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                                                                                                       Department of the Treasury
                                                                                                       Internal Revenue Service
Instructions for

Schedule M-3 (Form 1120)

(Rev. December 2019)
Net Income (Loss) Reconciliation for Corporations With Total Assets of
$10 Million or More

Section references are to the Internal Revenue including Schedule M-3 (Form 1120) at     total consolidated assets at the end of 
Code unless otherwise noted.                   the following address.                    the current tax year of less than $10 
                                                                                         million, the corporation is not required to 
Future Developments                              Department of the Treasury              file Schedule M-3 for the current tax 
                                                 Internal Revenue Service Center         year.
For the latest information about                 Ogden, UT 84201-0012
developments related to Schedule M-3                                                     See Completing Schedule M-3, later.
(Form 1120) and its instructions, such 
as legislation enacted after they were         Who Must File                             In the case of a U.S. consolidated tax 
published, go to IRS.gov/Form1120.             Generally, the following apply.           group, total assets at the end of the tax 
                                               • A domestic corporation or group of      year must be determined based on the 
What’s New                                     corporations required to file Form 1120,  total year-end assets of all includible 
                                               U.S. Corporation Income Tax Return,       corporations listed on Form 851, net of 
Domestic production activities de-             that reports on Form 1120, Schedule L,    eliminations for intercompany 
duction (DPAD).     The DPAD under             Balance Sheets per Books, total assets    transactions and balances between the 
former section 199 has been repealed           at the end of the corporation's tax year  includible corporations. In addition, for 
for tax years beginning after 2017.            that equal or exceed $10 million must     purposes of determining whether the 
However, specified agricultural or             file Schedule M-3 instead of              corporation (or U.S. consolidated tax 
horticultural cooperatives (specified          Schedule M-1, Reconciliation of Income    group) has total assets at the end of the 
cooperatives) may claim a deduction for        (Loss) per Books With Income per          current tax year of $10 million or more, 
income attributable to domestic                Return.                                   the corporation's total consolidated 
production activities under section            • A corporation filing a                  assets must be determined on an 
199A(g) for tax years beginning after          non-consolidated Form 1120 that           overall accrual method of accounting 
December 31, 2017. See the                     reports on Schedule L total assets that   unless both of the following apply: (a) 
instructions for Part III, Line 22.            equal or exceed $10 million must          the tax returns of all includible 
Domestic Production Activities                 complete and file Schedule M-3 and        corporations in the U.S. consolidated 
Deduction, later.                              must check box (1) Non-consolidated       tax group are prepared using an overall 
                                               return, at the top of page 1 of           cash method of accounting, and (b) no 
General Instructions                           Schedule M-3.                             includible corporation in the U.S. 
                                               • Any U.S. consolidated tax group         consolidated tax group prepares or is 
                                               consisting of a U.S. parent corporation 
Purpose of Schedule                                                                      included in financial statements 
                                               and additional includible corporations    prepared on an accrual basis.
Schedule M-3, Part I, asks certain             listed on Form 851, Affiliations 
questions about the corporation's              Schedule, required to file Form 1120,     Special Filing Requirements for 
financial statements and reconciles            that reports on Schedule L total          Certain Groups
financial statement net income (loss) for      consolidated assets at the end of the tax Mixed groups. If the parent 
the corporation (or consolidated               year that equal or exceed $10 million     corporation of a U.S. consolidated tax 
financial statement group, if applicable),     must file Schedule M-3 and must check     group files Form 1120 and files and 
as reported on Part I, line 4a, to net         box (2) Consolidated return (Form 1120    completes Schedule M-3, Parts II and 
income (loss) of the corporation for U.S.      only), or box (3) Mixed 1120/L/PC         III, then Schedule M-3, Parts II and III, 
taxable income purposes, as reported           group, as applicable, at the top of       must be completed for each member of 
on Part I, line 11.                            page 1 of Schedule M-3.                   the group. However, if the parent 
Schedule M-3, Parts II and III,                • Cooperatives filing Form 1120-C,        corporation of a U.S. consolidated tax 
reconcile financial statement net income       U.S. Income Tax Return for Cooperative    group files Form 1120 and any member 
(loss) for the U.S. corporation (or            Associations, that report total assets at of the group files Form 1120-PC, U.S. 
consolidated tax group, if applicable),        tax year end that equal or exceed $10     Property and Casualty Insurance 
as reported on Schedule M-3, Part I,           million must file Schedule M-3 (Form      Company Income Tax Return, or Form 
line 11, to taxable income on Form             1120).                                    1120-L, U.S. Life Insurance Company 
1120, page 1, line 28.                         • A corporation filing Form 1120 (or      Income Tax Return, that member must 
                                               Form 1120-C) that is not required to file complete Parts II and III of 
Where To File                                  Schedule M-3 may voluntarily file         Schedule M-3 (Form 1120-PC) or 
If the corporation is required to file (or     Schedule M-3.                             Schedule M-3 (Form 1120-L), 
voluntarily files) Schedule M-3 (Form          • If a corporation was required to file   respectively, and the group must 
1120), the corporation must file Form          Schedule M-3 for the preceding tax        comply with the mixed group 
1120 (or Form 1120-C, if applicable)           year, but reports on Form 1120, page 1,   consolidated Schedule M-3 instructions 
and all attachments and schedules,             Item D, and on Form 1120, Schedule L,     under Schedule M-3 Consolidation for 

Dec 23, 2019                                           Cat. No. 38103Y

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

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

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

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

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intercompany transactions between to be owned under these instructions by retain copies of the required reports it
includible corporations. The corporation the disregarded entity. receives under these instructions from
must not report as dividends on Form 3. The owner of 50% or more of a reportable entity partners.
1120, Schedule C, any amounts corporation by vote on any day of the Example 3.
received from an includible corporation. corporation’s tax year is deemed to own 1. A, an LLC filing a Form 1065 for
In general, dividends received from an all corporate and partnership interests 2019, is owned 50% by U.S. corporation
includible corporation must be owned or deemed to be owned under Z. A owns 50% of B, C, D, and E, which
eliminated in consolidation rather than these instructions by the corporation are also LLCs filing a Form 1065 for
offset by the dividends-received during its tax year. calendar year 2019. Z was first required
deduction.
4. The owner of 50% or more of to file 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, 2018, and filed its Form 1120 with
Schedule M-3 deemed to own all corporate and Schedule M-3 for 2018 on October 15,
For purposes of Schedule M-3, partnership interests owned or deemed 2019. As of October 16, 2019, 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, 2019, 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 more of the beneficial interest of a trust required to do within 30 days of October
generally is disregarded as separate or nominee arrangement on any day of 16, that Z is a reportable entity partner
from its owner for U.S. income tax the trust or nominee arrangement tax directly owning (with respect to A) or
purposes (disregarded entity) must not year is deemed to own all corporate and deemed to own indirectly (with respect
be 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 2019, each of A, B, C,
any item of income, gain, loss, D, and E is required to file Schedule M-3
deduction, or credit of a disregarded A reportable entity partner with (Form 1065) for 2019, regardless of
entity must be reported as an item of its respect to a partnership (as defined whether they would otherwise be
owner. In particular, the income or loss above) must report the following to the required to file Schedule M-3 for that
of a disregarded entity must not be partnership within 30 days of first year.
reported on Part II, line 9, 10, or 11, as becoming a reportable entity partner
2. P, a U.S. corporation, is the
from a separate partnership or other and, after first reporting to the
parent of a financial consolidation group
pass-through entity. The financial partnership under these instructions,
with 50 domestic subsidiaries DS1
statement income or loss of a thereafter within 30 days of the date of
disregarded entity is included on Part I, any change in the interest it owns or is through DS50 and 50 foreign
subsidiaries FS1 through FS50, all
line 7a or 7b, only if its financial deemed to own, directly or indirectly,
100% owned on October 16, 2019. On
statement income or loss is included on under these instructions, in the
October 15, 2019, P filed a consolidated
Part I, line 11, but not on Part I, line 4a. partnership.
tax return on Form 1120 and was
1. Name.
Reportable Entity Partner required to file Schedule M-3 for the tax
Reporting Responsibilities 2. Mailing address. year ending December 31, 2018. On
A reportable entity partner with respect 3. Taxpayer identification number October 16, 2019, DS1, DS2, DS3, FS1,
to a partnership filing Form 1065 is an (TIN) or (EIN), if applicable. and FS2 each acquires a 10%
partnership interest in partnership K,
entity that: 4. Entity or organization type. which files Form 1065 for the tax year
• Owns or is deemed to own, directly or 5. State or country in which it is ending December 31, 2019. P is
indirectly, under these instructions a organized. deemed to own, directly or indirectly
50% or greater interest in the income, (under these instructions) all corporate
6. Date on which it first became a
loss, or capital of the partnership on any and partnership interests of DS1, DS2,
reportable entity partner.
day of the tax year; and and DS3 as the parent of the tax
• Was required to file Schedule M-3 7. Date with respect to which it is
with its most recently filed U.S. income reporting a change in its ownership consolidation group and therefore is
tax return or return of income filed prior interest in the partnership, if applicable. deemed to own 30% of K on October
16, 2019. P is deemed to own, directly
to that day. 8. The interest in the partnership it or indirectly (under these instructions)
owns or is deemed to own in the
For the purposes of these all corporate and partnership interests
partnership, directly or indirectly (as
instructions, the following rules apply. of FS1 and FS2 as the owner of 50% or
defined under these instructions) as of more of each corporation by vote and
1. The parent corporation of a the date with respect to which it is therefore is deemed to own 20% of K on
consolidated tax group is deemed to reporting. September 16, 2019. P is therefore
own all corporate and partnership
9. Any change in that interest as of deemed to own 50% of K on October
interests owned or deemed to be owned
the date with respect to which it is 16, 2019. Since P owns or is deemed to
under these instructions by any member
reporting. own, directly or indirectly (under these
of the tax consolidated group.
instructions) 50% or more of K on
2. The owner of a disregarded entity The reportable entity partner must October 16, 2019, and was required to
is deemed to own all corporate and retain copies of required reports it file Schedule M-3 on its most recently
partnership interests owned or deemed makes to partnerships under these filed U.S. income tax return filed prior to
instructions. Each partnership must

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

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that date, P is a reportable entity partner   See Completing Schedule M-3 and               Schedule M-3, Part II, and, if applicable, 
of K as of October 16, 2019. On               Certain Allocations, Limitations, and         a Part II for consolidation eliminations 
November 5, 2019, P reports to K, as it       Carryovers, earlier.                          not includible in the subgroup 
is required to do, that P is a reportable                                                   eliminations. At the consolidated level, 
entity partner as of October 16, 2019,        Note. Complete only one                       there must also be a consolidated 
deemed to own (under these                    Schedule M-3, Part I, for each                Schedule M-3, Part I, and a 
instructions) a 50% interest in K. K is       consolidated group. A subsidiary of a         consolidated Form 8916. For a mixed 
therefore required to file Schedule M-3       consolidated group does not complete          group, there is no Schedule M-3, Part III, 
when it files its Form 1065 for its tax       Schedule M-3, Part I. Enter on                at the consolidated level.
year ending December 31, 2019.                Schedule M-3, Part I, the name and EIN 
                                              of the common parent of the                   The corporation must check the 
Consolidated                                  consolidated group. Indicate on               applicable mixed group checkboxes on 
                                              Schedule M-3, Parts II and III, on the        all Schedules M-3, Parts I, II, and III, as 
Schedule M-3 Versus                           line after the common parent's name           discussed below.
Consolidating Schedules                       and EIN, whether the Schedule M-3, 
M-3 for Form 1120 Groups                      Parts II and III, is for the (1) consolidated Subgroup Sub-Consolidation: 
A consolidated tax return group with a        group, (2) parent corporation, (3)            1120 Subgroup, 1120-PC 
parent corporation that files a Form          consolidation eliminations, or (4) 
1120 is a mixed group if any member is        subsidiary corporation, by checking the       Subgroup, and 1120-L Subgroup
a life insurance company (files using         appropriate box. If Schedule M-3, Parts       A subgroup Schedule M-3, Parts II and 
Form 1120-L) or a property and casualty       II and III, are for a subsidiary in a         III, sub-consolidation must be prepared 
insurance company (files using Form           consolidated return, also enter the name      with all necessary eliminations within 
1120-PC). See Schedule M-3                    and EIN of the subsidiary.                    the subgroup for each of the three 
                                                                                            possible subgroups that are in fact 
Consolidation for Mixed Groups                Schedule M-3 Consolidation for                present: one subgroup for those 
(1120/L/PC) below.
                                              Mixed Groups (1120/L/PC)                      corporations reporting on Form 1120, 
  A U.S. consolidated tax group must          Special Schedule M-3 consolidation            one subgroup for those corporations 
file a consolidated Schedule M-3. Parts       rules apply to a mixed group, that is, a      reporting on Form 1120-PC, and one 
I, II, and III of the consolidated            consolidated tax group that includes (a)      subgroup for those reporting on Form 
Schedule M-3 must reflect the activity of     both a corporation that is an insurance       1120-L. The parent corporation is 
the entire U.S. consolidated tax group.       company and a corporation that is not         included in the subgroup that 
The parent corporation must also              an insurance company; or (b) both a life      corresponds to the form on which it 
complete Parts II and III of a separate       insurance company and a property and          reports and the entire consolidated 
Schedule M-3 to reflect the parent's own      casualty insurance company; or (c) a life     group files. For example, in the case of 
activity. In addition, Parts II and III of a  insurance company, a property and             a Form 1120 parent and Form 1120 
separate Schedule M-3 must be                 casualty insurance company, and a             consolidated group, the parent is 
completed by each includible                  corporation that is not an insurance          included in the Form 1120 subgroup 
corporation to reflect the activity of that   company.                                      sub-consolidation. Each subgroup uses 
includible corporation. Lastly, it                                                          its own Schedule M-3 (Form 1120, 
generally will be necessary to complete       Mixed group consolidation for                 1120-PC, or 1120-L), Parts II and III, for 
Parts II and III of a separate                Schedule M-3, Parts II and III, requires      each corporation within the subgroup 
Schedule M-3 for consolidation                (a) subgroup sub-consolidation of the         and for the subgroup sub-consolidation 
eliminations.                                 1120 subgroup, the 1120-PC subgroup,          and the subgroup eliminations.
                                              and the 1120-L subgroup, each with its 
  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 
• Parts II and III of a separate              sub-consolidations, there generally will      carryforward used are not taken into 
Schedule M-3 for each of the four             be a total of six additional                  account in the determination of the three 
includible corporations to reflect the        Schedule M-3, Parts II, and six               subgroup sub-consolidated taxable 
activity of each includible corporation.      additional Schedule M-3, Parts III, for       incomes on Schedule M-3, but are 
• Parts II and III of a separate              the subgroup sub-consolidations.              reflected on Form 8916 and in the 
Schedule M-3 to eliminate                     Specifically, there must be one Part II       calculation of the life/non-life loss 
intercompany transactions between             and one Part III for each subgroup's          limitation and carryforward used. See 
includible corporations and to include        sub-consolidated amounts and one Part         Life/Non-Life Loss Limitation and 
limitations on deductions (charitable         II and one Part III for each subgroup's       Carryforward Used Calculations, later.
contribution limitations and capital loss     sub-consolidation eliminations amounts.
limitations) and carryover amounts                                                          The reconciliation totals for book, 
(charitable contribution carryovers and       At the mixed group consolidated               temporary difference, permanent 
capital loss carryovers).                     level, there must be a consolidated           difference, and taxable income for each 

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

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subgroup are reported on Form 1120, Completion of Mixed Group consolidated level Schedule M-3 (Form
1120-PC, or 1120-L, as applicable, Checkboxes for Schedule M-3, 1120), Parts I and II, and a consolidated
Schedule M-3, Part II, line 29a, columns Form 8916. The mixed group
(a), (b), (c), and (d), and equal the sum Part II and Part III consolidated Schedule M-3, Part II,
of the line amounts on Part II, lines 26 must be indicated by checking box (1)
Note. The following discussion of
through 28. For a mixed group, Consolidated group, and box (5) Mixed
checkboxes will assume that the 1120
Schedule M-3, Part II, lines 29b, 29c, 1120/L/PC group. (If a consolidated
subgroup includes the corporate parent
and 30 are blank on the Form 1120, level Part II for consolidation
of the mixed group.
1120-PC, or 1120-L, as applicable, for eliminations not includible in the
the separate corporations (parent and subgroup eliminations is applicable, that
subsidiary) and for the three subgroup Forms 1120, 1120-PC, and 1120-L, Part II must be indicated by checking
sub-consolidations. Schedule M-3, Parts II and III, each box (3) Consolidated eliminations, and
have a checkbox (5) at the top box (5) Mixed 1120/L/PC group.)
Note. A sub-consolidation is required indicating a mixed group. Checkbox (5)
for every subgroup, even if the and one or more other applicable
subgroup consists of only one checkboxes must be checked. Life/Non-Life Loss Limitation and
corporation. In addition, Form 8916-A, if Carryforward Used Calculations
applicable, is required at the For example, an 1120 parent The applicable life/non-life loss
sub-consolidated level and the corporation included in the 1120 limitation and all carryforward used
sub-consolidated elimination level. subgroup must check Schedule M-3 calculations are made using the
(Form 1120), Parts II and III, box (2) amounts determined for taxable income
Reconciliation of Mixed Group Parent corporation, and box (5) Mixed in the three subgroup
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
Amounts to Schedule M-3, Part I, must check Schedule M-3 (Form 1120), 8916. The calculated life/non-life loss
Line 11, and to Tax Return Taxable Parts II and III, box (4) Subsidiary limitation or carryforward used amounts,
Income corporation, and box (5) Mixed if any, are not entered on Schedule M-3.
1120/L/PC group. An 1120-PC The calculated amounts, if any, are
At the consolidated level, use the subsidiary corporation within the entered on Form 8916.
Schedule M-3 (Form 1120, 1120-PC, or 1120-PC subgroup must check
1120-L), Parts I and II, that matches the Schedule M-3 (Form 1120-PC), Parts II
form on which the parent corporation and III, box (4) Subsidiary corporation, Specific Instructions
reports and the entire consolidated and box (5) Mixed 1120/L/PC group. An for Part I
group files. For a mixed group, on the 1120-L subsidiary corporation within the
consolidated Schedule M-3, Part II, 1120-L subgroup must check
lines 29a, 29b, and 29c, report the Schedule M-3 (Form 1120-L), Parts II Part I. Financial
applicable amounts from the three and III, box (4) Subsidiary corporation, Information and Net
subgroup sub-consolidation Part II, and box (5) Mixed 1120/L/PC group.
line 29a, amounts. (If a consolidated Income (Loss)
level Part II for consolidation The 1120 subgroup Reconciliation
eliminations not includible in the sub-consolidation Schedule M-3 (Form When To Complete Part I
subgroup eliminations is applicable, the 1120), Parts II and III, must be indicated
applicable amounts must be adjusted by by checking box (5) Mixed 1120/L/PC Part I must be completed for any tax
the applicable elimination amounts.) group, and box (6) 1120 group for the year for which the corporation files
The consolidated Schedule M-3, Part II, sub-consolidation, and by checking box Schedule M-3. Check either box (1)
line 30, amounts are the sum of the (5) Mixed 1120/L/PC group, and box (7) Non-consolidated return, (2)
applicable amounts on the consolidated 1120 eliminations for the eliminations. Consolidated return (Form 1120 only),
Part II, lines 29a, 29b, and 29c. For a The 1120-PC subgroup or (3) Mixed 1120/L/PC group, as
mixed group, the consolidated Part II, sub-consolidation Form 1120-PC, applicable. In addition, check box (4)
lines 1 through 28, are blank and no Schedule M-3, Parts II and III, must be Dormant subsidiaries schedule
consolidated Part III is required to be indicated by checking box (5) Mixed attached, if applicable.
completed. 1120/L/PC group, and box (6) 1120-PC Line 1. Questions Regarding
For mixed groups, the consolidated group for the sub-consolidation, and by the Type of Income Statement
Part II, line 30, column (a), must equal checking box (5) Mixed 1120/L/PC
Part I, line 11, with appropriate group, and box (7) 1120-PC Prepared
adjustments for statutory accounting eliminations for the eliminations. The For Part I, lines 1 through 12, use only
requirements reflected on Part I, lines 1120-L subgroup sub-consolidation the financial statements of the U.S.
10a and 10b. The consolidated taxable Schedule M-3 (Form 1120-L), Parts II corporation filing the U.S. income tax
income indicated on Part II, line 30, and III, must be indicated by checking return (or the consolidated financial
column (d), must equal the amount box (5) Mixed 1120/L/PC group, and statements for the U.S. parent
shown on Form 8916, line 1. Form box (6) 1120-L group for the corporation of a U.S. consolidated tax
8916, line 8, must equal taxable income sub-consolidation, and by checking box group). If the U.S. corporation filing a
reported on the tax return. (5) Mixed 1120/L/PC group, and box (7) U.S. income tax return (or the U.S.
1120-L eliminations for the eliminations. parent corporation of a U.S.
consolidated tax group) prepares its
A mixed group with a Form 1120 own financial statements but is
parent corporation completes a controlled by another corporation (U.S.

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

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

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line 1, or from its books and records if 1120 (separate or consolidated); (c) the supporting statement should be
Part I, line 1c, is checked “No.” If Part I, does not have a separate non-tax-basis reported for each separate
line 1a, is checked “Yes,” report on Part financial statement (certified or nonincludible foreign entity without
I, line 4a, the net income amount otherwise) of its own; and (d) reports on regard to the effect of consolidation or
reported in the income statement Schedule L of its own Form 1120 total elimination entries. If there are
presented to the SEC on the consolidated assets that equal or consolidation or elimination entries
corporation's Form 10-K (the Form 10-K exceed $10 million at the end of the relating to nonincludible foreign entities
for the security identified on Part I, corporation's tax year, the corporation whose income (loss) is reported on the
line 3b, if applicable). must answer questions 1a, 1b, and 1c attached statement that are not
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.
If the corporation prepares separate non-tax-basis financial For example, if the net income (after
non-tax-basis financial statements and statements (certified or otherwise) of its consolidation and elimination entries) of
the income statement period differs own, independent of the amount of the a nonincludible foreign
from the corporation's tax year, the corporation's net income included in sub-consolidated group is being
income statement period indicated on Part I, line 4a, of the other U.S. reported on line 5a, the attached
Part I, line 2a, applies for purposes of corporation, the corporation must supporting statement should report the
Part I, lines 4a through 8. answer questions 1a, 1b, and 1c of Part income (loss) of each separate
I, as appropriate, for its own Form 1120, nonincludible foreign legal entity from
If the corporation does not prepare based on its own separate income each such entity's own financial
non-tax-basis financial statements and statement, and must report on Part I, accounting net income statement or
has checked “No” on Part I, line 1c, line 4a, the net income amounts shown books and records, and any
enter the net income (loss) per the on its separate income statement. 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
statutory income. foreign entity's separate net income
1. U.S. Generally Accepted
(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.
not an includible corporation in the U.S. entity that is included on line 4a and is
5. Other (specify). 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
line 4a (whether from financial between any nonincludible foreign entity intercompany dividends between any
statements or books and records), to and any includible corporation. Do not nonincludible U.S. entity and any
net income (loss) of includible remove in Part I the financial net income includible corporation. Do not remove in
corporations that must be reported on (loss) of any nonincludible foreign entity Part I the financial net income (loss) of
Part I, line 11. accounted for on line 4a using the any nonincludible U.S. entity accounted
equity method. for on line 4a using the equity method.
Report on line 12a the worldwide
consolidated total assets and total Attach a supporting statement that Attach a supporting statement that
liabilities amounts for the corporation provides the name, EIN (if applicable), provides the name, EIN, and net income
using the same financial statements (or and net income (loss) included on (loss) included on line 4a that is
books and records) used for the line 4a that is removed on this line 5 for removed on this line 6 for each separate
worldwide consolidated income (loss) each separate nonincludible foreign nonincludible U.S. entity. Also state the
amount reported on Part I, line 4a. entity. Also state the total assets and total assets and total liabilities for each
total liabilities for each such separate such separate nonincludible U.S. entity
If a U.S. corporation (a) has net nonincludible foreign entity and include and include those assets and liabilities
income (loss) included on Part I, line 4a, those assets and liabilities amounts in amounts in the total assets and total
and removed on Part I, line 6a or 6b, on the total assets and total liabilities liabilities reported on Part I, line 12c.
another U.S. corporation's reported on Part I, line 12b. The The amounts of income (loss) detailed
Schedule M-3; (b) files its own Form amounts of income (loss) detailed on on the supporting statement should be

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reported for each separate                     (loss) per the financial statement or       group and other disregarded entities 
nonincludible U.S. entity without regard       books and records on lines 7a, 7b, and      and other includible entities that are not 
to the effect of consolidation or              7c, for each separate other U.S.            in the consolidated financial group but 
elimination entries. If there are              disregarded entity or other includible      that are reported on Part I, line 7a, 7b, or 
consolidation or elimination entries           entity. Also, state the total assets and    7c, in order to report the correct total 
relating to nonincludible U.S. entities        total liabilities for each such separate    amount on Part I, line 11.
whose income (loss) is reported on the         included 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 
Entities, and Other Includible                                                             Consolidation and elimination entries 
                                               (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.
income reported on Part I, line 4a. 
Include on line 7a or 7b financial income      Line 8. Adjustment to                       If a corporate owner of an interest in 
of any disregarded entity that is not          Eliminations of Transactions                another entity (a) accounts for the 
included in the income reported on Part        Between Includible Entities and             interest in the entity in the owner 
I, line 4a, but is included in Part I, line 11 Nonincludible Entities                      corporation's separate general ledger 
(other disregarded entities). Include on                                                   on the equity method, and (b) fully 
line 7c the financial income of any entity     Adjustments on Part I, line 8, to reverse   consolidates the entity in the owner 
not a disregarded entity that is not           certain financial accounting                corporation's consolidated financial 
included in the income reported on             consolidation or elimination entries are    statements, but the entity is not 
line 4a, but is included on line 11 (other     necessary to ensure that transactions       includible in the owner corporation's 
includible entities). In addition, on Part I,  between includible entities and             consolidated U.S. income tax return, 
line 8, adjust for consolidation               nonincludible U.S. or foreign entities are  then, as part of reversing all 
eliminations and correct for minority          not eliminated, in order to report the      consolidation and elimination entries for 
interest and intercompany dividends for        correct total amount on Part I, line 11.    the nonincludible entity, the corporate 
any other disregarded entity or other          Also, additional consolidation entries      owner must reverse on Schedule M-3, 
includible entities.                           and elimination entries may be              Part I, line 8, the elimination of the equity 
                                               necessary on Part I, line 8, related to     income inclusion from the entity. If the 
Attach a supporting statement that             transactions between includible entities    owner corporation does not account for 
provides the name, EIN, and net income         that are in the consolidated financial      the entity on the equity method on its 

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own general ledger, it will not have on Part I, line 4a. However, an consolidated tax group, report the
eliminated the equity income for insurance company may be required to consolidated income statement net
consolidated financial statement include certain intercompany dividends income (loss) of all corporations listed
purposes and therefore will have no on Part I, line 11, so that the amount on Form 851 and included in the
elimination of equity income to reverse. reported on Part I, line 11, agrees with consolidated U.S. income tax return for
The attached supporting statement statutory accounting net income (Annual the tax year. Amounts reported in
for Part I, line 8, must identify the type Statement). If the net income (loss) of a column (a) of Parts II and III (see
(for example, minority interest, corporation that files Form 1120-PC or instructions, later) must be reported on
intercompany dividends, etc.) and Form 1120-L is included on Part I, the same accounting method used to
amount of consolidation or elimination line 4a or line 7, and is computed on a report the amount of net income (loss)
entries reported, as well as the names basis other than statutory accounting, per income statement of includible
of the entities to which they pertain. It is include on line 10a the adjustments corporations on Part I, line 11, which for
not necessary, but it is permitted, to necessary such that Part I, line 11, insurance companies is statutory
report intercompany eliminations that includes intercompany dividends in the accounting. If an insurance company is
net to zero on Part I, line 8, such as net income (loss) for the corporation to included in a consolidated Form 1120,
intercompany interest income and the extent required by statutory the amount of net income reported on
expense. accounting principles. (For insurance Part I, line 11, will include the statutory
companies included in the consolidated accounting net income for the insurance
Line 9. Adjustment To U.S. income tax return, see the corporation and the GAAP net income
Reconcile Income Statement instructions for Part I, line 11, and Part for the non-insurance corporations
Period to Tax Year II, line 7.) included in the U.S. consolidated tax
group. (For insurance companies
Include on line 9 any adjustments Statutory accounting for an insurance included in the consolidated U.S.
necessary to the income (loss) of company subsidiary acquired or merged income tax return, see the instructions
includible corporations to reconcile may require the use of a financial for Part I, line 10, and Part II, line 7.)
differences between the corporation's statement period for income reported on
income statement period reported on Part I, line 11, that differs from the Do not, in any event, report on this
line 2a and the corporation's tax year. period reported on Part I, line 4a or line 11 the net income of entities not
Attach a statement describing the line 7. Report on Part I, line 10b, listed on Form 851 and not included in
adjustment. adjustments to income because of such the consolidated U.S. income tax return
Statutory accounting for an insurance differences in accounting period. for the tax year. For example, it is not
permissible to remove the income of
company subsidiary acquired or merged
For any adjustments reported on Part nonincludible entities on lines 5 and/or
may require the use of a financial
I, lines 10a, 10b, and 10c, attach a 6, discussed earlier; then to add back
statement period for income reported on
supporting statement that provides, for such income on lines 7 through 10, such
Part I, line 11, that differs from the
each corporation to which an that the amount reported on line 11
period reported on Part I, line 4a or
adjustment relates the name and EIN of includes the net income of entities not
line 7. Report on Part I, line 10b,
the corporation; the amount of net includible in the consolidated U.S.
adjustments to income because of the
income included in Part I before any income tax return. A principal purpose
differences in accounting period.
adjustments on line 10; the amount of of Schedule M-3 is to report on this Part
Line 10a. Intercompany net income included on Part I, line 11; I, line 11, only the financial accounting
Dividend Adjustments To the amount of the net adjustment that is net income of only the corporations
attributable to intercompany dividend included in the consolidated U.S.
Reconcile to Line 11, adjustments required to be reported by income tax return.
Line 10b. Other Statutory statutory accounting and included on
Accounting Adjustments To Part I, line 10a; the amount of the net Whether or not the corporation
Reconcile to Line 11, and adjustment attributable to other prepares financial statements, Part I,
Line 10c. Other Adjustments To statutory accounting requirements and line 11, must include all items that
included on Part I, line 10b; and the impact the net income (loss) of the
Reconcile to Amount on Line 11 amount of the remainder of the net corporation even if they are not
Include on lines 10a, 10b, and 10c, any adjustment not required because of recorded in the profit and loss accounts
other adjustments to reconcile net statutory accounting and included on in the corporation's general ledger,
income (loss) on Part I, line 4a, through Part I, line 10c. If any net adjustment is including, for example, all post-closing
Part I, line 9, with net income (loss) on included for the corporation on Part I, adjusting entries (including workpaper
Part I, line 11. Include on line 10a the line 10b or 10c, attach a supplemental adjustments) and dividend income or
amount of any intercompany dividend supporting statement identifying the line other income received from
adjustment required by statutory (10b or 10c), the type, and the amount nonincludible corporations.
accounting. Include on line 10b the of each adjustment included in the net Example 4.
amount of any other required statutory adjustment. 1. U.S. corporation P is publicly
accounting adjustment. Include on traded and files Form 10-K with the
line 10c the amount of any other Line 11. Net Income (Loss) per
SEC. P owns 80% or more of the stock
adjustment not required by statutory Income Statement of Includible of 75 U.S. corporations, DS1 through
accounting. Corporations DS75, between 51% and 79% of the
Normally, all intercompany dividends Report on line 11 the net income (loss) stock of 25 U.S. corporations DS76
will have been eliminated or excluded per the income statement (or books and through DS100, and 100% of the stock
from the financial accounting records, if applicable) of the of 50 foreign subsidiaries FS1 through
consolidated net income (loss) reported corporation. In the case of a U.S. FS50. P eliminates all dividend income

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from DS1 through DS100, and FS1 I, and enter worldwide net income (loss) P accounts for DS1 in P's separate
through FS50 in financial statement per the books and records of the general ledger on the equity method.
consolidation entries. Furthermore, P includible corporations (P and DS1) on DS1 has net income of $100 (before
eliminates the minority interest Part I, line 4a. P must enter any minority interests) and pays dividends of
ownership, if any, of DS1 through necessary adjustments on lines 5a $50, of which P receives $30. The
DS100 in financial statement through 10 in order for Part I, line 11, to dividend reduces P's investment in DS1
consolidation entries. P's SEC Form report the net income (loss) of includible for equity method reporting on P's
10-K includes P, DS1 through DS100 corporations P and DS1, net of separate general ledger where P
and FS1 through FS50 on a fully eliminations for transactions between P includes its 60% equity share of DS1
consolidated basis. P files a and DS1. income, which is $60. In its financial
consolidated U.S. income tax return statements, P eliminates the DS1 equity
with DS1 through DS75. Example 5. method income of $60 and consolidates
P must check “Yes” on Part I, line 1a. 1. U.S. corporation P owns 60% of DS1, including $60 of net income ($100
On Part I, line 4a, P must report the corporation DS1 which is fully less the minority interest of $40) on Part
consolidated net income from the SEC consolidated in P's financial statements. I, line 4a.
Form 10-K for the consolidated financial P does not account for DS1 in P's P must remove the $100 net income
statement group of P, DS1 through separate general ledger on the equity of DS1 on Part I, line 6a. P must reverse
DS100, and FS1 through FS50. P must method. DS1 has net income of $100 on Part I, line 8, the elimination of the
remove the net income (loss) of FS1 (before minority interests) and pays $40 minority interest net income of DS1
through FS50 on Part I, line 5a or 5b, as dividends of $50, of which P receives and the elimination of the $60 of DS1
applicable. P must remove the net $30. The dividend is eliminated in the equity income. The net result is that P
income (loss) before minority interests consolidated financial statements. In its includes the $60 of equity method
of DS76 through DS100 on Part I, financial statements, P consolidates income from DS1 on Part I, line 11, and
line 6a or 6b, as applicable. P must DS1 and includes $60 of net income on Part II, line 6, column (a). P's
reverse on Part I, line 8: ($100 less the minority interest of $40) dividend income included on the tax
on Part I, line 4a.
a. The elimination of dividends return from its investment in DS1 must
received by P and DS1 through DS75 P must remove the $100 net income be reported on Part II, line 7, column (d).
from DS76 through DS100 and FS1 of DS1 on Part I, line 6a. P must reverse 4. U.S. corporation C owns 60% of
through FS50; and on Part I, line 8, the elimination of the the capital and profits interests in U.S.
$40 minority interest net income of DS1. LLC N. C accounts for N in C's separate
b. The recognition of minority In addition, P reverses its elimination of general ledger on the equity method. N
interests' share of the net income (loss) the $30 intercompany dividend in its has net income of $100 (before minority
of DS76 through DS100. Note. The financial statements on Part I, line 8. interests) and makes no distributions
minority interests' share, if any, of the The net result is that P includes the $30 during the tax year. C treats N as a
income of DS1 through DS75 must be dividend from DS1 on Part I, line 11, corporation for financial statement
reported in Part II, line 8. and on Part II, line 7, column (a). P's purposes and as a partnership for U.S.
P reports on Part I, line 11, the dividend income included on the tax income tax purposes. For equity method
consolidated financial statement net return from DS1 must be reported on reporting on C's separate general
income (loss) attributable to the Part II, line 7, column (d). ledger, C includes its 60% equity share
includible corporations. Intercompany 2. U.S. corporation C owns 60% of of N income, which is $60. In its
transactions between the includible the capital and profits interests in U.S. financial statements, C eliminates the
corporations that had been eliminated in LLC N. C does not account for N in C's $60 of N equity method income and
the net income amount on line 4a separate general ledger on the equity consolidates N, including $60 of net
remain eliminated in the net income method. N has net income of $100 income ($100 less the minority interest
amount on line 11. Transactions (before minority interests) and makes no of $40) on Part I, line 4a.
between the includible corporations and distributions during the tax year. C C must remove the $100 net income
the nonincludible entities that are treats N as a corporation for financial of N on Part I, line 6a. C must reverse on
eliminated in the net income amount on statement purposes; and as a Part I, line 8, the elimination of the $40
line 4a are included in the net income partnership for U.S. income tax minority interest net income of N and the
amount on line 11 since the elimination purposes. In its financial statements, C elimination of the $60 of N equity
of those transactions was reversed on consolidates N and includes $60 of net method income. The result is that C
line 8. income ($100 less the minority interest includes the $60 of equity method
2. Foreign corporation F owns 100% of $40) on Part I, line 4a. income for N on Part I, line 11, and on
of the stock of U.S. corporation P. P C must remove the $100 net income Part II, line 9, column (a). C's taxable
owns 100% of the stock of DS1, 60% of of N on Part I, line 6a. C must reverse on income from N must be reported by C
the stock of DS2, and 100% of the stock Part I, line 8, the elimination of the $40 on Part II, line 9, column (d).
of FS1. F prepares certified audited minority interest net income of N. The 5. U.S. corporation C owns 60% of
financial statements. P does not prepare result is that C includes no income for N the capital and profits interests in U.S.
any financial statements. P files a either on Part I, line 11, or on Part II, LLC N. C accounts for N in C's separate
consolidated U.S. income tax return line 9, column (a). C's taxable income general ledger on the equity method. N
with DS1. from N must be reported by C on Part II, has net income of $100 (before minority
P must not complete Schedule M-3, line 9, column (d). interests) and pays a $50 cash
Part I, with reference to the financial 3. U.S. corporation P owns 60% of distribution, of which C receives $30.
statements of its foreign parent F. P corporation DS1, which is fully The distribution reduces C's investment
must check “No” on Part I, lines 1a, 1b, consolidated in P's financial statements. in N for equity method reporting on C's
and 1c, skip lines 2a through 3c of Part

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separate general ledger. C treats N as a P, measured before recognition of the 4. Subsidiary corporation, or
corporation for financial statement intercompany interest income from DS1 5. Mixed 1120/L/PC group.
purposes and as a partnership for U.S. and the consolidation of DS1
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
For each line item in Parts II and III,
C must remove the $100 net income minority interest in the net income of
report in column (a) the amount of net
of N on Part I, line 6a. C must reverse on DS1, but is not required to report the
income (loss) included in Part I, line 11,
Part I, line 8, the elimination of the $40 offsetting adjustment to the
and report in column (d) the amount
minority interest net income of N and the intercompany elimination of interest
included in taxable income on Form
elimination of the $60 of N equity income and interest expense (though it
1120, page 1, line 28.
method income. The result is that C is permitted to do so).
For any item of income, gain, loss,
includes the $60 of equity method Line 12. Total Assets and
income for N on Part I, line 11, and on expense, or deduction for which there is
Part II, line 9, column (a). C's taxable Liabilities of Entities Included a difference between columns (a) and
income from N must be reported by C or Removed on Part I, Lines 4, (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
Example 6. U.S. corporation P Line 12 must be completed by all (b) and the portion of the difference that
owns 80% of the stock of corporation corporations that file Schedule M-3. is permanent must be entered in column
DS1. DS1 is included in P's Report on lines 12a, 12b, 12c, and 12d, (c).
consolidated income tax return, even the total amount (not just the Note. A statement or explanation may
though DS1 is not included in P's corporation's share) of assets and be attached to any line item even if none
consolidated financial statements on liabilities of entities included or removed is required.
either a consolidated basis or on the on Part I, lines 4, 5, 6, and 7. All assets
equity method. DS1 has current year and liabilities reported for If financial statements are prepared
net income of $100 after taking into Schedule M-3, Part I, lines 12a, 12b, by the corporation in accordance with
account its $40 interest payment to P. P 12c, and 12d, must be entered as generally accepted accounting
has net income of $1,040 after positive amounts. principles (GAAP), differences that are
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
consolidated U.S. income tax return, of the entities removed in completing (creates, increases, or decreases) a
and the intercompany interest income Part I, line 5. On line 12c, enter the total deferred tax asset or liability.
and expense must be removed by assets and total liabilities removed in
consolidation elimination entries. completing Part I, line 6. On line 12d, If the corporation does not prepare
P must report its financial statement enter total assets and total liabilities financial statements, or the financial
net income of $1,040 on Part I, line 4a, included in completing Part I, line 7. statements are not prepared in
and reports DS1's net income of $100 accordance with GAAP, report in
on Part I, line 7c. Then, in order to column (b) any difference that the
reflect the full consolidation of the Specific Instructions for corporation believes will reverse in a
financial accounting net income of P Parts II and III future tax year (that is, have an opposite
and DS1 on Part I, line 11, the following For consolidated U.S. income tax effect on taxable income in a future tax
consolidation and elimination entries are returns, attach supporting statements year (or years) due to the difference in
reported on Part I, line 8: (a) offsetting for each includible corporation. See the timing of recognition for financial
entries to remove the $40 of interest instructions for consolidated returns in accounting and U.S. income tax
income received from DS1 included by the Instructions for Form 1120. purposes) or is the reversal of such a
P on line 4a, and to remove the $40 of difference that arose in a prior tax year.
interest expense of DS1 included in General Format of Parts II Report in column (c) any difference that
line 7c for a net change of zero; and (b) the corporation believes will not reverse
an entry to reflect the $20 minority and III in a future tax year (and is not the
interest in the net income of DS1 (DS1 Check the applicable box(es) at the top reversal of such a difference that arose
net income of $100 times 20% minority of pages 2 and 3 of Schedule M-3 to in a prior tax year).
interest). The result is that Part I, line 11, indicate whether the Schedule M-3 is for
reports $1,120: $1,040 from line 4a, the: If the corporation is unable to
$100 from line 7c, and ($20) from line 8. 1. Consolidated group, determine whether a difference between
column (a) and column (d) for an item
Stated another way, Part I, line 11, 2. Parent corporation, will reverse in a future tax year or is the
includes the entire $1,000 net income of
3. Consolidated eliminations, reversal of a difference that arose in a

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prior tax year, report the difference for   included in the corporation's current       Schedule M-3 requires reporting 
that item in column (c).                    year financial statement net income         amounts according to the substantive 
Example 7. Corporation B is a U.S.          (loss) or in an income or expense           nature of the specific line items included 
publicly traded corporation that files a    account maintained in the corporation's     in Schedule M-3 and consistent 
consolidated U.S. income tax return and     books and records, even if there is no      reporting of all transactions of like 
prepares consolidated GAAP financial        difference between that amount and the      substantive nature that occurred during 
statements. In prior years, B acquired      amount included in taxable income           the tax year. For example, all expense 
intellectual property (IP) and goodwill     unless (a) otherwise provided in these      amounts that are included in the 
through several corporate acquisitions.     instructions or (b) the amount is           financial statements or exist in the 
The IP is amortizable for both U.S.         attributable to a reportable transaction    books and records that represent some 
income tax and financial statement          described in Regulations section            form of “Bad debt expense” must be 
purposes. In the current year, B's annual   1.6011-4(b) and is therefore reported on    reported on Part III, line 32, in column 
amortization expense for IP is $9,000 for   Part II, line 12. For example, with the     (a), regardless of whether the amounts 
U.S. income tax purposes and $6,000         exception of interest income reflected      are recorded or stated under different 
for financial statement purposes. In its    on a Schedule K-1 received by a             nomenclature in the financial 
financial statements, B treats the          corporation as a result of the              statements or the books and records 
difference in IP amortization as a          corporation's investment in a               such as “Provision for doubtful 
temporary difference. The goodwill is       partnership or other pass-through entity,   accounts,” “Expense for uncollectible 
not amortizable for U.S. income tax         all interest income, included on Part I,    notes receivable,” or “Impairment of 
purposes and is subject to impairment       line 11, whether from unconsolidated        trade accounts receivable.” Likewise, as 
for financial statement purposes. In the    affiliated companies, third parties,        stated in the preceding paragraph, all 
current year, B records an impairment       banks, or other entities, whether from      fines and penalties must be included on 
charge on the goodwill of $5,000. In its    foreign or domestic sources, whether        Part III, line 12, column (a), regardless 
financial statements, B treats the          taxable or exempt from tax, and whether     of the terminology or nomenclature 
goodwill impairment as a permanent          classified as some other type of income     attached to them by the corporation in 
difference. B must report the               for U.S. income tax purposes (such as       its books and records or financial 
amortization attributable to the IP on      dividends), must be included on Part II,    statements.
Part III, line 28, and report $6,000 in     line 13, column (a). Likewise, all fines 
column (a), a temporary difference of       and penalties included in Part I, line 11,  With limited exceptions, Part II 
$3,000 in column (b), and $9,000 in         paid to a government or other authority     includes lines for specific items of 
column (d). B must report the goodwill      for the violation of any law for which      income, gain, or loss (income items). 
impairment on Part III, line 26, and        fines or penalties are assessed must be     See Part II, lines 1 through 24. If an 
report $5,000 in column (a), a              included on Part III, line 12, column (a),  income item is described in Part II, lines 
permanent difference of ($5,000) in         regardless of the government authority      1 through 24, report the amount of the 
column (c), and $0 in column (d).           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, regardless item. If there is a difference for the 
Reporting Requirements                      of the classification, nomenclature, or     income item, or only a portion of the 
                                            terminology attached to the fines or        income item has a difference and a 
for Parts II and III                                                                    portion of the item does not have a 
                                            penalties by the imposing authority in its 
Except for mixed group consolidation,       actions or documents.                       difference, and the item is not described 
the number of Parts II must equal the                                                   in Part II, lines 1 through 24, report and 
number of Parts III filed by the            If a corporation would be required to       describe the entire amount of the item 
corporation. Mixed groups should see        report in Parts II and III, column (a), the on Part II, line 25.
Schedule M-3 Consolidation for Mixed        amount of any item specifically listed on 
Groups (1120/L/PC), earlier.                Schedule M-3 in accordance with the         With limited exceptions, Part III 
                                            preceding paragraph, except that the        includes lines for specific items of 
General Reporting                           corporation has capitalized the item of     expense or deduction (expense items). 
Requirements                                income or expense and reports the           See Part III, lines 1 through 37. If an 
If an amount is attributable to a           amount in its financial statement           expense item is described on Part III, 
reportable transaction described in         balance sheet or in asset and liability     lines 1 through 37, report the amount of 
Regulations section 1.6011-4(b), the        accounts maintained in the                  the item on the applicable line, 
amount must be reported in columns          corporation's books and records, the        regardless of whether there is a 
(a), (b), (c), and (d), as applicable, of   corporation must report the proper tax      difference for the item. If there is a 
Part II, line 12, regardless of whether the treatment of the item in columns (b), (c),  difference for the expense item, or only 
amount would otherwise be reported on       and (d), as applicable.                     a portion of the expense item has a 
                                                                                        difference and a portion of the item does 
Part II or Part III of Schedule M-3. Thus,  Furthermore, in applying the two            not have a difference and the item is not 
if a taxpayer files Form 8886,              preceding paragraphs, a corporation is      described in Part III, lines 1 through 37, 
Reportable Transaction Disclosure           required to report in Parts II and III,     report and describe the entire amount of 
Statement, the amounts attributable to      column (a), the amount of any item          the item on Part III, line 38.
that reportable transaction must be         specifically listed on Schedule M-3 that 
entered on Part II, line 12.                is included in the corporation's financial  If there is no difference between the 
A corporation is required to report in      statements or exists in the corporation's   financial accounting amount and the 
column (a) of Parts II and III the amount   books and records, regardless of the        taxable amount of an entire item of 
of any item specifically listed on          nomenclature associated with that item      income, loss, expense, or deduction 
Schedule M-3 that is in any manner          in the financial statements or books and    and the item is not described or 
                                            records. Accurate completion of             included in Part II, lines 1 through 25, or 

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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
purposes. P and A must report this The description for each amount temporary differences that will reverse
expense/deduction in column (a) and entered in column (a) must be readily in future years. The three reserves are
(d) on Part II, line 28. B must report the identifiable to the name of the account expenses in D's current financial
following on Part III, line 38: in column in the financial statements or books and statements but are not deductions for
(a), B's expense recognized in the records of the taxpayer, under which the U.S. income tax purposes in the current
financial statements when accrued; in amount in column (a) was recorded in year. D must not combine the
column (d), B's real estate tax expense the accounting records. Also, the Schedule M-3 differences for the three
recognized for U.S. income tax description for each amount entered in reserve accounts. D must report the
purposes; and in column (b) or (c), as column (a) must include detailed amounts attributable to the allowance
applicable, the difference between B's information supporting each adjustment for uncollectible accounts receivable on
real estate tax expense in its financial reported in columns (b) and (c), Part III, line 32, Bad debt expense, and
statements and its real estate tax including how the adjustment is must separately state and adequately
deduction recognized for U.S. taxable identified in the accounting records. The disclose the amounts attributable to
income purposes. entire description is considered the tax each of the other two reserves, coupons
description for the amount reported in outstanding and warranty costs, on a
Separately stated and adequately column (d) for each item reported on required, attached statement that
disclosed. Each difference reported in Part II, line 25, or Part III, line 38. supports the amounts on Part III, line 38.
Parts II and III must be separately stated Each description should adequately D must also provide a description for
and adequately disclosed. In general, a describe all four columns of Part II, each reserve that meets the
difference is adequately disclosed if the line 25, or Part III, line 38. If additional requirements for Part III, line 38,
difference is labeled in a manner that information is required to provide an discussed earlier under Required
clearly identifies the item or transaction acceptable description, provide a statements for Part II, line 25, and Part
from which the difference arises. See supporting statement. III, line 38. In this example, an
Regulations section 1.6662-4(f). If a acceptable description would be
specific item of income, gain, loss, Example 8. Corporation C is a
expense, or deduction is described on calendar year taxpayer that placed in “Coupon Issue Reserves—Rewards
Part II, lines 9 through 24, or Part III, service 10 depreciable fixed assets in a Expense” and “Future Warranty
lines 1 through 38, and the line does not previous tax year. C files and entirely Expense Reserve.”
indicate to “attach statement” and the completes Schedule M-3 for its current
Note. There is no need to add the title
specific instructions for the line do not tax year. C's total depreciation expense
call for an attachment of a statement, for its current tax year for five of the of the reserve account to the description
if the account name for the amount in
then the item is considered separately assets is $50,000 for income statement
stated and adequately disclosed if the purposes and $70,000 for U.S. income column (a) is already part of the
adjustment description.
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 Example 10. Corporation E is a
entered in the applicable columns of the year for the other five assets is $40,000 calendar year taxpayer that files and
applicable line. See the instructions for for income statement purposes and entirely completes Schedule M-3 for its
Part II, lines 1 through 8, for specific $30,000 for U.S. income tax purposes. 2019 tax year. On January 2, 2019, E
additional information required to be In its financial statements, C treats the establishes an allowance for
provided for these particular lines. differences between financial statement uncollectible accounts receivable (bad
and U.S. income tax depreciation debt reserve) of $100,000. During 2019,

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E increased the reserve by $250,000 for (5) the amounts for columns (a) through
additional accounts receivable that may Part II. Reconciliation of (d).
become uncollectible. Additionally, Net Income (Loss) per Line 3. Subpart F, QEF, and
during 2019, E decreases the reserve
by $75,000 for accounts receivable that Income Statement of Similar Income Inclusions
were discharged in bankruptcy during Includible Corporations Report on line 3, column (d), the amount
2019. The balance in the reserve With Taxable Income per included in taxable income under
account on December 31, 2019, is section 951, relating to Subpart F; the
Return
$275,000. The $100,000 amount to amounts included under section 951A,
establish the reserve account and the Attach supporting statements for Parts relating to global intangible low-taxed
$250,000 to increase the reserve II, lines 1 through 12. For any item income (GILTI); gains or other income
account are expenses on E's 2019 reported on lines 1, 3 through 6, or 8, inclusions resulting from elections under
financial statements but are not include in the supporting statement the sections 1291(d)(2) and 1298(b)(1); and
deductible for U.S. income tax purposes name of the entity for which the item is any amount included in taxable income
in 2019. However, the $75,000 reported, the entity's EIN (if applicable), pursuant to section 1293, relating to a
decrease to the reserve is deductible for the type of entity (corporation, qualified electing fund (QEF). The
U.S. income tax purposes in 2019. In its partnership, etc.), and the item amounts amount included under section 951
financial statements, E treats the for columns (a) through (d). See the corresponds to the total of the amounts
reserve account as giving rise to a instructions for Part II, lines 2, 7, and 9 reported on Form 1120, Schedule C,
temporary difference that will reverse in through 12, for the specific information lines 15, 16a, 16b, and 16c (or the
future tax years. E must report on Part required for those particular lines. corresponding line on Form 1120-C,
III, line 32, for its 2019 tax year income Line 1. Income (Loss) From Schedule C, if applicable). The amount
statement bad debt expense of Equity Method Foreign of GILTI corresponds to the amount
$350,000 in column (a), a temporary reported on Form 1120, Schedule C,
difference of ($275,000) in column (b), Corporations line 17 (or the corresponding line on
and U.S. income tax bad debt expense Report on line 1, column (a), the Form 112-C, Schedule C, if applicable).
of $75,000 in column (d). financial income (loss) included in Part I, The amount of QEF income
line 11, for any foreign corporation
Example 11. Corporation F is a corresponds to the total of the amounts
accounted for on the equity method and
calendar year taxpayer that files and of income from a QEF reported by the
remove such amount in column (b) or
entirely completes Schedule M-3 for its corporation on all Forms 8621,
(c), as applicable. Report the amount of
current tax year. F incurs $200 of meal Information Return by a Shareholder of
dividends received and other taxable
expenses and $100 of entertainment a Passive Foreign Investment Company
amounts received from or includible with
expenses that F deducts in computing or Qualified Electing Fund. See Form
respect to foreign corporations on Part
net income per the income statement. 8621 and the Instructions for Form
II, lines 2 through 5, as applicable.
All of the $200 of meal expenses are 8621.
subject to the 50% limitation under Line 2. Gross Foreign Also include on line 3 passive foreign
section 274(n). The $100 of Dividends Not Previously investment company (PFIC)
entertainment expenses are mark-to-market gains and losses under
nondeductible under section 274(a). In Taxed
its financial statements, F treats the Except as otherwise provided in this section 1296. Do not report such gains
limitation on deductions for meals and paragraph, report on line 2, column (d), and losses on Part II, line 16.
entertainment as a permanent the amount (before any withholding tax) Line 4. Gross-Up for Foreign
difference. Because meals and of any foreign dividends included in Taxes Deemed Paid
entertainment expenses are specifically current year taxable income on Form
described in Part III, line 11, F must 1120, page 1, line 28, and report on Report on line 4, column (d), the amount
report all of its meals and entertainment line 2, column (a), the amount of of any foreign taxes deemed paid not
expenses on this line, regardless of dividends from any foreign corporation included in column (d) of Part II, lines 9,
whether there is a difference. included in Part I, line 11. Do not report 10, and 11, Income (loss) from U.S.
Accordingly, F must report $300 in on line 2 any amounts that must be partnerships, foreign partnerships, and
column (a), $200 in column (c), and reported on Part II, line 3 or 4, or other pass-through entities. The foreign
$100 in column (d). All meals and dividends that were previously taxed taxes deemed paid amount on this
entertainment expenses, whether and must be reported on Part II, line 5. line 4 must correspond to the total
allowed fully or subject to limitations, See the instructions below for Part II, foreign taxes deemed paid amounts
must be reported on Part III, line 11. No lines 3, 4, and 5. reported by the corporation on all Forms
1118, Foreign Tax
amounts should be reported on Part II, For any dividends reported on Part II, Credit—Corporations, excluding the
line 28. line 2, that are received on a class of amounts reported in column (d) of Part
voting stock of which the corporation II, lines 9, 10, and 11.
directly or indirectly owned 10% or more
of the outstanding shares of that class at Line 5. Gross Foreign
any time during the tax year, report on Distributions Previously Taxed
an attached supporting statement (1) Report on line 5, column (a), any
the name of the dividend payer, (2) the distributions received from foreign
payer's EIN (if applicable), (3) the class corporations that correspond to
of voting stock on which the dividend amounts included in Part I, line 11, and
was paid, (4) the percentage of the that were previously taxed for U.S.
class directly or indirectly owned, and income tax purposes. For example,

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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 
Since 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 
                                               an attached supporting statement for        includible corporations, ($100) is 
Corporations                                                                               reported in column (a), $100 in column 
                                               Part II, line 7: (1) the name of the 
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 
                                               minority interest included in the financial 
Eliminated in Tax Consolidation                                                            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.                                                           For any interest owned by the 
corporation. Report on line 7, column          Example 12.  Corporation G is a 
(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           partnership that is included in Part I, 
listed on Form 851) are eliminated or          report its equity interest in the income of line 11.
excluded for financial accounting              DS1 on its separate financial               2. In column (b) or (c), as 
purposes and eliminated for the                statements. DS1 has financial               applicable, except for amounts 
calculation of U.S. taxable income. In         statement net income (before minority       described in item 4 below, report the 
the case of an insurance company               interests) and taxable income of $1,000     sum of all differences, if any, attributable 
included in the consolidated U.S.              ($2,500 of revenue less $1,500 cost of      to the corporation's distributive share of 
income tax return required to report           goods sold).                                income or loss from a U.S. or foreign 
intercompany dividends as part of              On the consolidated Schedule M-3,           partnership.
statutory accounting net income,               Part I, line 4, Worldwide consolidated      3. In column (d), except for amounts 
include such intercompany dividends on         net income (loss) per income statement,     described in item 4 below, report the 
Part II, line 7, column (a), and the           and on line 11, Net income (loss) per       sum of all amounts of income, gain, 
taxable amount of those dividends on           income statement of includible              loss, or deduction attributable to the 
Part II, line 7, column (d). (For insurance    corporations, the U.S. consolidated tax     corporation's distributive share of 
companies included in the consolidated         group GDS1 must report $900 of              income or loss from a U.S. or foreign 
U.S. income tax return, see the                financial statement net income ($1,000      partnership (that is, the sum of all 
instructions for Part I, lines 10 and 11.)     net income less $100 minority interest).    amounts reportable on the corporation's 
For any intercompany dividends                 The GDS1 group must prepare one             Schedule(s) K-1 received from the 
(dividends received from includible            consolidated Schedule M-3, Parts II and     partnership (if applicable)), without 
corporations listed on Form 851)               III, and three additional Schedules M-3,    regard to any limitations computed at 
included on Part II, line 7, report on an      Parts II and III: one for G, one for DS1,   the partner level (for example, 
attached supporting statement: (1) the         and one for consolidation eliminations.     limitations on utilization of charitable 
name of the dividend payer, (2) the            On the Schedule M-3, Parts II and III,      contributions, capital losses, and 
payer's EIN, (3) the class of stock or         for DS1, $1,000 is reported on Part II,     interest expense).
security on which the dividends were           lines 28 and 30, in both columns (a) and 
paid, (4) the amount of any net                (d). On G's Schedule M-3, Parts II and 

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For each partnership reported on sum of all differences, if any, attributable In lieu of the requirements of the
line 9 or 10, attach a supporting to the pass-through entity. preceding paragraph, a corporation will
statement that provides the name, EIN 3. In column (d), except for amounts be considered to have separately stated
(if applicable), end of year profit-sharing described in item 4 below, report the and adequately disclosed a reportable
percentage (if applicable), end of year sum of all taxable amounts of income, transaction if the corporation attaches a
loss-sharing percentage (if applicable), gain, loss, or deduction reportable on supporting statement that provides the
and the amount reported in column (a), the corporation's Schedule(s) K-1 following for each reportable
(b), (c), or (d) of line 9 or 10, as received from the pass-through entity (if transaction.
applicable. applicable). 1. A description of the reportable
Example 13. U.S. corporation H is a 4. Do not report on Part II, line 11, transaction disclosed on Form 8886 for
calendar year taxpayer that files and any portion of a corporation's domestic which amounts are reported on Part II,
entirely completes Schedule M-3. H has production activities deduction even if line 12;
an investment in a U.S. partnership some or all of the corporation's 2. The name and tax shelter
USP. H prepares financial statements in deduction is attributable to an interest in registration number, if applicable, as
accordance with GAAP. In its financial a pass-through entity held by the reported on lines 1a and 1c,
statements, H treats the difference corporation. If applicable, a corporation respectively, of Form 8886; and
between financial statement net income must report this deduction only on Part 3. The type of reportable transaction
and taxable income from its investment III, line 22. (that is, listed transaction, confidential
in USP as a permanent difference. For
its current tax year, H's financial For each pass-through entity transaction, transaction with contractual
statement net income includes $10,000 reported on line 11, attach a supporting protection, etc.) as reported on line 2 of
of income attributable to its share of statement that provides that entity's Form 8886.
USP's net income. H's Schedule K-1 name, EIN (if applicable), the If a transaction is a listed transaction
from USP reports $5,000 of ordinary corporation's end of year profit-sharing described in Regulations section
income, $7,000 of long-term capital percentage (if applicable), the 1.6011-4(b)(2), the description must
gains, $4,000 of charitable corporation's end of year loss-sharing also include the description provided on
contributions, and $200 of section 179 percentage (if applicable), and the line 3 of Form 8886. In addition, if the
expense. H must report on Part II, line 9, amounts reported by the corporation in reportable transaction involves an
$10,000 in column (a), a permanent column (a), (b), (c), or (d) of line 11, as investment in the transaction through
difference of ($2,200) in column (c), and applicable. another entity such as a partnership, the
$7,800 in column (d). Line 12. Items Relating to description must include the name and
EIN (if applicable) of that entity as
Example 14. Same facts as Reportable Transactions reported on line 5 of Form 8886.
Example 13, except that corporation H's Any amounts attributable to any
charitable contribution deduction is reportable transactions (as described in Example 15. Corporation J is a
wholly attributable to its partnership Regulations section 1.6011-4) must be calendar year taxpayer that files and
interest in USP and is limited to $90 included on Part II, line 12, regardless of entirely completes Schedule M-3 for its
pursuant to section 170(b)(2) due to whether the difference, or differences, current tax year. J incurred seven
other investment losses incurred by H. would otherwise be reported elsewhere different abandonment losses during its
In its financial statements, H treated this in Part II or Part III. Thus, if a taxpayer current tax year. One loss of $12 million
limitation as a temporary difference. H files Form 8886 for any reportable results from a reportable transaction
must not report the charitable transaction described in Regulations described in Regulations section
contribution limitation of $3,910 section 1.6011-4, the amounts 1.6011-4(b)(5), another loss of $5
($4,000 - $90) on Part II, line 9. H must attributable to that reportable million results from a reportable
report the limitation on Part III, line 21, transaction must be reported on Part II, transaction described in Regulations
and report the disallowed charitable line 12. In addition, all income and section 1.6011-4(b)(4), and the
contributions of ($3,910) in columns (b) expense amounts attributable to a remaining five abandonment losses are
and (d). reportable transaction must be reported not reportable transactions. J discloses
Line 11. Income (Loss) From on Part II, line 12, columns (a) and (d) the reportable transactions giving rise to
Other Pass-Through Entities even if there is no difference between the $12 million and $5 million losses on
the financial amounts and the taxable separate Forms 8886 and sequentially
For any interest in a pass-through entity amounts. numbers them X1 and X2, respectively.
(other than an interest in a partnership J must separately state and adequately
reportable on Part II, line 9 or 10, as Each difference attributable to a disclose the $12 million and $5 million
applicable) owned by a member of the reportable transaction must be losses on Part II, line 12. The $12 million
U.S. consolidated tax group (other than separately stated and adequately loss and the $5 million loss will be
an interest in a disregarded entity), disclosed. A corporation will be adequately disclosed if J attaches a
report the following on line 11. considered to have separately stated supporting statement for line 12 that
1. In column (a), report the sum of and adequately disclosed a reportable lists each of the sequentially numbered
the corporation's distributive share of transaction on line 12 if the corporation forms, Form 8886-X1 and Form
income or loss from the pass-through sequentially numbers each Form 8886 8886-X2, and with respect to each
entity that is included in Part I, line 11. and lists by identifying number on the reportable transaction reports the
supporting statement for Part II, line 12, appropriate amounts required for Part II,
2. In column (b) or (c), as each sequentially numbered reportable line 12, columns (a) through (d).
applicable, except for amounts transaction and the amounts required Alternatively, J's disclosures will be
described in item 4 below, report the for Part II, line 12, columns (a) through adequate if the description provided for
(d). each loss on the supporting statement

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

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

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entirely completes Schedule M-3. For spread over 4 tax years, beginning with Line 23a. Income Statement
financial accounting purposes, M the current tax year. In its financial Gain/Loss on Sale, Exchange,
accounts for each transaction as a sale. statements, N treats the section 481(a)
For U.S. income tax purposes, each of adjustment as a temporary difference. N Abandonment, Worthlessness,
M's transactions must be treated as a must report on Part II, line 19, $25,000 or Other Disposition of Assets
lease. In its financial statements, M in columns (b) and (d) for its current tax Other Than Inventory and
treats the difference in the financial year and each of the subsequent 3 tax Pass-Through Entities
accounting and the U.S. income tax years (unless N is otherwise required to
Report on line 23a, column (a), all gains
treatment of these transactions as recognize the remainder of the 481(a)
and losses on the disposition of assets
temporary. During its current tax year, M adjustment earlier). N must not report
except for (1) gains and losses on the
reports in its financial statements $1,000 the section 481(a) adjustment on Part
disposition of inventory, and (2) gains
of sales and $700 of cost of goods sold III, line 31.
and losses allocated to the corporation
with respect to its current year lease
transactions. M receives periodic Line 20. Unearned/Deferred from a pass-through entity (for example,
payments of $500 in its current year with Revenue on Schedule K-1) that are included in
the net income (loss) of includible
respect to these current year Report on line 20, column (a), amounts corporations reported on Part I, line 11.
transactions and similar transactions of revenues included in Part I, line 11, Reverse the amount reported in column
from prior years and treats $400 as that were deferred from a prior financial (a) in column (b) or (c), as applicable.
principal and $100 as interest income. accounting year. Report on line 20, The corresponding gains and losses for
For financial accounting purposes, M column (d), amounts of revenues U.S. income tax purposes are reported
reports gross profit of $300 ($1,000 - recognizable for U.S. income tax on Part II, lines 23b through 23g, as
$700) and interest income of $100 from purposes in the current tax year that are applicable.
these transactions. For U.S. income tax recognized for financial accounting
purposes, M reports $500 of gross purposes in a different year. Also, report Line 23b. Gross Capital Gains
rental income (the periodic payments) on line 20, column (d), any amount of From Schedule D, Excluding
and (based on other facts) $200 of revenues reported on line 20, column Amounts From Pass-Through
depreciation deduction on the property. (a), that are recognizable for U.S.
On its current year Schedule M-3, M income tax purposes in the current tax Entities
must report on Part II, line 13, $100 in year. Use columns (b) and (c) of line 20, Report on line 23b gross capital gains
column (a), ($100) in column (b), and as applicable, to report the differences reported on Schedule D (Form 1120),
zero in column (d). In addition, M must between columns (a) and (d). Capital Gains and Losses, excluding
report on Part II, line 18, $300 of gross capital gains from pass-through entities,
profit in column (a), $200 in column (b), Line 20 must not be used to report which must be reported on Part II, line 9,
and $500 of gross rental income in income recognized from long-term 10, or 11, as applicable.
column (d). Lastly, M must report on contracts. Instead, use line 21.
Line 23c. Gross Capital Losses
Part III, line 31, $200 in columns (b) and Line 21. Income Recognition
From Schedule D, Excluding
(d). From Long-Term Contracts
Amounts From Pass-Through
Line 19. Section 481(a) Report on line 21 the amount of net
Adjustments income or loss for financial statement Entities, Abandonment Losses,
With the exception of a section 481(a) purposes (or books and records, if and Worthless Stock Losses
adjustment that is required to be applicable) or U.S. income tax purposes Report on line 23c gross capital losses
reported on Part II, line 12, for for any contract accounted for under a reported on Schedule D (Form 1120),
reportable transactions, any difference long-term contract method of excluding capital losses from (a)
between an income or expense item accounting. pass-through entities, which must be
reported on Part II, line 9, 10, or 11, as
attributable to an authorized (or Line 22. Original Issue Discount applicable; (b) abandonment losses,
unauthorized) change in method of and Other Imputed Interest which must be reported on Part II,
accounting made for U.S. income tax
purposes that results in a section 481(a) Report on line 22 any amounts of line 23e; and (c) worthless stock losses,
adjustment must be reported on Part II, original issue discount (OID) and other which must be reported on Part II,
line 19, regardless of whether a imputed interest. The term “original line 23f. Do not report on line 23c capital
separate line for that income or expense issue discount and other imputed losses carried over from a prior tax year
item exists in Part II or Part III. interest” includes, but is not limited to: and utilized in the current tax year. See
Example 20. Corporation N is a 1. The excess of a debt instrument's the instructions for Part II, line 24,
calendar year taxpayer that files and stated redemption price at maturity over regarding the reporting requirements for
entirely completes Schedule M-3 for its its issue price, as determined under capital loss carryovers utilized in the
current tax year. N was depreciating section 1273; current tax year.
certain fixed assets over an erroneous 2. Amounts that are imputed interest Line 23d. Net Gain/Loss
recovery period and, effective for its on a deferred sales contract under Reported on Form 4797,
current tax year, N receives IRS consent section 483; Line 17, Excluding Amounts
to change its method of accounting for 3. Amounts treated as interest or From Pass-Through Entities,
the depreciable fixed assets and begins OID under the stripped bond rules under
using the proper recovery period. The section 1286; and Abandonment Losses, and
change in method of accounting results 4. Amounts treated as OID under Worthless Stock Losses
in a positive section 481(a) adjustment the below-market interest rate rules Report on line 23d the net gain or loss
of $100,000 that is required to be under section 7872. reported on line 17 of Form 4797, Sales

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of Business Property, excluding and column (d). For a U.S. consolidated Line 26. Total Income (Loss)
amounts from (a) pass-through entities, tax group, the Schedule M-3 adjustment Items
which must be reported on Part II, line 9, for the amount of the consolidated
10, or 11, as applicable; (b) capital loss carryforward should not be Combine lines 1 through 25 and enter
abandonment losses, which must be made on the separate consolidating the total on line 26.
reported on Part II, line 23e; and (c) Schedules M-3 of the includible Note. Line 17, Cost of goods sold,
worthless stock losses, which must be corporations, but on the separate columns (a) and (d), if applicable, are
reported on Part II, line 23f. Schedule M-3 for consolidation negative amounts which will affect the
eliminations (or on Form 8916 in the totals entered on line 26.
Note. Traders in securities or case of a mixed group) as described
commodities that have made a valid under Completing Schedule M-3 and Line 27. Total Expense/
election under section 475(f) to use the Certain Allocations, Limitations, and Deduction Items
mark-to-market method to account for Carryovers, earlier.
securities or commodities, see the Report on Part II, line 27, columns (a)
instructions for Part II, line 16, earlier. Line 25. Other Income (Loss) through (d), as applicable, the negative
Items With Differences of the amounts reported on Part III,
Line 23e. Abandonment Losses line 39, columns (a) through (d), as
Separately state and adequately applicable. Report positive amounts as
Report on line 23e any abandonment disclose on Part II, line 25, all items of negative and negative amounts as
losses, regardless of whether the loss is income (loss) with differences that are positive. For example, if Part III, line 39,
characterized as an ordinary loss or a not otherwise listed on Part II, lines 1 column (a), reflects an amount of $1
capital loss. through 24. Attach a statement that million, then report on Part II, line 27,
Line 23f. Worthless Stock itemizes the type of income (loss) and column (a), ($1 million). Similarly, if Part
Losses the amount of each item and provides a III, line 39, column (b), reflects an
description that states the income (loss) amount of ($50,000), then report on Part
Report on line 23f any worthless stock name for book purposes for the amount II, line 27, column (b), $50,000.
loss, regardless of whether the loss is recorded in column (a) and describes
characterized as an ordinary loss or a the adjustment being recorded in Line 28. Other Items With No
capital loss. Attach a statement that column (b) or (c). The entire description Differences
separately states and adequately completes the tax description for the
If there is no difference between the
discloses each event that gives rise to a amount included in column (d) for each
financial accounting amount and the
worthless stock loss and the amount of item separately stated on this line.
each loss. taxable amount of an entire item of
The attached statement should have income, gain, loss, expense, or
Line 23g. Other Gain/Loss on five columns. The first column has the deduction and the item is not described
Disposition of Assets Other description for the next four columns. or included in Part II, lines 1 through 25,
Than Inventory The second column is column (a) or Part III, lines 1 through 38, report the
Report on line 23g any gains or losses income (loss) per income statement, the entire amount of the item in columns (a)
from the sale or exchange of property third column is column (b) temporary and (d) of line 28. If a portion of an item
other than inventory that are not difference, the fourth column is column of income, loss, expense, or deduction
reported on lines 23b through 23f. (c) permanent difference, and the fifth has a difference and a portion of the
column is column (d) income (loss) per item does not have a difference, do not
Line 24. Capital Loss Limitation tax return. Every item listed on the report any portion of the item on line 28.
and Carryforward Used attached statement for line 25 must Instead, report the entire amount of the
Report as a positive amount on line 24, always have columns (a) + (b) + (c) = item (that is, both the portion with a
column (b) or (c), as applicable, and (d) (d). Each item with amounts in columns difference and the portion without a
the excess of the net capital losses over (a), (b), (c), and (d) will be totaled and difference) on the applicable line of Part
the net capital gains reported on included as one line on Part II, line 25. II, lines 1 through 25, or Part III, lines 1
through 38. See Example 11, earlier.
Schedule D (Form 1120) by the If any “comprehensive income” as
corporation. For a U.S. consolidated tax defined by Statement of Financial Line 29a. 1120 Subgroup
group, the Schedule M-3 adjustment for Accounting Standards (SFAS) No. 130 Reconciliation Totals
the amount of the consolidated net is reported on this line, describe the For filers other than a mixed group,
capital loss that is disallowed should not item(s) in detail. Examples of sufficiently combine lines 26 through 28 and skip
be made on the separate consolidating detailed descriptions include “foreign lines 29b and 29c. On the
Schedules M-3 of the includible currency translation sub-consolidated Schedule M-3 for a
corporations, but on the separate adjustments—comprehensive income” mixed group, combine lines 26 through
Schedule M-3 for consolidated and “gains and losses on 28 and skip lines 29b and 29c. For the
eliminations (or on Form 8916 in the available-for-sale consolidated Schedule M-3 of a mixed
case of a mixed group) as described securities—comprehensive income.” group, complete only lines 29a through
under Completing Schedule M-3 and
Certain Allocations, Limitations, and Whether an item of income (loss) is 29c and line 30 of Part II. No Part III is
Carryovers, earlier. reported on line 25, or is reported on required to be completed for the
Part II, line 28, is determined separately consolidated Schedule M-3 of a mixed
If the corporation utilizes a capital by each member of the U.S. group.
loss carryforward on Schedule D in the consolidated tax group and not at the
current tax year, report the carryforward U.S. consolidated tax group level.
utilized as a negative amount on Part II,
line 24, column (b) or (c), as applicable,

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Line 29b. PC Insurance consolidated tax group but is retained in required to file Form 8916-A, but may
Subgroup Reconciliation Totals the parent corporation's financial voluntarily do so.
statements (or books and records, if
Line 29b is only used by mixed groups. applicable), then amounts are reported Line 9. Stock Option Expense
See Schedule M-3 Consolidation for only on Part III, lines 1 through 6, of the Report on line 9, column (a), amounts
Mixed Groups (1120/L/PC), earlier. parent's separate Schedule M-3. expensed on Part I, line 11, net income
per the income statement, that are
Line 29c. Life Insurance Line 7. Foreign Withholding attributable to all stock options. Report
Subgroup Reconciliation Totals Taxes on line 9, column (d), deduction
Line 29c is only used by mixed groups. Report on line 7, column (a), the amount amounts attributable to all stock options.
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
Line 30. Reconciliation Totals I, line 11. If the corporation is deducting Compensation
Mixed groups, see Schedule M-3 foreign tax, use column (b) or (c), as Report on line 10 any amounts for
Consolidation for Mixed Groups applicable, to correct for any difference equity-based compensation or
(1120/L/PC), earlier. between foreign withholding tax consideration that are reflected as
included in financial accounting net expense for financial accounting
income and the amount of foreign purposes (column (a)) or deducted in
Part III. Reconciliation of withholding taxes being deducted in the the U.S. income tax return (column (d))
return. If the corporation is crediting other than amounts reportable
Net Income (Loss) per foreign withholding taxes against the elsewhere on Schedule M-3, Parts II
Income Statement of U.S. income tax liability, use column (b) and III (for example, on Part III, line 9,
Includible Corporations or (c), as applicable, to negate the for stock options expense). Examples of
amount reported in column (a). amounts reportable on line 10 include
With Taxable Income per payments attributable to employee
Return—Expense/ Line 8. Interest Expense stock purchase plans (ESPPs),
Deduction Items Report on Part III, line 8, column (a), the phantom stock options, phantom stock
Note. Expense amounts that reduce total amount of interest expense units, stock warrants, stock appreciation
financial accounting income must be included on Part I, line 11, and report on rights, qualified equity grants, and
reported on Part III, column (a), as Part III, line 8, column (d), the total restricted stock, regardless of whether
positive amounts. Deduction amounts amount of interest deduction included such payments are made to employees
that reduce taxable income must be on Form 1120, page 1, line 28, that is or non-employees, or as payment for
reported on Part III, column (d), as not required to be reported elsewhere property or compensation for services.
positive amounts. Amounts reported on on Schedule M-3. In column (b) or (c),
Part II, line 27, must be the negative of as applicable, include any adjustments Line 11. Meals and
the amounts reported on Part III, line 39. for any amounts treated for U.S. income Entertainment
tax purposes as interest deduction that Report on line 11, column (a), any
Lines 1 Through 6. Income Tax are treated as some other form of amounts paid or accrued by the
Expense expense for financial accounting corporation during the tax year for
If the corporation does not distinguish purposes, or vice versa. For example, meals, beverages, and entertainment
between current and deferred income adjustments to interest expense/ that are accounted for in financial
tax expense in its financial statements deduction resulting from adjustments accounting income, regardless of the
(or its books and records, if applicable), made in accordance with the classification, nomenclature, or
report income tax expense as current instructions for Part III, line 34, Purchase terminology used for such amounts, and
income tax expense using lines 1, 3, versus lease (for purchasers and/or regardless of how or where such
and 5, as applicable. lessees), should be made in columns amounts are classified in the
(b) and (c), as applicable, on this line 8. corporation's financial income statement
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, Schedule M-3, Parts II and III (for
financial statements (or its books and columns (a) through (d), as applicable. example, Part II, line 17).
records, if applicable). If the current and Attach Form 8916-A.
deferred U.S., state, and foreign income Line 12. Fines and Penalties
tax expense for the U.S. consolidated Do not report on Form 8916-A and Report on line 12 any fines or similar
tax group (income tax expense) is this line 8 amounts reported in penalties paid to a government or other
allocated among the members of the accordance with the instructions for Part authority for the violation of any law for
U.S. consolidated tax group in the II, lines 9, 10, 11, and 12. which fines or penalties are assessed.
group's financial statements (or its All fines and penalties expensed in
books and records, if applicable), then Note. Any corporation that files Form financial accounting income (paid or
each member must report its allocated 1120 (or Form 1120-C) that (a) is accrued) must be included on this
income tax expense on Part III, lines 1 required to file Schedule M-3 (Form line 12, column (a), regardless of the
through 6, of that member's separate 1120) and has less than $50 million in government or other authority that
Schedule M-3. However, if the income total assets at the end of the tax year, or imposed the fines or penalties;
tax expense is not shared or allocated (b) is not required to file Schedule M-3 regardless of whether the fines and
among members of the U.S. and voluntarily files Schedule M-3, is not penalties are civil or criminal; regardless

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of the classification, nomenclature, or Line 14. Parachute Payments line 11, for the current tax year and that
terminology used for the fines or Report on line 14, column (a), the total is not reportable elsewhere on
penalties by the imposing authority in its expense included in financial Schedule M-3. For example, report
actions or documents; and regardless of accounting net income on Part I, line 11, originations and reversals of deferred
how or where the fines or penalties are that is subject to section 280G. Report compensation subject to section 409A
classified in the corporation's financial in column (b) or (c), as applicable, the on line 18.
income statement or the income and amount of nondeductible parachute Line 20. Charitable
expense accounts maintained in the payments pursuant to section 280G, Contribution of Intangible
corporation's books and records. Also and report in column (d) the deductible
report on line 12, column (a), the amount of compensation after any Property
reversal of any overaccrual of any excess parachute payment limitations Report on line 20 any charitable
amount described in this paragraph. under section 280G. If a payment is contribution of intangible property, for
See section 162(f) for additional subject to limitation under both sections example, contributions of:
guidance. 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
contributions allowable by virtue of
such amounts as described in the Line 15. Compensation With income earned by donees subsequent
preceding paragraph that are includible
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);
nondeductible amount of current • Railroad rights of way;
Do not report on line 12 amounts compensation in excess of $1 million • Mineral rights; and
required to be reported in accordance ($500,000 if the corporation receives or • Other intangible property.
with the instructions for Part III, line 13. 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,
both sections 162(m) and 280G, report columns (b), (c), and (d), as applicable,
Line 13. Judgments, Damages, 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
section 1.162-27(g) for the interaction
Report on line 13, column (a), the amount of the charitable contribution
between sections 162(m) and 280G.
amount of any estimated or actual limitation amount.
judgments, damages, awards, Line 16. Pension and If the corporation utilizes a
settlements, and similar costs, however Profit-Sharing contribution carryforward in the current
named or classified, included in tax year, report the carryforward utilized
financial accounting income, regardless Report on line 16 any amounts
of whether the amount deducted was attributable to the corporation's pension as a positive amount on columns (b),
attributable to an estimate of future plans, profit-sharing plans, and any (c), and (d), as applicable.
anticipated payments or actual other retirement plans. When a consolidated income tax
payments. Also report on line 13, Line 17. Other Post-Retirement return is being filed, Schedule M-3
adjustments for the amount of charitable
column (a), the reversal of any Benefits contributions in excess of the limitation,
overaccrual of any amount described in
this paragraph. Report on line 17 any amounts or for charitable contribution
attributable to other post-retirement carryforward utilized, should not be
Report on line 13, column (d), any benefits not otherwise includible on Part made on the separate consolidating
such amounts as are described in the III, line 16 (for example, retiree health Schedules M-3 of the includible
preceding paragraph that are includible and life insurance coverage, dental corporations, but on the separate
in taxable income, regardless of the coverage, etc.). consolidating Schedule M-3 for
financial accounting period in which consolidation eliminations (or on Form
such amounts were or are included in Line 18. Deferred
8916 in the case of a mixed group). See
financial accounting net income. Compensation Completing Schedule M-3 and Certain
Complete columns (b) and (c) as Report on line 18, column (a), any Allocations, Limitations, and Carryovers,
appropriate. compensation expense included in the earlier.
net income (loss) amount reported in
Do not report on line 13 amounts Part I, line 11, that is not deductible for Line 22. Domestic Production
required to be reported in accordance U.S. income tax purposes in the current Activities Deduction
with the instructions for Part III, line 12. tax year and that was not reported For specified agricultural or horticultural
Do not report on line 13 amounts elsewhere on Schedule M-3, column cooperatives (specified cooperatives), a
recovered from insurers or any other (a). Report on line 18, column (d), any deduction for income attributable to
indemnitors for any judgments, compensation deductible in the current domestic production activities under
damages, awards, or similar costs tax year that was not included in the net section 199A(g) is available for tax
described above. income (loss) amount reported in Part I, years beginning after 2017. See the

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Instructions for Form 8903. Also see fees paid or incurred at any stage of the of the premiums that are deductible for
section 199A(g). acquisition or reorganization process federal income tax purposes.
including, for example, fees paid or
Report on line 22, column (d), the incurred to evaluate whether to Line 34. Purchase Versus
cooperative's section 199A(g) investigate an acquisition, fees to Lease (for Purchasers and/or
deduction that is reported on Form conduct an actual investigation, and Lessees)
1120-C. Complete columns (b) and (c) fees to consummate the acquisition.
as appropriate. Do not report any Also include on this line other Note. Also see the instructions for
portion of the cooperative’s section acquisition/reorganization costs sellers and/or lessors in the instructions
199A(g) deduction on any other line of incurred in connection with the for Part II, line 18.
Schedule M-3. liquidation of a subsidiary, a spin-off of a Asset transfer transactions with periodic
Line 23. Current Year subsidiary, or an initial public stock payments characterized for financial
offering. accounting purposes as either a
Acquisition or Reorganization purchase or a lease may, under some
Investment Banking Fees Line 26. Amortization/
circumstances, be characterized as the
Report on line 23 any investment Impairment of Goodwill opposite for tax purposes.
banking fees paid or incurred in Report on line 26 amortization of
connection with a taxable or tax-free goodwill or amounts attributable to the If a transaction is treated as a lease,
acquisition of property (for example, impairment of goodwill. the purchaser/lessee reports the
stock or assets) or a tax-free periodic payments as gross rental
reorganization. Report on this line any Line 27. Amortization of expense. If the transaction is treated as
investment banking fees incurred at any Acquisition, Reorganization, a purchase, the purchaser/lessee
stage of the acquisition or and Start-Up Costs reports the periodic payments as
payments of principal and interest and
reorganization process including, for Report on line 27 amortization of also reports depreciation expense or
example, fees paid or incurred to acquisition, reorganization, and start-up deduction with respect to the purchased
evaluate whether to investigate an costs. For purposes of columns (b), (c), asset.
acquisition, fees to conduct an actual and (d), include amounts amortizable
investigation, and fees to consummate under section 167, 195, or 248. Report in column (a) gross rent
the acquisition. Also include on this line expense for a transaction treated as a
investment banking fees incurred in Line 28. Other Amortization or
lease for financial accounting purposes
connection with the liquidation of a Impairment Write-Offs but as a sale for U.S. income tax
subsidiary, a spin-off of a subsidiary, or Report on line 28 any amortization or purposes. Report in column (d) gross
an initial public stock offering. impairment write-offs not otherwise rental deductions for a transaction
Line 24. Current Year includible on Schedule M-3. treated as a lease for U.S. income tax
purposes but as a purchase for financial
Acquisition or Reorganization Line 29. Reserved accounting purposes. Report interest
Legal and Accounting Fees When using this line to figure amounts expense for such transactions on Part
Report on line 24 any legal and on other tax forms or worksheets, this III, line 8, column (a) or (d), as
accounting fees paid or incurred in line should be considered to be zero. applicable. Report depreciation
connection with a taxable or tax-free expense or deductions for such
Line 31. Depreciation
acquisition of property (for example, transactions on Part III, line 31, column
stock or assets) or tax-free Report on line 31 any depreciation (a) or (d), as applicable. Use columns
reorganization. Report on this line any expense that is not required to be (b) and (c) of Part III, lines 8, 31, and 34,
legal and accounting fees incurred at reported elsewhere on Schedule M-3 as applicable, to report the differences
any stage of the acquisition or (for example, on Part II, line 9, 10, 11, or between columns (a) and (d) for such
reorganization process including, for 17). recharacterized transactions.
example, fees paid or incurred to Line 32. Bad Debt Expense Example 21. U.S. corporation X
evaluate whether to investigate an acquired property in a transaction that,
acquisition, fees to conduct an actual Report on line 32, column (a), any
investigation, and fees to consummate amounts attributable to an allowance for for financial accounting purposes, X
the acquisition. Also include on this line uncollectible accounts receivable or treats as a lease. X is a calendar year
legal and accounting fees incurred in actual write-offs of accounts receivable taxpayer that files and entirely
connection with the liquidation of a included on Part I, line 11. Report in completes Schedule M-3 for its current
subsidiary, a spin-off of a subsidiary, or column (d) the amount of bad debt tax year. Because of its terms, the
an initial public stock offering. expense deductible for federal income transaction is treated for U.S. income
tax purposes under section 166. tax purposes as a purchase and X must
Line 25. Current Year treat the periodic payments it makes
Line 33. Corporate Owned Life
Acquisition/Reorganization partially as payment of principal and
Insurance Premiums partially as payment of interest. In its
Other Costs financial statements, X treats the
Report on line 33 all amounts of
Report on line 25 any other fees paid or insurance premiums attributable to any difference between the financial
incurred in connection with a taxable or life insurance policy if the corporation is accounting and U.S. income tax
tax-free acquisition of property (for directly or indirectly a beneficiary under treatment of this transaction as a
example, stock or assets) or a tax-free the policy or if the policy has a cash temporary difference. For its current tax
reorganization not otherwise reportable value. Report in column (d) the amount year, X reports in its financial
on Schedule M-3 (for example, Part III, statements $1,000 of gross rental
line 23 or 24). Report on this line any expense that, for U.S. income tax

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purposes, is recharacterized as a $700     expense/deduction item is determined       ($2,000) in column (b), and $0 in 
payment of principal and a $300            separately by each member of a U.S.        column (d) on Part III, line 28, Other 
payment of interest, accompanied by a      consolidated tax group and not at the      amortization or impairment write-offs.
depreciation deduction of $1,200           U.S. consolidated tax group level. For     Example 24.   Assume the same 
(based on other facts). On its             example, U.S. corporation P has two        facts as Example 22, except X elected 
Schedule M-3, X must report the            subsidiaries, A and B, which are           to capitalize and amortize its research 
following on Part III, line 34: column (a) included in P’s consolidated financial     and expenditures over 60 months with 
$1,000, its financial accounting gross     statements and in P’s consolidated U.S.    respect to all its research programs for 
rental expense; column (b), ($1,000);      income tax return. For financial           U.S. income tax purposes. X first 
and column (d), zero. On Part III, line 8, purposes, P, A, and B recognize            realized benefits from such 
X reports zero in column (a) and $300 in   research and development cost as an        expenditures on August 1. Accordingly, 
columns (b) and (d) for the interest       expense when accrued. For U.S.             X must report $100,000 in column (a), a 
deduction. On Part III, line 31, X reports income tax purposes, P and A               temporary difference of ($90,000) 
zero in column (a) and $1,200 in           recognize such costs consistent with the   ($20,000 minus ($120,000/60 months x 
columns (b) and (d) for the depreciation   method used for financial purposes,        55 months)) in column (b), and $10,000 
deduction.                                 whereas B capitalizes and amortizes        in column (d).
                                           such costs. P and A must report these 
Line 35. Research and                      expenses in columns (a) and (d). B         Example 25.   Corporation X is a 
Development Costs                          must report its expense recognized in      calendar year taxpayer that files and 
Report in column (a) the amount of         the financial statements when accrued      entirely completes Schedule M-3 for its 
expenses included in net income            in column (a); in column (d), B’s          current tax year. X adopted the current 
reported on Part I, line 11, that are      research and development                   expense method for research and 
related to research and development        expenditures recognized for U.S.           experimental expenditures for U.S. 
expense. Report in column (d) the          income tax purposes; and in columns        income tax purposes. During its current 
amount of deductions included in Form      (b) and (c), as applicable, the difference tax year, X incurred $50,000 of research 
1120, page 1, line 27, that are            between B’s research and development       and development costs that X 
recognized and reported as section 174     costs in its financial statements and its  recognized as an expense in its 
research and experimental                  research and experimental                  financial statements. Also, X undertook 
expenditures consistent with the           expenditures for U.S. taxable income       to develop a new machine for its 
corporation’s adopted method of            purposes.                                  business. X expended $30,000 on the 
                                                                                      project of which $10,000 represents 
accounting for such expenditures. In       Example 22. Corporation X is a             actual costs of material, labor, and 
column (c), as applicable, include any     calendar year taxpayer that files and      component cost to construct the 
adjustments for any amounts treated for    entirely completes Schedule M-3 for its    machine, and $20,000 represents 
U.S. income tax purposes as research       current tax year. During its current tax   research costs not attributable to the 
or experimental expenditures that are      year, X incurred $100,000 of research      machine itself. X capitalized $30,000 of 
treated as some other form of expense      and development costs that X               costs related to the machine and 
for financial accounting purposes, or      recognized as an expense in its            recognized $6,000 of depreciation 
vice versa. Report any difference in       financial statements. Also, X incurred     expense in its financial statements. X’s 
timing recognition in column (b). For      $20,000 in attorney fees in obtaining a    depreciation expense on the $10,000 of 
example, if the taxpayer's financial       related patent application that X          costs related to the machine itself was 
accounting method does not specify         capitalized and amortized in its financial $2,000 for U.S. income tax purposes. 
otherwise, column (b) adjustments          statements. X recognized a $2,000          Accordingly, X must report $50,000 in 
include adjustments for timing             amortization deduction. In compliance      column (a), $20,000 (research costs 
differences between financial and tax      with its adopted method of accounting      which are not attributable to the 
accounting for (1) deferral and            under section 174, X deducts research      machine itself) in column (b), and 
amortization of research expenditures,     and experimental expenditures for U.S.     $70,000 in column (d). X must also 
(2) a section 59(e) election, (3)          income tax purposes. Accordingly, X        report $6,000 in column (a), ($4,000) in 
reduction of section 174 expenditures      must report $100,000 in column (a),        column (b), and $2,000 in column (d) on 
under section 280C or section 482, (4)     $20,000 in column (b), and $120,000 in     Part III, line 31, Depreciation.
costs attributable to obtaining a patent,  column (d). X must also report $2,000 in 
(5) research in social sciences, and (6)   column (a), ($2,000) in column (b), and    Example 26.   Corporation X is a 
cost elements for property of a            $0 in column (d) on Part III, line 28,     calendar year taxpayer that files and 
character subject to depreciation.         Other amortization or impairment           entirely completes Schedule M-3 for its 
Section 174 provides two methods           write-offs.                                current tax year. During its current tax 
                                                                                      year, X incurred $10,000 of research 
for the treatment of research and          Example 23. Assume the same                and development costs related to social 
experimental expenditures paid or          facts as Example 22, except X makes        sciences that it recognized as an 
incurred by a taxpayer in connection       an election under section 59(e) to         expense in its financial statements. X 
with the taxpayer’s trade or business.     deduct $80,000 of its $120,000 of          adopted the current expense method for 
These expenditures may be treated as       research and experimental                  research and experimental 
expenses not chargeable to a capital       expenditures ratably over a 10-year        expenditures for U.S. income tax 
account and deducted in the year in        period. Accordingly, X must report         purposes. Because such costs are not 
which they are paid or incurred, or they   $100,000 in column (a), a temporary        allowable costs under section 174, X 
may be deferred and amortized. Since       difference of ($52,000) ($20,000 minus     must report $10,000 in column (a), 
the method for treatment of research       ($80,000/10 years x 9 years)) in column    permanent difference ($10,000) in 
and experimental expenditures is           (b), and $48,000 in column (d). X must     column (c), and $0 in column (d). If such 
adopted at the subsidiary level, the       also report $2,000 in column (a), 

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costs are otherwise deductible for U.S. the dollar amounts summarized by this contingent liability. The appropriate level
income tax purposes, X must report this line. An accompanying statement is of disclosure depends upon each
item of expense on Part III, line 38, required even if there are no dollar taxpayer’s operational activity and the
Other expense/deduction items with amounts reported on line 36. nature of its accounting records. For
differences. example, if a corporation’s net income
Line 37. Section 162(r)—FDIC amount reported in the income
Example 27. Corporation X is a Premiums Paid by Certain statement includes anticipated
calendar year taxpayer that files and
entirely completes Schedule M-3 for its Large Financial Institutions expenses for a discontinued operation
current tax year. During its current tax Report on line 37, column (a), the total as a single amount, and its general
year, X paid $75,000 to acquire or amount paid or accrued as FDIC ledger or other books, records, and
in-license intangible assets under a premiums included on Part I, line 11. workpapers provide details for the
collaborative arrangement with another Report on line 37, column (c), any anticipated expenses under more
company that X recognized as a disallowed amounts, subject to the explanatory and defined categories
research and development expense in applicable percentage, of any FDIC such as employee termination costs,
its financial statements. X adopted the premiums paid or included by the large lease cancellation costs, loss on sale of
current expense method for research financial institution. For this purpose, the equipment, etc., a supporting statement
and experimental expenditures for U.S. large financial institution includes that lists those categories of expenses
income tax purposes. Because members of its expanded affiliated and their details will satisfy the
payments made to acquire rights to a group, as defined in section 162(r)(6) requirement to separately state and
product or technology are excluded (B). The disallowance does not apply if adequately disclose. In order to
costs from the definition of research and the institution’s (including members of separately state and adequately
experimental expenditures, X must its expanded affiliated group’s) total disclose the employee termination
report $75,000 in column (a), ($75,000) consolidated assets (determined as of costs, it is not required that an
in column (c), and $0 in column (d). X the close of the tax year) do not exceed anticipated termination cost amount be
must report any amortization otherwise $10 billion. listed for each employee, or that each
allowable related to the payments on asset (or category of asset) be listed
Part III, line 28, Other amortization or The applicable percentage is the along with the anticipated loss on
impairment write-offs. excess of the corporation’s total disposition.
consolidated assets over $10 billion,
Line 36. Section 118 Exclusion divided by $40 billion. For taxpayers The attached statement should have
Report on line 36 any inducements with total consolidated assets of $50 five columns. The first column has the
received in the current year and treated billion or more, the applicable description for the next four columns.
as contributions to the capital of a percentage is 100%. See section 162(r). The second column is column (a)
expense per income statement, the third
corporation by a nonshareholder. The Example 28. Corporation X has column is column (b) temporary
following nonshareholder contributions total consolidated assets of $20 billion. difference, the fourth column is column
to capital are not eligible for exclusion Under section 162(r), no deduction is (c) permanent difference, and the fifth
under section 118. allowed for 25% ((20,000,000,000 – column is column (d) deduction per tax
• Any contribution in aid of construction 10,000,000,000) / 40,000,000,000) of return. Every item listed on the attached
or any other contribution as a customer FDIC premiums. statement for line 38 must always have
or potential customer. columns (a) + (b) + (c) = (d). Each item
• Any contribution by any civic group. Line 38. Other Expense/
with amounts in columns (a), (b), (c),
• Any contribution by any governmental Deduction Items With and (d) will be totaled and included as
entity, except any contribution made Differences one line on Part III, line 38.
after December 22, 2017, and made Separately state and adequately
Comprehensive income. If any
pursuant to a master development plan disclose on Part III, line 38, all items of
“comprehensive income” as defined by
that was approved prior to December expense/deduction that are not
SFAS No. 130 is reported on this line,
22, 2017, by a governmental entity. otherwise listed on Part III, lines 1
describe the item(s) in detail as, for
Report in column (a) any income through 37.
amount as a negative number and any example, “Foreign currency translation
expense amount as a positive number. Attach a statement that describes adjustments—comprehensive income”
and itemizes the type of expense/ and “Gains and losses on
Corporations must identify on an deduction and the amount of each item, available-for-sale
accompanying statement referencing and provides a description that states securities—comprehensive income.”
line 36 the fair market value of land or the expense/deduction name for book Reserves and contingent liabilities.
other property (including cash) provided purposes for the amount recorded in Report on line 38 amounts related to the
to the corporation by any column (a) and describes the change in each reserve or contingent
nonshareholder, including a adjustment being recorded in column liability that is not required to be
governmental unit, as an inducement, or (b) or (c). The entire description reported elsewhere on Schedule M-3.
for any other purpose. completes the tax description for the For example, (1) amounts relating to
On the accompanying statement, amount included in column (d) for each changes in reserves for litigation must
also identify any inducements that item separately stated on this line. be reported on Part III, line 13,
include refundable or transferable tax Judgments, damages, awards, and
credits, including transferable credits The statement attached to the
that were sold. Schedule M-3 for line 38 must similar costs; and (2) amounts relating
separately state and adequately to changes in reserves for uncollectible
The statement must separately state, disclose the nature and amount of the accounts receivable must be reported
adequately disclose, and identify all of expense related to each reserve and/or

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on Part III, line 32, Bad debt expense. report on line 38 items that are not premium when paid and amortizes the
See Example 9, earlier. required to be reported elsewhere on advertising over the 12-month period. In
Report on line 38 the amortization of Schedule M-3, Parts II and III. its annual statement, Q treats the
various items of prepaid expense, such Example 29. Corporation Q is a difference attributable to the annual
as prepaid subscriptions and license calendar year taxpayer that files and statement treatment and U.S. income
fees, prepaid insurance, etc. entirely completes Schedule M-3 for its tax treatment of the prepaid insurance
Report on line 38, column (a), current tax year. On July 1 of each year, as a temporary difference. As there is
expenses included in net income Q has a fixed liability for its annual no difference between the book and tax
reported on Part I, line 11, that are insurance premiums on its home office treatment of advertising expense, it
related to reserves and contingent building that provides a 12-month should be included on Part II, line 28,
liabilities. Report on line 38, column (d), coverage period beginning July 1 Other items with no differences.
amounts related to liabilities for reserves through June 30. In addition, Q Q also has a legal reserve where
and contingent liabilities that are historically prepays 12 months of $300,000 was expensed for financial
deductible in the current tax year for advertising expenses on July 1. On July accounting purposes and a ($100,000)
U.S. income tax purposes. Examples of 1, Q prepays its insurance premium of temporary difference was calculated to
reserves that are allowed for book $500,000 and advertising expenses of arrive at the income tax deduction of
purposes, but not for tax purposes, $800,000. For statutory accounting $200,000. The statement attached to
include warranty reserves, restructuring purposes, Q capitalizes and amortizes Q's return for Part III, line 38, must be
reserves, reserves for discontinued the prepaid insurance and advertising separately stated and adequately
operations, and reserves for over 12 months. For U.S. income tax disclosed as follows.
acquisitions and dispositions. Only purposes, Q deducts the insurance

Line 38—Example 29
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                                                     Totals  22
A                                Entity considerations  4        J                                 Reorganization:
Abandonment    20                Equity-based                    Judgments   23                     Amortization   24
Accounting standards, order of     compensation     22                                              Investment banking 
  priority 7                     Equity method    16                                                    fees 24
Accrual to cash adjustment    18 Equity method foreign           L                                  Legal and accounting 
Acquisition:                       corporations   15             Lease, sale vs.   19                   fees 24
  Amortization 24                Exchange   20                   Lease vs. purchase   24            Other costs   24
  Investment banking             Expense/deduction:              Life/non-life loss limitation and Reportable transactions 17
  fees     24                      Items with differences  26        carryforward  6               Reserved 24
  Legal and accounting           Expense/deduction items:        Life insurance premiums,          Reserves and contingent 
  fees     24                      Total   21 27,                    corporate owned  24            liabilities 26
  Other costs  24                                                Life insurance subgroup           Restatements   7
Adequately disclosed,                                                reconciliation totals 22      Revenue, unearned/
  separately stated and  14      F                               Limitations 3                      deferred    20
Adjustments  10                  FDIC premiums    26             Long-term contracts  20
Allocations, limitations, and    Financial information and net 
  carryovers   3                   income (loss)                                                   S
Amortization of goodwill 24        reconciliation 6              M                                 Sale vs. lease 19
Amortization write-offs 24       Financial statements:           Mark-to-market    19              Schedule:
Awards    23                       Non-tax-basis    7            Meals and entertainment    22      L   3
                                   Tax-basis  7                  Minority interest 16               M-2  3
                                 Fines and penalties  22         Mixed group:                      Section 481(a) 
B                                Foreign:                            1120/L/PC  5                   adjustments    20
Bad debt expense    24             Corporations   15                 Checkboxes    6               Section 78 gross-up   15
                                   Distributions  15                 Subgroup                      Separately stated and 
                                   Dividends   15                    sub-consolidation     6        adequately disclosed     14
C                                  Entities, nonincludible 8                                       Start-up costs:
Capital gains 20                   Partnerships   16                                                Amortization   24
Capital loss 20 21,                Withholding taxes    22                                         Statutory accounting 
Carryovers   3                   Form 4797   20                  N                                  adjustments    10
                                                                 Nonincludible:                    Stock option expense    22
Charitable contribution 23                                           Foreign entities 8            Subgroup sub-consolidation: 
  Carryforward   23                                                  U.S. entities 8                1120 subgroup, 1120-PC 
  Limitation  23                 G                               Nonincludible entities:            subgroup, and 1120-L 
Compensation with section        Gain/loss on disposition of         Eliminations  9                subgroup    5
  162(m) limitation  23            assets   21                   Non-tax-basis financial 
Comprehensive income     26      Gain/loss on sale  20               statements and tax-basis 
Consolidated return  3           General instructions   1            financial statements  7
Consolidated vs.                 Goodwill  24                                                      T
  consolidating  5               Groups, consolidated vs.                                          Tax-basis financial 
Consolidation  16                  consolidating  5                                                 statements    7
                                                                 O
Consolidation for mixed                                          Original issue discount   20
  groups:
  1120/L/PC    5                 H                                                                 U
Contingent liabilities, reserves Hedging transactions   18                                         U.S.:
                                                                 P                                  Dividends   16
  and 26                                                         Parachute payments     23          Entities, nonincludible  8
Corporate owned life                                             Partnerships:                      Partnerships   16
  insurance premiums     24      I                                   Foreign 16                    Unearned revenue      20
Cost of goods sold  19           Includible corporations  10 16,     U.S. 16
                                 Includible entities:            Pass-through entities  17
                                   Eliminations   9              PC insurance subgroup 
D                                  Other   9                         reconciliation totals 22      W
Damages    23                    Inclusions 15                   Pension and profit-sharing   23   Worldwide consolidated net 
Deferred compensation    23      Income:                         Post-retirement benefits  23       income (loss)   7
Deferred revenue  20               Statement   6                 Publicly traded common            Worthlessness  20
Depreciation  24                   Statement period     7            stock 7                       Worthless stock losses  21
Disposition of assets 20         Income (loss):                  Purchase vs. lease   24
Disregarded entities 9             Differences    21
Dividend adjustments   10          Equity method      16
Dividends  15                    Income statement period   10
Domestic production activities   Interest:                       R
  deduction   23                   Expense   22                  Reconciliation:
                                   Imputed   20                      1120 subgroup    21
                                   Income   18                       Life insurance 22
                                                                     Mixed group subgroup 
E                                                                    sub-consolidation     6
Entities:                                                            PC insurance  22
  Disregarded  9

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