee termination required to be reported elsewhere on
consolidated assets (determined as of costs, it is not required that an Schedule M-3, Parts II and III.
the close of the tax year) do not exceed anticipated termination cost amount be
$10 billion. listed for each employee, or that each Example 26. Corporation Q is a
asset (or category of asset) be listed calendar year taxpayer that files and
The applicable percentage is the along with the anticipated loss on entirely completes Schedule M-3 for its
excess of the corporation’s total disposition. current tax year. On July 1 of each year,
consolidated assets over $10 billion, Q has a fixed liability for its annual
divided by $40 billion. For taxpayers The attached statement should have insurance premiums on its home office
with total consolidated assets of $50 five columns. The first column has the building that provides a 12-month
billion or more, the applicable description for the next four columns. coverage period beginning July 1
percentage is 100%. See section 162(r). The second column is column (a) through June 30. In addition, Q
expense per income statement, the third historically prepays 12 months of
Example 25. Corporation X has advertising expenses on July 1. On July
column is column (b) temporary
total consolidated assets of $20 billion. 1, Q prepays its insurance premium of
difference, the fourth column is column
Under section 162(r), no deduction is $500,000 and advertising expenses of
(c) permanent difference, and the fifth
allowed for 25% (($20,000,000,000 – $800,000. For statutory accounting
column is column (d) deduction per tax
$10,000,000,000) / $40,000,000,000) of purposes, Q capitalizes and amortizes
return. Every item listed on the attached
FDIC premiums. the prepaid insurance and advertising
statement for line 38 must always have
Line 38. Other Expense/ columns (a) + (b) + (c) = (d). Each item over 12 months. For U.S. income tax
Deduction Items With with amounts in columns (a), (b), (c), purposes, Q deducts the insurance
and (d) will be totaled and included as premium when paid and amortizes the
Differences advertising over the 12-month period. In
one line on Part III, line 38.
Separately state and adequately its annual statement, Q treats the
disclose on Part III, line 38, all items of Comprehensive income. If any difference attributable to the annual
expense/deduction that are not “comprehensive income,” as defined by statement treatment and U.S. income
otherwise listed on Part III, lines 1 SFAS No. 130, is reported on this line, tax treatment of the prepaid insurance
through 37. describe the item(s) in detail as, for as a temporary difference. As there is
example, “Foreign currency translation no difference between the book and tax
Attach a statement that describes adjustments—comprehensive income” treatment of advertising expense, it
and itemizes the type of expense/ and “Gains and losses on should be included on Part II, line 28,
deduction and the amount of each item, available-for-sale Other items with no differences.
and provides a description that states securities—comprehensive income.”

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Q also has a legal reserve where         temporary difference was calculated to       Q's return for Part III, line 38, must be 
$300,000 was expensed for financial      arrive at the income tax deduction of        separately stated and adequately 
accounting purposes and a ($100,000)     $200,000. The statement attached to          disclosed as follows.

Line 38—Example 26
Statement Concerning Other Expense/Deduction Items With Differences
                          Column (a) Expense      Column (b) Temporary                Column (c)    Column (d) Deduction 
Description               per Income Statement    Difference                   Permanent Difference        per Tax Return
Prepaid insurance premium 
expensed not capitalized                 $250,000 $250,000                            -0-                  $500,000
Legal expense reserve                    $300,000 ($100,000)                          -0-                  $200,000
Total line 38                            $550,000 $150,000                            -0-                  $700,000

Line 39. Total Expense/                  line 39, columns (a) through (d), as         million, then report on Part II, line 27, 
Deduction Items                          applicable. Report positive amounts as       column (a), ($1 million). Similarly, if Part 
                                         negative and negative amounts as             III, line 39, column (b), reflects an 
Report on Part II, line 27, columns (a)  positive. For example, if Part III, line 39, amount of ($50,000), then report on Part 
through (d), as applicable, the negative column (a), reflects an amount of $1         II, line 27, column (b), $50,000.
of the amounts reported on Part III, 

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Index
 
                                Includible 9                                               Reorganization:
A                             Entity considerations  4       J                              Amortization  24
Abandonment    20             Equity method   16             Judgments   23                 Investment banking fees          24
Accounting standards,         Equity method foreign                                         Legal and accounting 
  order of priority 7           corporations  15             L                                  fees 24
Accrual to cash               Equity-based                                                  Other costs  24
  adjustment   18               compensation     22          Lease vs. purchase     24     Reportable transactions           17
Acquisition:                  Exchange    20                 Lease, sale vs.  19           Reserved  24
  Amortization 24             Expense/deduction:             Life insurance premiums,      Reserves and contingent 
  Investment banking fees  24   Items with differences  26      corporate owned     24      liabilities 26
  Legal and accounting        Expense/deduction items:       Life insurance subgroup       Restatements   7
                                                                reconciliation totals  22
  fees    24                    Total 21 27,                                               Revenue, unearned/
                                                             Life/non-life loss limitation  deferred 20
  Other costs  24                                               and carryforward    6
Adequately disclosed,         F                              Limitations 3
                                                                                           S
  separately stated and    14 FDIC premiums   26             Long-term contracts    20
Adjustments   10              Financial information and                                    Sale vs. lease 19
Allocations, limitations, and   net income (loss)            M                             Schedule:
  carryovers   3                reconciliation  6                                           L   3
Amortization of goodwill   24 Financial statements:          Mark-to-market    19
                                                                                            M-2  4
Amortization write-offs 24      Non-tax-basis 7              Meals and entertainment     22
                                                                                           Section 481(a) 
Awards  23                      Tax-basis  7                 Minority interest   16         adjustments    20
                              Fines and penalties  23        Mixed group:                  Section 78 gross-up           16
B                             Foreign:                          1120/L/PC 5                Separately stated and 
Bad debt expense    24          Corporations  15                Checkboxes    6             adequately disclosed            14
                                Distributions 16                Subgroup                   Start-up costs:
                                                                sub-consolidation    6
C                               Dividends  15                                               Amortization  24
                                                                                           Statutory accounting 
Capital gains  20               Entities, nonincludible 8    N                              adjustments    10
Capital loss 20 21,             Partnerships  16
Carryovers   3                  Withholding taxes  22        Non-tax-basis financial       Stock option expense            22
Charitable contribution 23    Form 4797   21                    statements and tax-basis   Subgroup 
                                                                financial statements   7    sub-consolidation: 1120 
  Carryforward  23                                           Nonincludible:                 subgroup, 1120-PC 
  Limitation 23               G                                 Foreign entities 8          subgroup, and 1120-L 
Compensation with section     Gain/loss on disposition of       U.S. entities 8             subgroup    5
  162(m) limitation 23          assets  21                   Nonincludible entities:
Comprehensive income    26    Gain/loss on sale  20             Eliminations  9            T
Consolidated return  4        General instructions   1                                     Tax-basis financial 
Consolidated vs.              Goodwill  24                   O                              statements    7
  consolidating   5           Groups, consolidated vs. 
Consolidation  16               consolidating   5            Original issue discount   20
                                                                                           U
Consolidation for mixed                                                                    U.S.:
  groups:                     H                              P
  1120/L/PC  5                Hedging transactions   18      Parachute payments     23      Dividends   16
Contingent liabilities,                                      Partnerships:                  Entities, nonincludible        8
  reserves and   26           I                                 Foreign 16                  Partnerships  16
Corporate owned life                                            U.S. 16                    Unearned revenue              20
  insurance premiums    24    Includible corporations   10, 
Cost of goods sold  19          16                           Pass-through entities   17
                              Includible entities:           PC insurance subgroup         W
                                                                reconciliation totals  22  Worldwide consolidated net 
D                               Eliminations  9                                             income (loss)   8
                                                             Pension and 
                                Other   9                       profit-sharing  23         Worthless stock losses          21
Damages   23                  Inclusions  15                 Post-retirement benefits  23  Worthlessness   20
Deferred compensation   23    Income:                        Publicly traded common 
Deferred revenue  20            Statement  7                    stock  7
Depreciation  24                Statement period   7         Purchase vs. lease    24
Disposition of assets   20    Income (loss):
Disregarded entities  9         Differences  21              R
Dividend adjustments    10      Equity method   16           Reconciliation:
Dividends 15                  Income statement period     10    1120 subgroup    22
Domestic production           Interest:                         Life insurance 22
  activities deduction  24
                                Expense   22                    Mixed group subgroup 
E                               Imputed   20                    sub-consolidation    6
                                Income  18
Entities:                                                       PC insurance  22
  Disregarded  9                                                Totals 22

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