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Department of the Treasury
Internal Revenue Service
Instructions for

Schedule M-3 (Form 1065)

(Rev. November 2023)

(For use with December 2021 revision of Sch. M-3 (Form 1065))
Net Income (Loss) Reconciliation for Certain Partnerships

Section references are to the Internal Revenue Code unless 1. The amount of total assets at the end of the tax year
otherwise noted. reported on Schedule L, line 14, column (d), is equal to $10
million or more.
Future Developments 2. The amount of adjusted total assets for the tax year is
For the latest information about developments related to equal to $10 million or more. See Total Assets and Adjusted
Schedule M-3 (Form 1065) and its instructions, such as Total Assets, later.
legislation enacted after they were published, go to IRS.gov/ 3. The amount of total receipts for the tax year is equal to
Form1065. $35 million or more. Total receipts is defined in the instructions
for Codes for Principal Business Activity and Principal Product or
What’s New Service in the Instructions for Form 1065.
Amortization of research and development costs. Specified 4. An entity that is a reportable entity partner with respect to
research and development costs paid or incurred in connection the partnership (as defined under these instructions) owns or is
with a trade or business in tax years beginning after December deemed to own, directly or indirectly, an interest of 50% or more
31, 2021, must be capitalized and amortized. See the in the partnership's capital, profit, or loss on any day during the
instructions for Line 29. Research and Development Costs. tax year of the partnership.
A common trust fund or foreign partnership must file
General Instructions Schedule M-3 if it meets any of the tests discussed above.
Applicable schedule and instructions. Use the December Note. All references to a U.S. partnership in these instructions
2021 Schedule M-3 (Form 1065) with these instructions for tax refer to any entity required to file Schedule M-3 (Form 1065),
years ending December 31, 2021, and until a new revision of the where appropriate.
form and instructions are available. For previous tax years, see
the applicable Schedule M-3 (Form 1065) and instructions. (For Partnerships not required to file Schedule M-3 may voluntarily
example, use the 2020 Schedule M-3 (Form 1065) with the 2020 file Schedule M-3.
instructions for tax years ending December 31, 2020, through
December 31, 2021.) Completing Schedule M-3 (Form 1065)
Form 1065 filers that are required to file Schedule M-3 (Form
Purpose of Schedule 1065) and have at least $50 million total assets at the end of the
tax year must complete Schedule M-3 (Form 1065) entirely.
Schedule M-3, Part I, asks certain questions about the
partnership's financial statements and reconciles financial Form 1065 filers that (a) are required to file Schedule M-3
statement net income (loss) for the consolidated financial (Form 1065) and have less than $50 million total assets at the
statement group to income (loss) per the income statement for end of the tax year, or (b) aren't required to file Schedule M-3
the partnership. (Form 1065) and voluntarily file Schedule M-3 (Form 1065) must
either (i) complete Schedule M-3 (Form 1065) entirely, or (ii)
Schedule M-3, Parts II and III, reconcile financial statement complete Schedule M-3 (Form 1065) through Part I and
net income (loss) for the partnership (per Schedule M-3, Part I, complete Schedule M-1 instead of completing Parts II and III of
line 11) to line 1 of the Analysis of Net Income (Loss) per Return Schedule M-3 (Form 1065). If the filer chooses to complete
found on Form 1065. Schedule M-1 instead of completing Parts II and III of
Schedule M-3 (Form 1065), line 1 of Schedule M-1 must equal
Where To File line 11 of Part I of Schedule M-3 (Form 1065).
If the partnership is required to file (or voluntarily files)
Schedule M-3 (Form 1065), the partnership must file Form 1065 For any part of Schedule M-3 (Form 1065) that is completed,
and all attachments and schedules, including Schedule M-3 all columns must be completed, all applicable questions must be
(Form 1065), at the following address. answered, all numerical data requested must be provided, and
any statement required to support a line item must be attached
Department of the Treasury and provide the information required for that line item. Any
Internal Revenue Service Center partnership required to file Schedule M-3 must check all boxes
Ogden, UT 84201-0011 above Part I that apply for the reason(s) for which the
Schedule M-3 is required to be filed. A partnership not required
to file Schedule M-3, but that is doing so voluntarily, should
Who Must File check box E above Part I.
Any entity that files Form 1065 must file Schedule M-3 (Form
1065) if any of the following is true. Total Assets and Adjusted Total Assets
The partnership should figure its adjusted total assets using the
Adjusted Total Assets Worksheet, later.

Aug 29, 2023 Cat. No. 38800Y

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For purposes of determining for Schedule M-3 whether the                  file Schedule M-3 for 2023 and either (i) complete Schedule M-3 
partnership's adjusted total assets (under these instructions)            entirely, or (ii) complete Schedule M-3 through Part I and 
equal $10 million or more, the partnership's total assets at the          complete Schedule M-1 instead of completing Parts II and III of 
end of the tax year must be determined on an overall accrual              Schedule M-3.
method of accounting unless both of the following apply: (a) the          4. The facts are the same as in Example 1.3 except that the 
tax return of the partnership is prepared using an overall cash           amount of total liabilities at the end of 2023 reported to Cypress' 
method of accounting, and (b) the partnership doesn't prepare             partners on Schedules K-1 is $11 million. Cypress made 
financial statements using, and isn't included in financial               distributions of $1.5 million during 2023 as reflected on 
statements prepared on, an accrual basis.                                 Schedule M-2, line 6. Cypress has adjusted total assets for 2023 
See Part I. Financial Information and Net Income (Loss)                   equal to $11 million, the greater of the tentative amount of $9 
Reconciliation regarding non-tax-basis income statements and              million, the sum of $7.5 million plus $1.5 million (the amount of 
related non-tax-basis balance sheets to be used in the                    distributions that must be added back to determine adjusted 
preparation of Schedule M-3 and the related non-tax-basis                 total assets for 2023), or $11 million (the amount of the total 
balance sheets to be used in the preparation of Schedule L.               liabilities at the end of 2023 reported to Cypress’ partners on 
                                                                          Schedules K-1). Because Cypress has adjusted total assets of 
In the case of a partnership year ending because of a section             $10 million or more for its tax year ending December 31, 2023, 
708 termination, the total assets of the partnership at the end of        Cypress must file Schedule M-3 for 2023 and either (i) complete 
the year for determining the requirement to file Schedule M-3 are         Schedule M-3 entirely, or (ii) complete Schedule M-3 through 
determined immediately before the section 708 termination and             Part I and complete Schedule M-1 instead of completing Parts II 
any actual or deemed contribution or distribution of the                  and III of Schedule M-3.
partnership assets under the provisions of section 708 are taken 
into account.                                                             5. Dogwood, a U.S. partnership, files Form 1065 for the tax 
                                                                          year ending December 31, 2023. Dogwood has total assets at 
Example 1.                                                                the end of 2023 reported on Schedule L, line 14, column (d), of 
1. U.S. partnership Ash, a limited liability company (LLC),               $7.5 million. The amount of total liabilities at the end of 2023 
owns 60% of the income and capital of U.S. partnership Birch,             reported to Dogwood's partners on Schedules K-1 is $5 million. 
also an LLC. For its tax year ending December 31, 2023, Ash               Dogwood made no distributions during 2023 reflected on 
prepares non-tax-basis GAAP (generally accepted accounting                Schedule M-2, line 6. Dogwood reported a loss of ($3 million) for 
principles) consolidated financial statements with Birch that             2023 on Schedule M-2, line 3. Dogwood didn't report 
report total assets at the end of the year of $12 million. Ash files      adjustments to capital on Schedule M-2, line 4 or 7. Dogwood 
Form 1065 and reports on its non-tax-basis unconsolidated                 has adjusted total assets for 2023 in the tentative amount of 
GAAP Schedule L total assets at the end of the year of $7                 $10.5 million, the sum of $7.5 million plus $3 million (the amount 
million. The $7 million total includes $3 million for its investment      of the loss stated as a positive amount that must be added back 
in Birch under the equity method of accounting. The amount of             to determine adjusted total assets for 2023). This tentative 
total liabilities at the end of the year reported to Ash's partners       amount is compared to the total liabilities at the end of 2023 as 
on Schedules K-1 is $5 million. Ash made distributions of $1              reported to Dogwood's partners on Schedules K-1, and the 
million during the year reflected on Schedule M-2, line 6. The            greater of the two amounts is considered the adjusted total 
amount of Ash's adjusted total assets is $8 million for the tax           assets. Because Dogwood has adjusted total assets of $10 
year. Ash has total receipts for the tax year of $15 million. Ash         million or more for its tax year ending December 31, 2023, 
has no reportable entity partners (as defined under Reportable            Dogwood must file Schedule M-3 for 2023 and either (i) 
Entity Partner Reporting Responsibilities, later). Ash isn't              complete Schedule M-3 entirely, or (ii) complete Schedule M-3 
required to file Schedule M-3 under any of the four tests                 through Part I and complete Schedule M-1 instead of completing 
discussed earlier. Ash may voluntarily file Schedule M-3 for the          Parts II and III of Schedule M-3.
tax year. If Ash doesn't file Schedule M-3, it must complete              6. Evergreen, a U.S. partnership, files Form 1065 for the tax 
Schedule M-1. If Ash files Schedule M-3, it must either (i)               year ending December 31, 2023. Evergreen has total assets at 
complete Schedule M-3 entirely, or (ii) complete Schedule M-3             the end of the tax year reported on Schedule L, line 14, column 
through Part I and complete Schedule M-1 instead of completing            (d), of $7.5 million. The amount of total liabilities at the end of 
Parts II and III of Schedule M-3.                                         2023 reported to Evergreen's partners on Schedules K-1 is $5 
2. The facts are the same as in Example 1.1 except that Ash               million. Evergreen made no distributions during 2023 reflected 
has total receipts for 2023 of $40 million. Ash must file                 on Schedule M-2, line 6. Evergreen didn't report a loss for 2023 
Schedule M-3 for 2023 and either (i) complete Schedule M-3                on Schedule M-2, line 3. Evergreen didn't report adjustments to 
entirely, or (ii) complete Schedule M-3 through Part I and                capital on Schedule M-2, line 7, but did report a negative 
complete Schedule M-1 instead of completing Parts II and III of           adjustment of ($3 million) on Schedule M-2, line 4. Evergreen 
Schedule M-3.                                                             has adjusted total assets for 2023 in the tentative amount of 
3. Cypress, a U.S. partnership, files Form 1065 for the tax               $10.5 million, the sum of $7.5 million plus $3 million (the amount 
year ending December 31, 2023. Cypress has total assets at the            of the negative adjustment stated as a positive amount that must 
end of the tax year reported on Schedule L, line 14, column (d),          be added back to determine adjusted total assets for 2023), an 
of $7.5 million. The aggregate amount of total liabilities at the         amount that isn't less than the total liabilities at the end of 2023 
end of 2023 reported to Cypress' partners on Schedules K-1 is             reported to Evergreen's partners on Schedules K-1. Because 
$5 million. Cypress made distributions of $3 million during 2023          Evergreen has adjusted total assets of $10 million or more for its 
reflected on Schedule M-2, line 6. Cypress didn't report a loss for       tax year ending December 31, 2023, Evergreen must file 
2023 on Schedule M-2, line 3. Cypress didn't report adjustments           Schedule M-3 for 2023 and either (i) complete Schedule M-3 
to capital on Schedule M-2, line 4 or 7. Cypress has adjusted             entirely, or (ii) complete Schedule M-3 through Part I and 
total assets for 2023 in the tentative amount of $10.5 million, the       complete Schedule M-1 instead of completing Parts II and III of 
sum of $7.5 million plus $3 million (the amount of distributions          Schedule M-3.
that must be added back to determine adjusted total assets for            7. Fern has $50 million in total assets at the end of its 2023 
2023), an amount that isn't less than the total liabilities at the end    tax year ending December 31, 2023, and files Form 1065. Fern 
of 2023 reported to Cypress' partners on Schedules K-1.                   must file Schedule M-3 and complete it entirely.
Because Cypress has adjusted total assets of $10 million or 
more for its tax year ending December 31, 2023, Cypress must 

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Adjusted Total Assets Worksheet                                                                                                               Keep for Your Records
  1.   Enter total assets at the end of the tax year on Schedule L, line 14, column (d) .                 . . . . . . . . . . . . . . .   1.  
  2.   Enter capital distributions on Schedule M-2, lines 6a and 6b (shown as a positive amount) .                        . . . . . . .   2.  
  3.   Enter any loss reported on Schedule M-2, line 3 (shown as a positive amount) .                     . . . . . . . . . . . . . . .   3.  
  4.   Enter the amount of any positive adjustment on Schedule M-2, line 7 .                  . . . . . . . . . . . . . . . . . . . . .   4.  
  5.   Enter the amount of any negative adjustment on Schedule M-2, line 4 (shown as a positive 
       amount) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.  
  6.   Add lines 1 through 5  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6.  
  7.   Enter combined total liabilities (recourse and non recourse) on all Schedules K-1 (Form 1065), Part II, 
       Item K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.  
  8.   Adjusted Total Assets. Enter the greater of line 6 or line 7 .         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8.  
Note. For line 2 above, if the partnership reflects partner capital account changes resulting from the sale of a partnership interest on Schedule M-2 as matching contributions and 
distributions (on lines 2a and 2b and on lines 6a and 6b, respectively), reduce the amounts shown on lines 6a and 6b by such matching amounts.

Reportable Entity Partner Reporting                                                                           5. State or country in which it is organized.
Responsibilities                                                                                              6. Date on which it first became a reportable entity partner.
For the purposes of these instructions, a reportable entity partner                                           7. Date with respect to which it is reporting a change in its 
with respect to a partnership filing Form 1065 is an entity that:                                       ownership interest in the partnership, if applicable.
• Owns or is deemed to own, directly or indirectly, under these                                               8. The interest in the partnership it owns or is deemed to 
instructions, a 50% or greater interest in the income, loss, or                                         own in the partnership, directly or indirectly (as defined under 
capital of the partnership on any day of the tax year; and                                              these instructions), as of the date with respect to which it is 
• Was required to file Schedule M-3 on its most recently filed                                          reporting.
U.S. federal income tax return or return of income filed prior to                                             9. Any change in that interest as of the date with respect to 
that day.                                                                                               which it is reporting.
  For the purposes of these instructions, the following rules                                                 The reportable entity partner must retain copies of required 
apply.                                                                                                  reports it makes to partnerships under these instructions. Each 
  1. The parent corporation of a consolidated tax group is                                              partnership must retain copies of the required reports it receives 
deemed to own all corporate and partnership interests owned or                                          under these instructions from reportable entity partners.
deemed to be owned under these instructions by any member of 
the tax consolidated group.                                                                                   For more information, see Item D. Reportable Entity Partner, 
                                                                                                        later.
  2. The owner of a disregarded entity is deemed to own all 
corporate and partnership interests owned or deemed to be                                                     Example 2. 
owned under these instructions by the disregarded entity.                                                     1. Ginkgo, a U.S. corporation, is the parent of a financial 
  3. The owner of 50% or more of a corporation by vote on any                                           consolidation group with 50 domestic subsidiaries, DS1 through 
day of the corporation tax year is deemed to own all corporate                                          DS50, and 50 foreign subsidiaries, FS1 through FS50, all 100% 
and partnership interests owned or deemed to be owned under                                             owned on September 16, 2023. On September 15, 2023, Ginkgo 
these instructions by the corporation during the corporation tax                                        filed a consolidated tax return on Form 1120 and was required to 
year.                                                                                                   file Schedule M-3 for the tax year ending December 31, 2022. 
  4. The owner of 50% or more of partnership income, loss, or                                           On September 16, 2023, DS1, DS2, DS3, FS1, and FS2 each 
capital on any day of the partnership tax year is deemed to own                                         acquire a 10% partnership interest in partnership Hawthorn, 
all corporate and partnership interests owned or deemed to be                                           which files Form 1065 for the tax year ending December 31, 
owned under these instructions by the partnership during the                                            2023. Ginkgo is deemed to own, directly or indirectly, under 
partnership tax year.                                                                                   these instructions all corporate and partnership interests of DS1, 
                                                                                                        DS2, and DS3, as the parent of the tax consolidation group, and 
  5. The beneficial owner of 50% or more of the beneficial                                              therefore is deemed to own 30% of Hawthorn on September 16, 
interest of a trust or nominee arrangement on any day of the trust                                      2023. Ginkgo is deemed to own, directly or indirectly, under 
or nominee arrangement tax year is deemed to own all corporate                                          these instructions all corporate and partnership interests of FS1 
and partnership interests owned or deemed to be owned under                                             and FS2 as the owner of 50% or more of each corporation by 
these instructions by the trust or nominee arrangement.                                                 vote and therefore is deemed to own 20% of Hawthorn on 
  A reportable entity partner with respect to a partnership (as                                         September 16, 2023. Ginkgo is therefore deemed to own 50% of 
defined above) must report the following to the partnership within                                      Hawthorn on September 16, 2023. Ginkgo owns or is deemed to 
30 days of first becoming a reportable entity partner and, after                                        own, directly or indirectly, under these instructions 50% or more 
first reporting to the partnership under these instructions,                                            of Hawthorn on September 16, 2023, and was required to file 
thereafter within 30 days of the date of any change in the interest                                     Schedule M-3 on its most recently filed U.S. income tax return 
it owns or is deemed to own, directly or indirectly, under these                                        filed before that date. Therefore, Ginkgo is a reportable entity 
instructions, in the partnership.                                                                       partner of Hawthorn as of September 16, 2023. On October 5, 
                                                                                                        2023, Ginkgo reports to Hawthorn, as it is required to do, that 
  1. Name.                                                                                              Ginkgo is a reportable entity partner as of September 16, 2023, 
  2. Mailing address.                                                                                   deemed to own, under these instructions, a 50% interest in 
                                                                                                        Hawthorn. Hawthorn is therefore required to file Schedule M-3 
  3. Employer identification number (EIN), if applicable.                                               when it files its Form 1065 for its tax year ending December 31, 
  4. Entity or organization type.                                                                       2023.

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2. Throughout 2019, A, an LLC filing Form 1065 for calendar Schedule M-3 and the related non-tax-basis balance sheet
year 2019, owns, as its only asset, 50% of each of B, C, D, and amounts that must be used for Schedule L.
E, each also an LLC filing Form 1065 for calendar year 2019. A
is owned by individuals and S corporations not required to file Total assets at the end of the tax year shown on Schedule L,
Schedule M-3 for 2018, 2019, or 2020. B, C, D, and E are owned line 14, column (d), must equal the total assets of the partnership
by A and by individuals and S corporations not required to file as of the last day of the tax year, and must be the same total
Schedule M-3 for 2018, 2019, or 2020. For the partnership tax assets reported by the partnership in the non-tax-basis financial
years ending December 31, 2019, each of B, C, D, and E has no statements, if any, used for Schedule M-3. If the partnership
year-end liabilities, $3 million in total assets and $6 million in prepares non-tax-basis financial statements, Schedule L must
adjusted total assets (the difference equal to the distributions by report the non-tax-basis financial statement total assets. If the
each in 2019), and 2019 total receipts of $20 million. As of partnership doesn't prepare non-tax-basis financial statements,
December 31, 2019, no owner, direct or indirect, of B, C, D, or E Schedule L must be based on the partnership's books and
was required to file Schedule M-3 on its most recently filed U.S. records. The Schedule L balance sheet can show tax-basis
income tax return or return of income. None of B, C, D, or E is balance sheet amounts if the partnership is allowed to use books
required to file Schedule M-3 for 2019. For the partnership tax and records for Schedule M-3 and the partnership's books and
year ending December 31, 2019, A has no year-end liabilities, $6 records reflect only tax-basis amounts.
million in total assets and $12 million in adjusted total assets (the
difference equal to the distributions in 2019), and 2019 total Generally, total assets at the beginning of the year
receipts of $6 million. As of December 31, 2019, no owner, direct (Schedule L, line 14, column (b)) must equal total assets at the
or indirect, of A was required to file Schedule M-3 on its most close of the prior year (Schedule L, line 14, column (d)). For
recently filed U.S. income tax return. A must file Schedule M-3 each Schedule L balance sheet item reported for which there is
when it files its Form 1065 for 2019 because A has adjusted total a difference between the current opening balance sheet amount
assets of $10 million or more. and the prior closing balance sheet amount, attach a statement
3. The ownership facts are the same as in Example 2.2 that reports the balance sheet item, the prior closing amount, the
continued to calendar year 2020. On March 3, 2020, A files its current opening amount, and a short explanation of the change.
Form 1065 with Schedule M-3 for the partnership tax year Such reasons for these differences include technical
ending December 31, 2019. As of March 4, 2020, A becomes a terminations and mergers.
reportable entity partner with respect to any partnership in which
it owns or is deemed to own, directly or indirectly, under these For purposes of measuring total assets at the end of the year,
instructions a 50% or greater interest in the income, loss, or the partnership's assets may not be netted or reduced by
capital of the partnership. A owns 50% of each of B, C, D, and E partnership liabilities. In addition, total assets may not be
and is therefore a reportable entity partner with respect to each reported as a negative amount. If Schedule L is prepared on a
as of March 4, 2020, the day after it filed its 2019 Form 1065 with non-tax-basis method, an investment in another partnership may
a required Schedule M-3. On March 20, 2020, A reports to B, C, be shown as appropriate under the partnership's non-tax-basis
D, and E, as it is required to do within 30 days of March 4, that it method of accounting, including, if required by the partnership's
is a reportable entity partner owning a 50% interest. Each of B, reporting methodology, the equity method of accounting for
C, D, and E is required to file Schedule M-3 for 2020 because investments. If Schedule L is prepared on a tax-basis method, an
each has a reportable entity partner. A will determine if it must investment by the partnership in another partnership must be
file Schedule M-3 for 2020 based on its separate facts for 2020. shown as an asset and measured by the partnership's adjusted
4. The ownership facts are the same as in Example 2.2 for basis in its partnership interest. Any liabilities contributing to
calendar year 2019, except that A is owned 50% by corporation such adjusted basis must be shown on Schedule L as
Z that was first required to file Schedule M-3 for its corporate tax partnership liabilities.
year ending December 31, 2018, and that filed its Form 1120 Example 3. Aspen, an LLC, files Form 1065 for calendar
with Schedule M-3 for 2018 on September 15, 2019. As of year 2023. Bamboo, a general partnership, also files Form 1065
September 16, 2019, Z was a reportable entity partner with for calendar year 2023. Aspen is a general partner in Bamboo.
respect to A and, through A, with respect to B, C, D, and E. On Aspen's capital account in Bamboo at the close of 2023 is
October 5, 2019, Z reports to A, B, C, D, and E, as it is required negative $4 million. This reflects Aspen's 2023 contribution to
to do within 30 days of September 16, that Z is a reportable Bamboo's capital of $2 million reduced by Aspen's share of 2023
entity partner directly owning (with respect to A) or deemed to losses passing through to it from Bamboo, $6 million. Aspen's
own indirectly (with respect to B, C, D, and E) a 50% interest. adjusted basis in Bamboo on December 31, 2023, is $16 million,
Therefore, because Z was a reportable entity partner for 2019, its $4 million negative tax capital account in Bamboo plus its $20
each of A, B, C, D, and E is required to file Schedule M-3 for million share of Bamboo's liabilities under section 752. Aspen
2019, regardless of whether it would otherwise be required to file prepares only tax-basis income statements and balance sheets.
Schedule M-3 for that year. On its Schedule L, Aspen reports as an asset the adjusted basis
of its investment in Bamboo, $16 million. Aspen also reports its
Other Form 1065 Schedules Affected by $20 million share of Bamboo's liabilities in the liabilities section
Schedule M-3 Requirements of Schedule L. Aspen doesn't report its $4 million negative
capital account in Bamboo on Schedule L.
Schedule L
Example 4. The facts are the same as in Example 3, except
If a non-tax-basis income statement and related non-tax-basis that Bamboo is an LLC and Aspen is a member of Bamboo.
balance sheet are prepared for any purpose for a period ending None of Bamboo's liabilities are recourse with respect to Aspen.
with or within the tax year, Schedule L must be prepared Aspen isn't obligated to restore any deficit capital account in
showing non-tax-basis amounts. See the discussion in Part I. Bamboo. Aspen prepares non-tax-basis income statements and
Financial Information and Net Income (Loss) Reconciliation balance sheets under an accounting method that requires the
regarding non-tax-basis income statements and related use of the equity method of accounting to account for its
non-tax-basis balance sheets prepared for any purpose and the investment in Bamboo. On its non-tax-basis books and records,
impact on the selection of the income statement used for Aspen initially reports $2 million as its investment in Bamboo, the
amount of Aspen's capital contribution. Aspen then reduces its
$2 million investment in Bamboo by its share of Bamboo's

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allocable losses. Because Aspen's allocable share of Bamboo's Non-Tax-Basis Financial Statements and Tax-Basis
losses is $6 million, Aspen's investment in Bamboo under the Financial Statements
equity method is reduced to $0. Because Aspen isn't liable to
repay any of Bamboo's liabilities and isn't obligated to restore
any deficit with respect to its capital account in Bamboo, Aspen A tax-basis income statement is allowed for Schedule M-3 and a
doesn't report any of Bamboo's liabilities on Aspen's Schedule L tax-basis balance sheet for Schedule L only if neither a
balance sheet. non-tax-basis income statement nor a non-tax-basis balance
sheet were prepared for any purpose and the books and records
Entity Considerations for Schedule M-3 of the partnership reflect only tax-basis amounts. The
partnership is deemed to have non-tax-basis income statements
For purposes of Schedule M-3, references to the classification of and the related non-tax-basis balance sheets for the current tax
an entity (for example, as a corporation, a partnership, or a trust) year for purposes of Schedule M-3 and Schedule L if such
are references to the treatment of the entity for U.S. income tax non-tax-basis financial statements were prepared for and
purposes. An entity that is generally disregarded as separate presented to management, creditors, members or partners,
from its owner for U.S. income tax purposes (disregarded entity) government regulators, or any other third parties for a period
must not be separately reported on Schedule M-3 except, if ending with or within the tax year.
required, on Part I, line 7a or 7b. On Schedule M-3, Parts II and
III, any item of income, gain, loss, deduction, or credit of a If a Form 10-K is filed with the Securities and Exchange
disregarded entity must be reported as an item of its owner. In Commission (SEC) for the period ending with or within the tax
particular, the income or loss of a disregarded entity must not be year, the partnership must check “Yes” for line 1a and use that
reported on Part II, line 7, 8, or 9, as from a separate partnership income statement for Schedule M-3. If Form 10-K isn't filed and
or other pass-through entity. The financial statement income or a non-tax-basis income statement is prepared that is a certified
loss of a disregarded entity is included on Part I, line 7a or 7b, non-tax-basis income statement for the period ending with or
only if its financial statement income or loss is included on Part I, within the tax year, the partnership must check “Yes” for line 1b
line 11, but not on Part I, line 4a. and use that income statement for Schedule M-3. If Form 10-K
isn't filed and no certified non-tax-basis income statement is
prepared but an unaudited non-tax-basis income statement is
Specific Instructions prepared for the period ending with or within the tax year, the
partnership must check “Yes” for line 1c and use that income
Item D. Reportable Entity Partner statement for Schedule M-3.
On Schedule M-3, page 1, if the partnership has any reportable Order of priority in accounting standards. If no Form 10-K
entity partners for the year, check item D. A partnership must is filed and two or more non-tax-basis income statements are
report the name, EIN (if applicable), and maximum percentage both certified non-tax-basis income statements for the period,
of actual or deemed ownership of each reportable entity partner the income statement prepared according to the following order
if there are one or two reportable entity partners for the tax year of priority in accounting standards must be used.
of the partnership, or, if there are more than two reportable entity 1. U.S. Generally Accepted Accounting Principles (GAAP).
partners for the tax year of the partnership, of the two reportable 2. International Financial Reporting Standards (IFRS).
entity partners with the largest maximum percentage of actual or
deemed ownership for the tax year of the partnership. The 3. Any other International Accounting Standards (IAS).
maximum percentage of actual or deemed ownership for a 4. Any regulatory accrual accounting.
reportable entity partner for a tax year of the partnership is the 5. Any other accrual accounting standard.
maximum percentage interest owned or deemed owned under
these instructions by the reportable entity partner in the 6. Section 704(b) book accounting.
partnership's capital, profit, or loss on any day during the tax 7. Any other fair market value reporting standard.
year of the partnership. 8. Any cash basis standard.
The reportable entity partner must retain copies of required If no non-tax-basis income statement is certified and two or
reports it makes to partnerships under these instructions. Each more non-tax-basis income statements are prepared, the
partnership must retain copies of the required reports it received income statement prepared according to the first listed of the
under these instructions from reportable entity partners. See accounting standards above must be used.
Reportable Entity Partner Reporting Responsibilities, earlier.
If no non-tax-basis financial statements are prepared for the
U.S. partnership filing Schedule M-3, the U.S. partnership must
Part I. Financial Information and Net check “No” on questions 1a, 1b, and 1c, skip lines 2 through 3b,
Income (Loss) Reconciliation and enter the net income (loss) per the books and records of the
U.S. partnership on line 4a.
Line 1. Questions Regarding the Type of Income
Statement Prepared Consolidated Financial Statements

For lines 1 through 11, use only the financial statements of the If a partnership filing a Schedule M-3
U.S. partnership filing Form 1065. If the U.S. partnership filing (a) is included in the non-tax-basis consolidated financial
Form 1065 is controlled by another entity, the U.S. partnership statements of a group (consolidated financial statement group)
must use for its Schedule M-3, Part I, its own financial with an entity parent filing a U.S tax return and Schedule M-3,
statements and not the financial statements of the controlling (b) has its income (loss) included and removed by the entity
entity. parent on that entity parent's Schedule M-3, Part I, and (c)
doesn't have a separate non-tax-basis financial statement
(certified or otherwise) of its own, the partnership must answer
questions 1a, 1b, and 1c, as appropriate, for its own tax return
and must report on its own Schedule M-3, as appropriate, the
amount for the partnership's net income (loss) that is equal to the

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amount included and removed in the entity parent's must be reported on line 11. Report on line 12a the worldwide
Schedule M-3, Part I. However, if in the circumstances described consolidated total assets and total liabilities amounts for the
immediately above, the partnership does have separate partnership using the same financial statements (or books and
non-tax-basis financial statements (certified or otherwise) of its records) used for the worldwide consolidated income (loss)
own, independent of the amount of the partnership's net income amount reported on line 4a.
included in the consolidated financial statements with the entity
parent, the partnership must answer questions 1a, 1b, and 1c, as Line 5. Net Income (Loss) of Nonincludible
appropriate, for its own tax return, based on its own separate Foreign Entities
non-tax-basis income statement, and must report on line 4a the
net income (loss) amounts shown on its separate income Remove the financial statement net income (line 5a) or loss
statement. (line 5b) of each foreign entity that is included on line 4a and isn't
the partnership (nonincludible foreign entity). In addition, on
Lines 2 and 3. Questions Regarding Income line 8, adjust for consolidation eliminations and correct for
minority interest and intercompany dividends between any
Statement Period and Restatements nonincludible foreign entity and the partnership filing Form 1065.
Enter the beginning and ending dates on line 2 for the Don't remove in Part I the financial statement net income (loss)
partnership's annual income statement period ending with or of any nonincludible foreign entity accounted for on line 4a using
within the current tax year. the equity method.
The questions on lines 3a and 3b, regarding income Attach a supporting statement that provides the name, EIN (if
statement restatements, refer to the worldwide consolidated applicable), and net income (loss) included on line 4a that is
income statement issued by the partnership filing Form 1065 removed on this line 5 for each separate nonincludible foreign
and used to prepare Schedule M-3. Answer “Yes” on lines 3a entity. Also state the total assets and total liabilities for each such
and/or 3b if the partnership's annual income statement has been separate nonincludible foreign entity and include those assets
restated for any reason. Attach a short statement of the reasons and liabilities amounts in the total assets and total liabilities
for the restatement in net income for each annual income reported on Part I, line 12b. The amounts of income (loss)
statement period that is restated, including the original amount detailed on the supporting statement should be reported for
and restated amount of each annual statement period's net each separate nonincludible foreign entity without regard to the
income. The attached statement isn't required to report effect of consolidation or elimination entries. If there are
restatements on an entity-by-entity basis. consolidation or elimination entries relating to nonincludible
foreign entities whose income (loss) is reported on the attached
Line 4. Worldwide Consolidated Net Income statement that aren't reportable on line 8, the net amounts of all
(Loss) per Income Statement such consolidation and elimination entries must be reported on a
separate line on the attached statement, so that the separate
Report on line 4a the worldwide consolidated net income (loss) financial accounting income (loss) of each nonincludible foreign
per the income statement (or books and records, if applicable) of entity remains separately stated.
the partnership.
For example, if the net income (after consolidation and
In completing Schedule M-3, the partnership must use
elimination entries) of a nonincludible foreign sub-consolidated
financial statement amounts from the financial statement type
group is being reported on line 5a, the attached supporting
checked “Yes” on line 1, or from its books and records if line 1c is
statement should report the income (loss) of each separate
checked “No.” If line 1a is checked “Yes,” report on line 4a the net
nonincludible foreign legal entity from each such entity's own
income amount reported in the income statement presented to
financial accounting net income statement or books and records,
the SEC on the partnership's Form 10-K.
and any consolidation or elimination entries (for intercompany
If a partnership prepares non-tax-basis financial statements, dividends, minority interests, etc.) not reportable on line 8 should
the amount on line 4a must equal the financial statement net be reported on the attached supporting statement as a net
income (loss) for the income statement period ending with or amount on a line separate and apart from lines that report each
within the tax year as indicated on line 2. nonincludible foreign entity's separate net income (loss).

If the partnership prepares non-tax-basis financial statements Line 6. Net Income (Loss) of Nonincludible U.S.
and the income statement period differs from the partnership's Entities
tax year, the income statement period indicated on line 2 applies
for purposes of lines 4a through 8. Remove the financial statement net income (line 6a) or loss
(line 6b) of each U.S. entity that is included on line 4a and isn't
If the partnership doesn't prepare non-tax-basis financial an includible entity in the partnership return (nonincludible U.S.
statements and has checked “No” on line 1c, enter the net entity). In addition, on line 8, adjust for consolidation eliminations
income (loss) per the books and records of the partnership on and correct for minority interest and intercompany dividends
line 4a. between any nonincludible U.S. entity and any includible entity.
Don't remove in Part I the financial statement net income (loss)
Check the appropriate box on line 4b to indicate which of the of any nonincludible U.S. entity accounted for on line 4a using
following accounting standards was used for line 4a. the equity method.
1. U.S. Generally Accepted Accounting Principles (GAAP).
Attach a supporting statement that provides the name, EIN (if
2. International Financial Reporting Standards (IFRS). applicable), and net income (loss) included on line 4a that is
3. Section 704(b). removed on line 6a or 6b for each separate nonincludible U.S.
4. Tax-basis. entity. Also state the total assets and total liabilities for each such
5. Other (specify). separate nonincludible U.S. entity and include those assets and
liabilities amounts in the total assets and total liabilities reported
Report on lines 5a through 10, as instructed below, all on Part I, line 12c. The amounts of income (loss) detailed on the
adjustment amounts required to adjust worldwide net income supporting statement should be reported for each separate
(loss) reported on line 4a (whether from financial statements or nonincludible U.S. entity without regard to the effect of
books and records) to net income (loss) of the partnership that consolidation or elimination entries. If there are consolidation or

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elimination entries relating to nonincludible U.S. entities whose       Line 8. Adjustment to Eliminations of 
income (loss) is reported on the attached statement that aren't 
                                                                        Transactions Between Includible Entities and 
reportable on line 8, the net amounts of all such consolidation 
and elimination entries must be reported on a separate line on          Nonincludible Entities
the attached statement, so that the separate financial accounting       Adjustments on line 8 to reverse certain financial accounting 
income (loss) of each nonincludible U.S. entity remains                 consolidation or elimination entries are necessary to ensure that 
separately stated.                                                      transactions between includible entities and nonincludible U.S. 
                                                                        or foreign entities aren't eliminated, in order to report the correct 
For example, if the net income (after consolidation and                 total amount on line 11. Also, additional consolidation entries 
elimination entries) of a nonincludible U.S. sub-consolidated           and elimination entries may be necessary on line 8 related to 
group is being reported on line 6a, the attached supporting             transactions between includible entities that are in the 
statement should report the income (loss) of each separate              consolidated financial statement group and other includible 
nonincludible U.S. legal entity from each such entity's own             entities that aren't in the consolidated financial statement group 
financial accounting net income statement or books and records,         but that are reported on line 7a or 7b in order to report the 
and any consolidation or elimination entries (for intercompany          correct total amount on line 11.
dividends, minority interests, etc.) not reportable on line 8 should 
be reported on the attached supporting statement as a net               Include on line 8 the total of the following: (a) amounts of any 
amount on a line separate and apart from lines that report each         adjustments to consolidation entries and elimination entries that 
nonincludible U.S. entity's separate net income (loss).                 are contained in the amount reported on line 4a, required as a 
                                                                        result of removing amounts on line 5 or 6; and (b) amounts of 
Lines 7a and 7b. Net Income (Loss) of Other                             any additional consolidation entries and elimination entries that 
                                                                        are required as a result of including amounts on line 7a or 7b. 
Foreign Disregarded Entities and Net Income                             This is necessary in order that the consolidation entries and 
(Loss) of Other U.S. Disregarded Entities                               intercompany elimination entries included in the amount 
Include on line 7a or 7b the financial net income or (loss) of each     reported on line 11 are only those applicable to the financial net 
disregarded entity in the U.S. tax return that isn't included in the    income (loss) of includible entities for the financial statement 
consolidated financial group, and therefore not included in the         period. For example, adjustments must be reported on line 8 to 
income reported on line 4a, but that is included on line 11.            remove minority interest and to reverse the elimination of 
Include on line 7a the financial income or (loss) of any foreign        intercompany dividends included on line 4a that relate to the net 
disregarded entity that isn't included in the income reported on        income of entities removed on line 5 or 6 because the income to 
line 4a but that is included on line 11 (other foreign disregarded      which the consolidation or elimination entries relate has been 
entities). Include on line 7b the financial income or (loss) of any     removed. Also, for example, consolidation or elimination entries 
U.S. disregarded entity that isn't included in the income reported      must be reported on line 8 to eliminate any intercompany 
on line 4a but that is included on line 11 (other U.S. disregarded      dividends between entities whose income is included on line 7a 
entities). In addition, on line 8, adjust for consolidation             or 7b and other entities included in the U.S. income tax return.
eliminations and correct for minority interest and intercompany         If an entity owner of an interest in another entity (a) accounts 
dividends for any other disregarded entity.                             for the interest in the other entity in the owner's separate general 
Attach a supporting statement that provides the name, EIN,              ledger on the equity method; and (b) fully consolidates the other 
and net income (loss) per the financial statement or books and          entity in the owner's consolidated financial statements, but that 
records included on line 7a or 7b for each separate foreign or          entity isn't includible in the owner's Form 1065, then, as part of 
U.S. disregarded entity. Also state the total assets and total          reversing all consolidation and elimination entries for the 
liabilities for each such separate included entity and include          nonincludible entity, the owner must reverse on line 8 the 
those assets and liabilities amounts in the total assets and total      elimination of the equity income inclusion from the other entity. If 
liabilities reported on Part I, line 12d. The amounts of income         the owner doesn't account for the other entity on the equity 
(loss) detailed on the supporting statement should be reported          method on its own general ledger, it won't have eliminated the 
for each separate other disregarded entity without regard to the        equity income for consolidated financial statement purposes, 
effect of consolidation or elimination entries solely between or        and therefore will have no elimination of equity income to 
among the entities listed. If there are consolidation or elimination    reverse.
entries relating to such separate other disregarded entities            The attached supporting statement for line 8 must identify the 
whose income (loss) is reported on the attached statement that          type (for example, minority interest, intercompany dividends, 
aren't reportable on line 8, the net amounts of all such                etc.) and amount of consolidation or elimination entries reported, 
consolidation and elimination entries must be reported on a             as well as the names of the entities to which they pertain. It isn't 
separate line on the attached statement, so that the separate           necessary, but it is permitted, to report on line 8 intercompany 
financial accounting income (loss) of each separate other               eliminations that net to zero, such as intercompany interest 
disregarded entity remains separately stated.                           income and expense.

For example, if the net income (after consolidation and                 Line 9. Adjustment to Reconcile Income 
elimination entries) of a sub-consolidated group of other foreign 
disregarded entities is being reported on line 7a, the attached         Statement Period to Tax Year
supporting statement should report the income (loss) of each            Include on line 9 any adjustments necessary to the income (loss) 
separate other foreign disregarded entity from each disregarded         of the partnership to reconcile differences between the 
entity's own financial accounting net income statement or books         partnership's income statement period reported on line 2 and the 
and records, and any consolidation or elimination entries (for          partnership's tax year. Attach a statement describing the 
intercompany dividends, minority interests, etc.) not reportable        adjustment.
on line 8 should be reported on the attached supporting 
statement as a net amount on a line separate and apart from             Line 10. Other Adjustments to Reconcile to 
lines that report each other foreign disregarded entity's separate      Amount on Line 11
net income (loss).
                                                                        Include on line 10 any other adjustments to reconcile net income 
                                                                        (loss) on line 4a through line 9, with net income (loss) of the 
                                                                        partnership reported on line 11.

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For any adjustment reported on line 10, attach a supporting includes no income for Nutmeg either on line 11 or on Part II,
statement with an explanation of each net adjustment included line 7, column (a). Cedar's taxable income from Nutmeg must be
on line 10. reported by Cedar on Part II, line 7, column (d).
3. U.S. partnership Palm owns 60% of corporation DS1,
Line 11. Net Income (Loss) per Income which is fully consolidated in Palm's financial statements. Palm
Statement of the Partnership accounts for DS1 in Palm's separate general ledger on the equity
Report on line 11 the net income (loss) per the income statement method. DS1 has net income of $100 (before minority interests)
(or books and records, if applicable) of the partnership. Amounts and pays dividends of $50, of which Palm receives $30. The
reported in column (a) of Parts II and III must be reported on the dividend reduces Palm's investment in DS1 for equity method
same accounting method as is used to report the amount of net reporting on Palm's separate general ledger where Palm
income (loss) per income statement of the partnership on includes its 60% equity share of DS1 income, which is $60. In its
line 11. financial statements, Palm eliminates the DS1 equity method
income of $60 and consolidates DS1, including $60 of net
Don't, in any event, report on line 11 the net income of entities income ($100 less the minority interest of $40) on line 4a.
other than the partnership filing Form 1065 for the tax year. For
example, it isn't permissible to remove the income of Palm must remove the $100 net income of DS1 on line 6a.
nonincludible entities on lines 5 and/or 6, above, then to add Palm must reverse on line 8 the elimination of the $40 minority
back such income on lines 7 through 10, such that the amount interest net income of DS1 and the elimination of the $60 of DS1
reported on line 11 includes the net income of entities not equity income. The net result is that Palm includes the $60 of
includible in the U.S. income tax return. A principal purpose of equity method income from DS1 on line 11 and on Part II, line 5,
Schedule M-3 is to report on line 11 only the financial accounting column (a). Palm's dividend income on the tax return from its
net income of only the partnership (including any other includible investment in DS1 must be reported on Part II, line 6, column (d).
entities) filing Form 1065. 4. U.S. partnership Cedar owns 60% of the capital and
profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg
Whether or not the partnership prepares financial statements, in Cedar's separate general ledger on the equity method.
line 11 must include all items that impact the net income (loss) of Nutmeg has net income of $100 (before minority interests) and
the partnership even if they aren't recorded in the profit and loss makes no distributions during the tax year. Cedar treats Nutmeg
accounts in the partnership's general ledger, including, for as a corporation for financial statement purposes and as a
example, all post-closing adjusting entries (including work paper partnership for U.S. income tax purposes. For equity method
adjustments) and dividend income or other income received reporting on Cedar's separate general ledger, Cedar includes its
from nonincludible entities. If the partnership prepares 60% equity share of Nutmeg income, which is $60. In its financial
unconsolidated financial statements using the same accounting statements, Cedar eliminates the $60 of Nutmeg equity method
method used to determine worldwide consolidated net income income and consolidates Nutmeg, including $60 of net income
(loss) for Part I, line 4, and if it uses the equity method for ($100 less the minority interest of $40) on line 4a.
investments, the amount reported on Part I, line 11, will equal the
amount of the unconsolidated net income (loss) reported on the Cedar must remove the $100 net income of Nutmeg on
unconsolidated financial statements. See Examples 5.3, 5.4, line 6a. Cedar must reverse on line 8 the elimination of the $40
and 5.5 below. minority interest net income of Nutmeg and the elimination of the
$60 of Nutmeg equity method income. The result is that Cedar
Example 5. includes the $60 of equity method income for Nutmeg on line 11
1. U.S. partnership Palm owns 60% of corporation DS1 and on Part II, line 7, column (a). Cedars's taxable income from
which is fully consolidated in Palm's financial statements. Palm Nutmeg must be reported by Cedar on Part II, line 7, column (d).
doesn't account for DS1 in Palm's separate general ledger on 5. U.S. partnership Cedar owns 60% of the capital and
the equity method. DS1 has net income of $100 (before minority profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg
interests) and pays dividends of $50, of which Palm receives in Cedar's separate general ledger on the equity method.
$30. The dividend is eliminated in the consolidated financial Nutmeg has net income of $100 (before minority interests) and
statements. In its financial statements, Palm consolidates DS1 pays a $50 cash distribution, of which Cedar receives $30. The
and includes $60 of net income ($100 less the minority interest distribution reduces Cedar's investment in Nutmeg for equity
of $40) on line 4a. method reporting on Cedar's separate general ledger. Cedar
Palm must remove the $100 net income of DS1 on line 6a. treats Nutmeg as a corporation for financial statement purposes
Palm must reverse on line 8 the elimination of the $40 minority and as a partnership for U.S. income tax purposes. For equity
interest net income of DS1. In addition, Palm reverses its method reporting on Cedar's separate general ledger, Cedar
elimination of the $30 intercompany dividend in its financial includes its 60% equity share of Nutmeg income, which is $60.
statements on line 8. The net result is that Palm includes the $30 In its financial statements, Cedar eliminates the $60 of Nutmeg
dividend from DS1 on line 11 and on Part II, line 6, column (a). equity method income, consolidates Nutmeg, and includes $60
Palm's dividend income included on the tax return from DS1 of net income ($100 less the minority interest of $40) on line 4a.
must be reported on Part II, line 6, column (d). Cedar must remove the $100 net income of Nutmeg on
2. U.S. partnership Cedar owns 60% of the capital and line 6a. Cedar must reverse on line 8 the elimination of the $40
profits interests in U.S. LLC Nutmeg. Cedar doesn't account for minority interest net income of Nutmeg and the elimination of the
Nutmeg in Cedar's separate general ledger on the equity $60 of Nutmeg equity method income. The result is that Cedar
method. Nutmeg has net income of $100 (before minority includes the $60 of equity method income for Nutmeg on line 11
interests) and makes no distributions during the tax year. Cedar and on Part II, line 7, column (a). Cedar's taxable income from
treats Nutmeg as a corporation for financial statement purposes Nutmeg must be reported by Cedar on Part II, line 7, column (d).
and as a partnership for U.S. income tax purposes. In its 6. U.S. partnership Palm owns 100% of the stock of U.S.
financial statements, Cedar consolidates Nutmeg and includes LLC Redwood, a disregarded entity. Redwood is included in
$60 of net income ($100 less the minority interest of $40) on Palm's federal income tax return, even though Redwood isn't
line 4a. included in Palm's consolidated financial statements on either a
Cedar must remove the $100 net income of Nutmeg on consolidated basis or on the equity method. Redwood has 2023
line 6a. Cedar must reverse on line 8 the elimination of the $40 net income of $100 after taking into account its $40 interest
minority interest net income of Nutmeg. The result is that Cedar payment to Palm. Palm has net income of $1,040 after

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recognition of the interest income from Redwood. Because                   column (c). Generally, under GAAP, a temporary difference 
Redwood is a disregarded entity, 100% of the net income of both            affects (creates, increases, or decreases) a deferred tax asset or 
Palm and Redwood must be reported on Palm's Form 1065 and                  liability.
the intercompany interest income and expense must be removed 
by consolidation elimination entries.                                      If the partnership doesn't prepare financial statements, or the 
                                                                           financial statements aren't prepared under GAAP, report in 
  Palm must report its financial statement net income of $1,040            column (b) any difference that the partnership believes will 
on line 4a and reports Redwood's net income of $100 on line 7b             reverse in a future tax year (that is, have an opposite effect on 
as a U.S. disregarded entity not included on line 4a, but included         taxable income in a future tax year (or years) due to the 
on line 11. Then, in order to reflect the full consolidation of the        difference in timing of recognition for financial accounting and 
financial accounting net income of Palm and Redwood on                     U.S. income tax purposes) or is the reversal of such a difference 
line 11, the following consolidation and elimination entry is              that arose in a prior tax year. Report in column (c) any difference 
reported on line 8: offsetting entries to remove the $40 of interest       that the partnership believes won't reverse in a future tax year 
income received from Redwood included by Palm on line 4a,                  (and isn't the reversal of such a difference that arose in a prior 
and to remove the $40 of interest expense of Redwood included              tax year).
in line 7b for a net change of zero. The result is that line 11 
reports $1,140: $1,040 from line 4a, and $100 from line 7. Stated          If the partnership is unable to determine whether a difference 
another way, line 11 includes the entire $1,000 net income of              between column (a) and column (d) for an item will reverse in a 
Palm, measured before recognition of the intercompany interest             future tax year or is the reversal of a difference that arose in a 
income from Redwood and the consolidation of Redwood                       prior tax year, report the difference for that item in column (c).
operations, plus the entire $140 net income of Redwood,                    Example 6.     At the end of Partnership Sycamore’s first tax 
measured before interest expense to Palm. Palm isn't required to           year, December 31, 2023, it wasn't required to file Schedule M-3 
include on the attached supporting statement for line 8 the                for any reason.
offsetting adjustment to the intercompany elimination of interest 
income and interest expense (though it is permitted to do so).             Sycamore may elect to file Schedule M-3 instead of 
                                                                           completing Schedule M-1.
Line 12. Total Assets and Liabilities of Entities                          If Sycamore elects to file Schedule M-3, it must either (i) 
Included or Removed on Part I, Lines 4, 5, 6, and                          complete Schedule M-3 entirely, or (ii) complete Schedule M-3 
                                                                           through Part I and complete Schedule M-1 instead of completing 
7                                                                          Parts II and III of Schedule M-3.
Line 12 must be completed by all partnerships that file                    If Sycamore elects to complete Schedule M-3 entirely, it must 
Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total             complete all columns of Parts II and III.
amounts (not just the partnership's share) of assets and liabilities 
of entities included or removed on Part I, lines 4, 5, 6, and 7. All       If Sycamore completes Schedule M-3 through Part I and 
assets and liabilities reported on Part I, lines 12a through 12d,          completes Schedule M-1 instead of completing Parts II and III of 
must be reported as positive amounts. On line 12a, enter the               Schedule M-3, line 11 of Part I of Schedule M-3 must equal line 1 
worldwide consolidated total assets and total liabilities of all of        of Schedule M-1.
the entities included in completing Part I, line 4. On line 12b, 
enter the total assets and total liabilities of the entities removed       Reporting Requirements for Parts II and III
in completing Part I, line 5. On line 12c, enter the total assets and      General Reporting Requirements
total liabilities of the entities removed in completing Part I, line 6. 
On line 12d, enter the total assets and total liabilities of the           If an amount is attributable to a reportable transaction described 
entities included in completing Part I, line 7.                            in Regulations section 1.6011-4(b), the amount must be reported 
                                                                           in columns (a), (b), (c), and (d), as applicable, of Part II, line 10, 
                                                                           items relating to reportable transactions, regardless of whether 
Parts II and III                                                           the amount would otherwise be reported on Schedule M-3, Part 
                                                                           II or Part III. Thus, if a taxpayer files Form 8886, Reportable 
General Reporting Information                                              Transaction Disclosure Statement, the amounts attributable to 
A schedule or statement may be attached to any line even if                that reportable transaction must be reported on Part II, line 10.
none is required.
                                                                           A partnership is required to report in column (a) of Parts II and 
  For each line item in Parts II and III, report in column (a) the         III the amount of any item specifically listed on Schedule M-3 that 
amount of net income (loss) included on Part I, line 11, and               is in any manner included in the partnership's current year 
report in column (d) the amount included on line 1 of the                  financial statement net income (loss) or in an income or expense 
Analysis of Net Income (Loss) found on Form 1065.                          account maintained in the partnership's books and records, even 
  Note. Part II, line 26, column (a), must equal Part I, line 11,          if there is no difference between that amount and the amount 
and column (d) must equal line 1 of the Analysis of Net Income             included in net income (loss) for tax purposes unless (a) 
(Loss) found on Form 1065. Thus, column (d) on Part II and Part            otherwise instructed in these instructions, or (b) the amount is 
III must include certain of the separately stated items on                 attributable to a reportable transaction described in Regulations 
Schedule K.                                                                section 1.6011-4(b) and is therefore reported on Part II, line 10. 
                                                                           For example, with the exception of interest income reflected on a 
  For any item of income, gain, loss, expense, or deduction for            Schedule K-1 received by the partnership as a result of the 
which there is a difference between columns (a) and (d), the               partnership's investment in a partnership or other pass-through 
portion of the difference that is temporary must be entered in             entity, all interest income included on Part I, line 11, whether from 
column (b) and the portion of the difference that is permanent             unconsolidated affiliated entities, third parties, banks, or other 
must be entered in column (c).                                             entities, whether from foreign or domestic sources, whether 
  If financial statements are prepared by the partnership in               taxable or exempt from tax, and whether classified as some 
accordance with generally accepted accounting principles                   other type of income for U.S. income tax purposes (such as 
(GAAP), differences that are treated as temporary under GAAP               dividends), must be included on Part II, line 11, column (a). 
must be reported in column (b) and differences that are                    Likewise, all fines and penalties included on Part I, line 11, paid 
permanent (that is, not temporary) for GAAP must be reported in            to a government or other authority for the violation of any law for 

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which fines or penalties are assessed must be included on Part and adequately disclosed. In general, a difference is adequately
III, line 7, column (a), regardless of the government authority that disclosed if the difference is labeled in a manner that clearly
imposed the fines or penalties, regardless of whether the fines or identifies the item or transaction from which the difference
penalties are civil or criminal, and regardless of the arises. For further guidance about adequate disclosure, see
classification, nomenclature, or terminology attached to the fines Regulations section 1.6662-4(f). If a specific item of income,
or penalties by the imposing authority in its actions or gain, loss, expense, or deduction is described on Part II, lines 7
documents. through 21, or Part III, lines 1 through 29, and the line doesn't
indicate to “attach schedule” or “attach details,” and the specific
If a partnership would be required to report in column (a) of instructions for the line don't call for an attachment of a schedule
Parts II and III the amount of any item specifically listed on or explanation, then the item is considered separately stated and
Schedule M-3 in accordance with the preceding paragraph, adequately disclosed if the item is reported on the applicable line
except that the partnership has capitalized the item of income or and the amount(s) of the item(s) is reported in the applicable
expense and reports the amount in its financial statement columns of the applicable line. See the instructions for Part II,
balance sheet or in asset and liability accounts maintained in the lines 1 through 9, for specific additional information required to
partnership's books and records, the partnership must report the be provided for these particular lines.
proper tax treatment of the item in columns (b), (c), and (d), as Except as otherwise provided, differences for the same item
applicable. must be combined or netted together and reported as one
amount on the applicable line of Schedule M-3. However,
Furthermore, in applying the two preceding paragraphs, a differences for separate items must not be combined or netted
partnership is required to report in column (a) of Parts II and III together. Each item (and corresponding amount attributable to
the amount of any item specifically listed on Schedule M-3 that is that item) must be separately stated and adequately disclosed
included in the partnership's financial statements or exists in the on the applicable line of Schedule M-3 or any statement required
partnership's books and records, regardless of the nomenclature to be attached, even if the amounts are below a certain dollar
associated with that item in the financial statements or books amount.
and records. Accurate completion of Schedule M-3 requires
reporting amounts according to the substantive nature of the Required statements for Part II, line 22, and Part III, line 30.
specific line items included in Schedule M-3 and consistent A separate statement must be attached to Schedule M-3 (Form
reporting of all transactions of like substantive nature that 1065) that includes a detailed description of each item and
occurred during the tax year. For example, all expense amounts adjustment entered on Part II, line 22, and Part III, line 30.
that are included in the financial statements or exist in the books The description for each amount entered in column (a) must
and records that represent some form of “Bad debt expense” be readily identifiable to the name of the account in the financial
must be reported on Part III, line 26, in column (a), regardless of statements or books and records of the taxpayer, under which
whether the amounts are recorded or stated under different the amount in column (a) was recorded in the accounting
nomenclature in the financial statements or the books and records. Also, the description for each amount entered in column
records such as “Provision for doubtful accounts,” “Expense for (a) must include detailed information supporting each
uncollectible notes receivable,” or “Impairment of trade accounts adjustment reported in columns (b) and (c), including how the
receivable.” Likewise, as stated in the preceding paragraph, all adjustment is identified in the accounting records. The entire
fines and penalties must be included on Part III, line 7, column description is considered the tax description for the amount
(a), regardless of the terminology or nomenclature attached to reported in column (d) for each item reported on Part II, line 22,
them by the partnership in its books and records or financial or Part III, line 30.
statements.
Each description should adequately describe all four columns
With limited exceptions, Part II includes lines for specific items of Part II, line 22, or Part III, line 30. If additional information is
of income, gain, or loss (income items). (See lines 1 through 21.) required to provide an acceptable description, provide a
If an income item is described on lines 1 through 21, report the supporting statement.
amount of the item on the applicable line, regardless of whether Example 7. Partnership Tulip prepares GAAP financial
there is a difference for the item. If there is a difference for the statements. In prior years, Tulip acquired intellectual property
income item, or only a portion of the income item has a (IP) and goodwill. The IP is amortizable for both U.S. income tax
difference and a portion of the item doesn't have a difference, and financial statement purposes. In 2023, Tulip's annual
and the item isn't described on lines 1 through 21, report and amortization expense for IP is $9,000 for U.S. income tax
describe the entire amount of the item on line 22. purposes and $6,000 for financial statement purposes. The
goodwill isn't amortizable for U.S. income tax purposes and is
With limited exceptions, Part III includes lines for specific subject to impairment for financial statement purposes. In 2023,
items of expense or deduction (expense items). (See lines 1 Tulip records an impairment charge on the goodwill of $5,000.
through 29.) If an expense item is described on lines 1 through Tulip must report the amortization attributable to the IP on Part III,
29, report the amount of the item on the applicable line, line 21, and report $6,000 in column (a), a temporary difference
regardless of whether there is a difference for the item. If there is of $3,000 in column (b), and $9,000 in column (d). Tulip must
a difference for the expense item, or only a portion of the report the goodwill impairment on Part III, line 19, and report
expense item has a difference and a portion of the item doesn't $5,000 in column (a), a permanent difference of ($5,000) in
have a difference and the item isn't described on lines 1 through column (c), and $0 in column (d).
29, report and describe the entire amount of the item on line 30. Example 8. Partnership Willow is a calendar year
If there is no difference between the financial accounting partnership that files and entirely completes Schedule M-3 for its
amount and the amount reported for tax purposes of an entire 2023 tax year. Willow placed in service 10 depreciable fixed
item of income, loss, expense, or deduction and the item isn't assets in a previous tax year. Willow's total depreciation expense
described or included on Part II, lines 1 through 22, or Part III, for its 2023 tax year for five of the assets is $50,000 for income
lines 1 through 30, report the entire amount of the item in statement purposes and $70,000 for U.S. income tax purposes.
columns (a) and (d) of Part II, line 25. Willow's total annual depreciation expense for its 2023 tax year
for the other five assets is $40,000 for income statement
Separately stated and adequately disclosed. Each purposes and $30,000 for U.S. income tax purposes. Willow
difference reported in Parts II and III must be separately stated

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treats the differences between financial statement and U.S.
income tax depreciation expense as giving rise to temporary Part II. Reconciliation of Net Income
differences that will reverse in future years. Willow must combine
all of its depreciation adjustments. Accordingly, Willow must (Loss) per Income Statement of
report on Part III, line 25, for its 2023 tax year income statement
depreciation expense of $90,000 in column (a), a temporary Partnership With Income (Loss) per
difference of $10,000 in column (b), and U.S. income tax Return
depreciation expense of $100,000 in column (d).
Example 9. Partnership Derry is a calendar year partnership Lines 1 Through 9. Additional Information for
that files and entirely completes Schedule M-3 for its 2023 tax Each Entity
year. On December 31, 2023, Derry establishes three reserve
accounts in the amount of $100,000 for each account. One For any item reported on lines 1 or 3 through 5, attach a
reserve account is an allowance for accounts receivable that are supporting statement that provides the name of the entity for
estimated to be uncollectible. The second reserve is an estimate which the item is reported, the entity's EIN (if applicable), the
of coupons outstanding that may have to be paid. The third type of entity (corporation, partnership, etc.), and the item
reserve is an estimate of future warranty expenses. In its amounts for columns (a) through (d). See the instructions for
financial statements, Derry treats the three reserve accounts as lines 2 and 6 through 9 for the specific information required for
giving rise to temporary differences that will reverse in future those particular lines.
years. The three reserves are expenses in Derry's 2023 financial
statements but aren't deductions for U.S. income tax purposes in Line 1. Income (Loss) From Equity Method
2023. Derry must not combine the Schedule M-3 differences for Foreign Corporations
the three reserve accounts. Derry must report the amounts Report on line 1, column (a), the financial income (loss) included
attributable to the allowance for uncollectible accounts on Part I, line 11, for any foreign corporation accounted for on the
receivable on Part III, line 26, Bad debt expense, and must equity method and remove such amount in column (b) or (c), as
separately state and adequately disclose the amounts applicable. Report the amount of dividends received and other
attributable to each of the other two reserves, coupons taxable amounts received or includible from foreign corporations
outstanding, and warranty costs, on a required, attached on lines 2 through 4, as applicable.
statement that supports the amounts on Part III, line 30. Derry
must also provide a description for each reserve that meets the Line 2. Gross Foreign Dividends Not Previously
requirements for Part III, line 30, discussed earlier under Taxed
Required statements for Part II, line 22, and Part III, line 30. In
this example, an acceptable description for warranty costs would Except as otherwise provided in this paragraph, report on line 2,
be “Future Warranty Expense Reserve.” column (d), the amount (before any withholding tax) of any
foreign dividends included on line 1 of the Analysis of Net
Note. There is no need to add the title of the reserve account to Income (Loss) found on Form 1065, and report on line 2, column
the description if the account name for the amount in column (a) (a), the amount of dividends from any foreign corporation
is already part of the adjustment description. included on Part I, line 11. Don't report on line 2 any amounts
that must be reported on line 3 or dividends that were previously
Example 10. Partnership Elm is a calendar year partnership taxed and must be reported on line 4. (See the instructions
that files and entirely completes Schedule M-3 for its 2023 tax below for lines 3 and 4.) Report withholding taxes on Part III,
year. On January 2, 2023, Elm establishes an allowance for line 30, Other expense/deduction items with differences, or
uncollectible accounts receivable (bad debt reserve) of line 25, Other items with no differences, as applicable.
$100,000. During 2023, Elm increases the reserve by $250,000
for additional accounts receivable that may become For any dividends reported on line 2 that are received on a
uncollectible. Additionally, during 2023, Elm decreases the class of voting stock of which the partnership directly or indirectly
reserve by $75,000 for accounts receivable that were discharged owned 10% or more of the outstanding shares of that class at
in bankruptcy during 2023. The balance in the reserve account any time during the tax year, report on an attached supporting
on December 31, 2023, is $275,000. The $100,000 amount to statement for line 2: (a) the name of the dividend payer, (b) the
establish the reserve account and the $250,000 to increase the payer's EIN (if applicable), (c) the class of voting stock on which
reserve account are expenses on Elm's 2023 financial the dividend was paid, (d) the percentage of the class directly or
statements but aren't deductible for U.S. income tax purposes in indirectly owned, and (e) the amounts for columns (a) through
2023. However, the $75,000 decrease to the reserve is (d).
deductible for U.S. income tax purposes in 2023. In its financial
statements, Elm treats the reserve account as giving rise to a Line 3. Subpart F, QEF, and Similar Income
temporary difference that will reverse in future tax years. Elm Inclusions
must report on Part III, line 26, Bad debt expense, for its 2023 tax Report on line 3, column (d), the amount included in taxable
year income statement bad debt expense of $350,000 in column income under section 951 (relating to Subpart F), gains or other
(a), a temporary difference of ($275,000) in column (b), and U.S. income inclusions resulting from elections under sections
income tax bad debt expense of $75,000 in column (d). 1291(d)(2) and 1298(b)(1), and any amount included in taxable
Example 11. During 2023, partnership Fig had $100 of income pursuant to section 1293 (relating to QEFs). See Form
meals expenses, $100 of entertainment expenses, and therefore 5471, Information Return of U.S. Persons With Respect to
deducted $200 on its income statement. For federal income tax Certain Foreign Corporations, and Form 8621, Information
purposes, the $100 of meals expenses is subject to section Return by a Shareholder of a Passive Foreign Investment
274(n) (50% allowance) and the $100 of entertainment Company or Qualified Electing Fund, for more information.
expenses is subject to section 274(a) (0% allowance). Fig must
report on Part III, line 6: $200 in column (a), $150 in column (c), Also include on line 3 passive foreign investment company
and $50 in column (d). Fig must report all of its meals and mark-to-market gains and losses under section 1296. Don't
entertainment expenses only on this line whether there is a report such gains and losses on line 14.
difference or not because meals and entertainment expenses
are specifically described.

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Line 4. Gross Foreign Distributions Previously                            loss-sharing percentage (if applicable), and the amount reported 
                                                                          in column (a), (b), (c), or (d) of line 7 or 8, as applicable.
Taxed
Report on line 4, column (a), any distributions received from             Example 12.   U.S. partnership Holly is a calendar year 
foreign corporations that were included on Part I, line 11, and           partnership that files and entirely completes Schedule M-3 for its 
that were previously taxed for U.S. income tax purposes. For              2023 tax year. Holly has an investment in a U.S. partnership 
example, include in column (a) amounts that are excluded from             USP. Holly prepares financial statements in accordance with 
taxable income under sections 959 and 1293(c). Remove such                GAAP. For its 2023 tax year, Holly's financial statement net 
amounts in column (b) or (c), as applicable. Report the full              income includes $10,000 of income attributable to its share of 
amount of the distribution before any withholding tax. Report             USP's net income. Holly's Schedule K-1 from USP reports 
withholding taxes on Part III, line 30, Other expense/deduction           $5,000 of ordinary income, $7,000 of long-term capital gains, 
items with differences, or line 25, Other items with no                   $4,000 of charitable contributions, and $200 of section 179 
differences, as applicable. Because previously taxed foreign              expense. Holly must report on line 7 $10,000 in column (a), a 
distributions aren't currently taxable, line 4, column (d), is            permanent difference of ($2,200) in column (c), and $7,800 in 
shaded. (Also, see the instructions above for line 2.)                    column (d).

Line 5. Income (Loss) From Equity Method U.S.                             Line 9. Income (Loss) From Other Pass-Through 
Corporations                                                              Entities
Report on line 5, column (a), the financial income (loss) included        For any interest in a pass-through entity (other than an interest in 
on Part I, line 11, for any U.S. corporation accounted for on the         a partnership reportable on line 7 or 8, as applicable) owned by 
equity method and remove such amount in column (b) or (c), as             the U.S. partnership (other than an interest in a disregarded 
applicable. Report on line 6 the amount of dividends received             entity), report the following on line 9.
from any U.S. corporations.                                               1. In column (a), the sum of the partnership's distributive 
                                                                          share of income or loss from the pass-through entity that is 
Line 6. U.S. Dividends                                                    included on Part I, line 11.
Report on line 6, column (a), the amount of dividends included            2. In column (b) or (c), as applicable, the sum of all 
on Part I, line 11, that were received from any U.S. corporation.         differences, if any, attributable to the pass-through entity.
Report on line 6, column (d), the amount of any U.S. dividends            3. In column (d), the sum of all taxable amounts of income, 
included in taxable income on line 1 of the Analysis of Net               gain, loss, or deduction reportable on the partnership's 
Income (Loss) found on Form 1065.                                         Schedule(s) K-1 received from the pass-through entity (if 
For any dividends reported on line 6 that are received on                 applicable).
classes of voting stock in which the partnership directly or              For each pass-through entity reported on line 9, attach a 
indirectly owned 10% or more of the outstanding shares of that            supporting statement that provides that entity's name, EIN (if 
class at any time during the tax year, report on an attached              applicable), the partnership's end of year profit-sharing 
supporting statement for line 6: (1) the name of the dividend             percentage (if applicable), the partnership's end of year 
payer, (2) the payer's EIN (if applicable), (3) the class of voting       loss-sharing percentage (if applicable), and the amounts 
stock on which the dividend was paid, (4) the percentage of the           reported by the partnership in column (a), (b), (c), or (d) of line 9, 
class directly or indirectly owned, and (5) the amounts for               as applicable.
columns (a) through (d).
                                                                          Line 10. Items Relating to Reportable 
Line 7. Income (Loss) From U.S. Partnerships, 
                                                                          Transactions
and
                                                                          Any amounts attributable to any reportable transactions (as 
Line 8. Income (Loss) From Foreign                                        described in Regulations section 1.6011-4) must be included on 
Partnerships                                                              line 10 regardless of whether the difference, or differences, 
For any interest owned by the partnership that is treated as an           would otherwise be reported elsewhere in Part II or Part III. Thus, 
investment in a partnership for U.S. income tax purposes (other           if a taxpayer files Form 8886 for any reportable transaction 
than an interest in a disregarded entity), report amounts on line 7       described in Regulations section 1.6011-4, the amounts 
or 8, as described below.                                                 attributable to that reportable transaction must be reported on 
                                                                          line 10. In addition, all income and expense amounts attributable 
1. In column (a), the sum of the partnership's distributive               to a reportable transaction must be reported on line 10, columns 
share of income or loss from a U.S. or foreign partnership that is        (a) and (d), even if there is no difference between the financial 
included on Part I, line 11.                                              statement amounts and the tax return amounts.
2. In column (b) or (c), as applicable, the sum of all 
differences, if any, attributable to the partnership's distributive       Each difference attributable to a reportable transaction must 
share of income or loss from a U.S. or foreign partnership.               be separately stated and adequately disclosed. A partnership 
3. In column (d), the sum of all amounts of income, gain,                 will be considered to have separately stated and adequately 
loss, or deduction attributable to the partnership's distributive         disclosed a reportable transaction on line 10 if the partnership 
share of income or loss from a U.S. or foreign partnership (that          sequentially numbers each Form 8886 and lists by statement 
is, the sum of all amounts reportable on the partnership's                number (shown on line A of Form 8886) on the supporting 
Schedule(s) K-1 received from the partnership (if applicable)),           statement for line 10 each sequentially numbered reportable 
without regard to any limitations computed at the partner level           transaction and the amounts required for line 10, columns (a) 
(for example, limitations on utilization of charitable contributions,     through (d).
capital losses, and interest expense).
                                                                          Instead of satisfying the requirements of the preceding 
For each partnership reported on line 7 or 8, attach a                    paragraph, a partnership will be considered to have separately 
supporting statement that provides the name, EIN (if applicable),         stated and adequately disclosed a reportable transaction if the 
end of year profit-sharing percentage (if applicable), end of year        partnership attaches a supporting statement that provides the 
                                                                          following for each reportable transaction.

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1. A description of the reportable transaction disclosed on line 6, columns (a) through (d), on Schedule M-3, line 11,
Form 8886 for which amounts are reported on line 10. columns (a) through (d), as applicable.
2. The name and reportable transaction or tax shelter An entity that (a) is required to file a Schedule M-3 and has
registration number, if applicable, as reported on lines 1a and 1c, less than $50 million in total assets at the end of the tax year, or
respectively, of Form 8886. (b) isn't required to file a Schedule M-3 and voluntarily files a
3. The type of reportable transaction (that is, listed Schedule M-3, isn't required to file Form 8916-A but may
transaction, confidential transaction, transaction with contractual voluntarily do so.
protection, etc.) as reported on line 2 of Form 8886. Report on line 11, column (a), the total amount of interest
If a transaction is a listed transaction described in income included on Part I, line 11, and report on line 11, column
Regulations section 1.6011-4(b)(2), the description must also (d), the total amount of interest income included on line 1 of the
include the published guidance number shown on line 3 of Form Analysis of Net Income (Loss) found on Form 1065 that isn't
8886. In addition, if the reportable transaction involves an required to be reported elsewhere on Schedule M-3. In column
investment in the transaction through another entity such as a (b) or (c), as applicable, adjust for any amounts treated for U.S.
partnership, the description must include the name and EIN (if income tax purposes as interest income that are treated as some
applicable) of that entity as reported on line 5 of Form 8886. other form of income for financial accounting purposes, or vice
versa. For example, adjustments to interest income resulting
Example 13. Partnership Jasmine is a calendar year from adjustments made in accordance with the instructions for
partnership that files and entirely completes Schedule M-3 for its line 16, Sale versus lease, should be made in columns (b) and
2023 tax year. Jasmine incurred seven different abandonment (c) of line 11.
losses during its 2023 tax year. One loss of $12 million results
from a reportable transaction described in Regulations section Don't report on line 11 amounts reported in accordance with
1.6011-4(b)(5), another loss of $5 million results from a the instructions for lines 7, 8, 9, 10, and 20.
reportable transaction described in Regulations section
1.6011-4(b)(4), and the remaining five abandonment losses Line 12. Total Accrual to Cash Adjustment
aren't reportable transactions. Jasmine discloses the reportable This line is completed by a partnership that prepares financial
transactions giving rise to the $12 million and $5 million losses statements (or books and records, if permitted) using an overall
on separate Forms 8886 and sequentially numbers them X1 and accrual method of accounting and uses an overall cash method
X2, respectively. Jasmine must separately state and adequately of accounting for U.S. income tax purposes (or vice versa). With
disclose the $12 million and $5 million losses on line 10. The $12 the exception of amounts required to be reported on line 10, the
million loss and the $5 million loss will be adequately disclosed if partnership must report on line 12, a single amount net of all
Jasmine attaches a supporting statement for line 10 that lists adjustments attributable solely to the use of the different overall
each of the sequentially numbered forms, Form 8886-X1 and methods of accounting (for example, adjustments related to
Form 8886-X2, and with respect to each reportable transaction accounts receivable, accounts payable, compensation, accrued
reports the appropriate amounts required for line 10, columns (a) liabilities, etc.), regardless of whether a separate line on
through (d). Alternatively, Jasmine's disclosures will be adequate Schedule M-3 corresponds to an item within the accrual to cash
if the description provided for each loss on the supporting reconciliation. Differences not attributable to the use of the
statement includes the names and reportable transaction or tax different overall methods of accounting must be reported on the
shelter registration numbers, if any, disclosed on the applicable appropriate lines of Schedule M-3 (for example, a depreciation
Form 8886, identifies the type of reportable transaction for the difference must be reported on Part III, line 25).
loss, and reports the appropriate amounts required for line 10,
columns (a) through (d). Jasmine must report the losses Example 15. Partnership Laurel is a calendar year
attributable to the other five abandonment losses on line 21e, partnership that files and entirely completes Schedule M-3 for its
regardless of whether a difference exists for any or all of those 2023 tax year. Laurel prepares financial statements in
abandonment losses. accordance with GAAP using an overall accrual method of
accounting. Laurel uses an overall cash method of accounting
Example 14. Partnership Kiwi is a calendar year partnership for U.S. income tax purposes. Laurel's financial statements for
that files and entirely completes Schedule M-3 for its 2023 tax the year ending December 31, 2023, report accounts receivable
year. Kiwi enters into a transaction with contractual protection of $35,000, an allowance for bad debts of $10,000, and
that is a reportable transaction described in Regulations section accounts payable of $17,000 related to 2023 acquisition and
1.6011-4(b)(4). This reportable transaction is the only reportable reorganization legal and accounting fees. In addition, for Laurel's
transaction for Kiwi's 2023 tax year and results in a $7 million year ending December 31, 2023, Laurel reported financial
capital loss for both financial accounting purposes and U.S. statement depreciation expense of $15,000 and depreciation for
income tax purposes. Although the transaction doesn't result in a U.S. income tax purposes of $25,000. For Laurel's 2023 tax year
difference, Kiwi is required to report on line 10 the following using an overall cash method of accounting, Laurel doesn't
amounts: ($7 million) in column (a), $0 in columns (b) and (c), recognize the $35,000 of revenue attributable to the accounts
and ($7 million) in column (d). The transaction will be adequately receivable, can't deduct the $10,000 allowance for bad debt, and
disclosed if Kiwi attaches a supporting statement for line 10 that can't deduct the $17,000 of accounts payable. In its financial
(a) sequentially numbers the Form 8886 and refers to the statements, Laurel treats both the difference in overall
sequentially numbered Form 8886-X1; and (b) reports the accounting methods used for financial statement and U.S.
applicable amounts required for line 10, columns (a) through (d). income tax purposes and the difference in depreciation expense
Alternatively, the transaction will be adequately disclosed if the as temporary differences. Laurel must combine all adjustments
supporting statement for line 10 includes a description of the attributable to the differences related to the overall accounting
transaction, the name and reportable transaction number, if any, methods on line 12. As a result, Laurel must report on line 12
and the type of reportable transaction disclosed on Form 8886. $8,000 in column (a) ($35,000 – $10,000 – $17,000), ($8,000) in
column (b), and $0 in column (d). Laurel must not report the
Line 11. Interest Income accrual to cash adjustment attributable to the legal and
Attach Form 8916-A, Supplemental Attachment to accounting fees on Part III, line 18, Current year acquisition/
Schedule M-3. Complete Part II and enter the amounts shown on reorganization legal and accounting fees. Because the
difference in depreciation expense doesn't relate to the use of
the cash or accrual method of accounting, Laurel must report the

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depreciation difference on Part III, line 25, Depreciation, and • Amounts reportable on line 10.
report $15,000 in column (a), $10,000 in column (b), and • Any gain or loss from inventory hedging transactions
$25,000 in column (d). reportable on line 13.
• Amounts reportable on line 16.
Line 13. Hedging Transactions • Amounts reportable on line 19.
Report on line 13, column (a), the net gain or loss from hedging • Mark-to-market income or (loss) associated with the
transactions on Part I, line 11. Report in column (d) the amount inventories of dealers in securities under section 475 reportable
of taxable income from hedging transactions as defined in on line 14.
section 1221(b)(2). Use columns (b) and (c) to report all • Section 481(a) adjustments related to cost of goods sold or
differences caused by treating hedging transactions differently inventory valuation reportable on line 17.
for financial accounting purposes and for U.S. income tax • Fines and penalties reportable on Part III, line 7.
purposes. For example, if a portion of a hedge is considered • Judgments, damages, awards, and similar costs, reportable
ineffective under GAAP but is still a valid hedge under section on Part III, line 8.
1221(b)(2), the difference must be reported on line 13. The • Amounts included on Part III, line 28, Purchase versus lease.
hedge of a capital asset, which isn't a valid hedge for U.S. Important. Complete and attach Form 8916-A, Part I, for each
income tax purposes but may be considered a hedge for GAAP item listed on line 15 in columns (a) through (d).
purposes, must also be reported here.
An entity that (a) is required to file a Schedule M-3 and has
Report hedging gains and losses computed under the less than $50 million in total assets at the end of the tax year, or
mark-to-market method of accounting on line 13 and not on (b) isn't required to file a Schedule M-3 and voluntarily files a
line 14. Schedule M-3, isn't required to file Form 8916-A but may
Report any gain or loss from inventory hedging transactions voluntarily do so.
on line 13 and not on line 15. Example 16. Partnership Cashew is a calendar year
partnership that files and entirely completes Schedule M-3 for its
Line 14. Mark-to-Market Income (Loss) 2023 tax year. Cashew placed in service 10 depreciable fixed
Report on line 14 any amount representing the mark-to-market assets in a previous tax year. Cashew's total depreciation
income or loss for any securities held by a dealer in securities, a expense for its 2023 tax year for five of the assets is $50,000 for
dealer in commodities having made a valid election under financial accounting purposes and $70,000 for U.S. income tax
section 475(e), or a trader in securities or commodities having purposes. Cashew's total annual depreciation expense for its
made a valid election under section 475(f). “Securities” for these 2023 tax year for the other five assets is $40,000 for financial
purposes are securities described in section 475(c)(2) and accounting purposes and $30,000 for U.S. income tax purposes.
commodities described in section 475(e)(2). Securities In addition, Cashew incurs $200 of meal expenses that Cashew
described in section 475(c)(2)(E) do not include contracts to deducts in computing net income for financial accounting
which section 1256(a) applies. purposes. All $200 of the meal expenses is subject to the 50%
limitation under section 274(n). In its financial statements,
Report hedging gains and losses computed under the Cashew treats the $50,000 depreciation and $100 of the meals
mark-to-market method of accounting on line 13, Hedging as other costs in computing cost of goods sold. Cashew must
transactions, and not on line 14. include on Form 8916-A and on line 15, in column (a), the
Traders in securities or commodities. For a trader in $50,000 of depreciation and $100 of meals. Cashew must also
securities or commodities that made a valid election under include a temporary difference of $20,000 in column (b), a
section 475(f) to use the mark-to-market method to account for permanent difference of ($50) in column (c), and $70,050 in
securities or commodities held in connection with a trading column (d) ($70,000 depreciation and $50 meals). In addition,
business that files Form 4797, Sales of Business Property, any Cashew must report on Part III, line 25, for its 2023 tax year
Schedule M-3 entries required as a result of mark-to-market income statement, depreciation expense of $40,000 in column
these securities or commodities are reported as follows: (a) (a), a temporary difference of ($10,000) in column (b), and
mark-to-market gains and losses from Form 4797, line 10, are $30,000 in column (d); and on Part III, line 6, meals and
included on Schedule M-3, Part II, line 14; and (b) any other entertainment expense of $100 in column (a), a permanent
Schedule M-3 entries required based on other results difference of ($50) in column (c), and $50 in column (d). All other
(non-mark-to-market gains and losses) included in the total cost of goods sold items would be added to the amounts
reported on Form 4797, line 17, should be reported on included on line 15, detailed in this example, and reported on
Schedule M-3, Part II, line 21d, unless the instructions for Form 8916-A and on line 15 in the appropriate columns.
Schedule M-3 require the amounts to be reported on another
line. Line 16. Sale Versus Lease (for Sellers and/or
Lessors)
Line 15. Cost of Goods Sold Note. Also see the instructions for Part III, Line 28. Purchase
Report on line 15 any amounts deducted as part of cost of goods Versus Lease (for Purchasers and/or Lessees), later.
sold during the tax year, regardless of whether the amounts Asset transfer transactions with periodic payments
would otherwise be reported elsewhere in Part II or Part III. characterized for financial accounting purposes as either a sale
However, don't report the items mentioned in the next paragraph or a lease may, under some circumstances, be characterized as
on line 15. Examples of amounts that must be included on the opposite for tax purposes. If the transaction is treated as a
line 15 are amounts attributable to inventory valuation, such as lease, the seller/lessor reports the periodic payments as gross
amounts attributable to cost-flow assumptions, additional costs rental income and also reports depreciation expense or
required to be capitalized (including depreciation) such as deduction. If the transaction is treated as a sale, the seller/lessor
section 263A costs, inventory shrinkage accruals, inventory reports gross profit (sale price less cost of goods sold) from the
obsolescence reserves, and lower of cost or market (LCM) sale of assets and reports the periodic payments as payments of
write-downs. principal and interest income.
On line 16, column (a), report the gross profit or gross rental
Note. The entries in columns (a) and (d) are negative amounts.
income for financial accounting purposes for all sale or lease
Don't report the following on line 15 or on Form 8916-A. transactions that must be given the opposite characterization for

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tax purposes. On line 16, column (d), report the gross profit or recognizable for U.S. income tax purposes in the current tax
gross rental income for federal income tax purposes. Interest year. Use columns (b) and (c) of line 18, as applicable, to report
income amounts for such transactions must be reported on differences between columns (a) and (d).
line 11 in column (a) or (d), as applicable. Depreciation expense
for such transactions must be reported on Part III, line 25, in Line 18 must not be used to report income recognized from
column (a) or (d), as applicable. Use columns (b) and (c) of lines long-term contracts. Instead, use line 19.
11 and 16, and Part III, line 25, as applicable, to report the
differences between columns (a) and (d). Line 19. Income Recognition From Long-Term
Contracts
Example 17. Maple is a calendar year partnership that files
and entirely completes Schedule M-3 for its 2023 tax year. Report on line 19 the amount of net income or loss for financial
Maple sells and leases property to customers. For financial statement purposes (or books and records, if applicable) or U.S.
accounting purposes, Maple accounts for each transaction as a income tax purposes for any contract accounted for under a
sale. For U.S. income tax purposes, each of Maple's long-term contract method of accounting.
transactions must be treated as a lease. In its financial
statements, Maple treats the difference in the financial Line 20. Original Issue Discount and Other
accounting and the U.S. income tax treatment of these Imputed Interest
transactions as temporary. During 2023, Maple reports in its Report on line 20 any amounts of original issue discount (OID)
financial statements $1,000 of sales and $700 of cost of goods and other imputed interest. The term “original issue discount and
sold with respect to 2023 lease transactions. Maple receives other imputed interest” includes, but isn't limited to:
periodic payments of $500 in 2023 with respect to these 2023
transactions and similar transactions from prior years and treats 1. The excess of a debt instrument's stated redemption price
$400 as principal and $100 as interest income. For financial at maturity over its issue price, as determined under section
accounting purposes, Maple reports gross profit of $300 ($1,000 1273;
− $700) and interest income of $100 from these transactions. For 2. Amounts that are imputed interest on a deferred sales
U.S. income tax purposes, Maple reports $500 of gross rental contract under section 483;
income (the periodic payments) and (based on other facts) $200 3. Amounts treated as interest or OID under the stripped
of depreciation deduction on the property. On its 2023 bond rules under section 1286; and
Schedule M-3, Maple must report on line 11 $100 in column (a), 4. Amounts treated as OID under the below-market interest
($100) in column (b), and $0 in column (d). In addition, Maple rate rules under section 7872.
must report on line 16 $300 of gross profit in column (a), $200 in
column (b), and $500 of gross rental income in column (d). Line 21a. Income Statement Gain/Loss on Sale,
Lastly, Maple must report on Part III, line 25, $200 in columns (b)
and (d). Exchange, Abandonment, Worthlessness, or
Other Disposition of Assets Other Than
Line 17. Section 481(a) Adjustments Inventory and Pass-Through Entities
With the exception of a section 481(a) adjustment that is Report on line 21a, column (a), all gains and losses on the
required to be reported on Part I, line 10, for reportable disposition of assets except for (a) gains and losses on the
transactions, any difference between an income or expense item disposition of inventory, and (b) gains and losses allocated to
attributable to an authorized (or unauthorized) change in method the partnership from a pass-through entity (for example, on
of accounting made for U.S. income tax purposes that results in Schedule K-1) that are included in the net income (loss) of the
a section 481(a) adjustment must be reported on line 17, partnership reported on Part I, line 11. Reverse the amount
regardless of whether a separate line for that income or expense reported in column (a) in column (b) or (c), as applicable. The
item exists in Part II or Part III. corresponding gains and losses for U.S. income tax purposes
Example 18. Partnership Noble is a calendar year are reported on lines 21b through 21g, as applicable.
partnership that files and entirely completes Schedule M-3 for its
2023 tax year. Noble was depreciating certain fixed assets over Line 21b. Gross Capital Gains From Schedule D,
an erroneous recovery period and, effective for its 2023 tax year, Excluding Amounts From Pass-Through Entities
Noble receives IRS consent to change its method of accounting Report on line 21b gross capital gains reported on Schedule D,
for the depreciable fixed assets and begins using the proper Capital Gains and Losses, excluding capital gains from
recovery period. The change in method of accounting results in a pass-through entities, which must be reported on line 7, 8, or 9,
positive section 481(a) adjustment of $100,000 that is required as applicable.
to be spread over 4 tax years, beginning with the 2023 tax year.
In its financial statements, Noble treats the section 481(a) Line 21c. Gross Capital Losses From
adjustment as a temporary difference. Noble must report on
line 17 $25,000 in columns (b) and (d) for its 2023 tax year and Schedule D, Excluding Amounts From
each of the subsequent 3 tax years (unless Noble is otherwise Pass-Through Entities, Abandonment Losses,
required to recognize the remainder of the section 481(a) and Worthless Stock Losses
adjustment earlier). Noble must not report the section 481(a) Report on line 21c gross capital losses reported on Schedule D,
adjustment on Part III, line 25. excluding capital losses from (a) pass-through entities, which
must be reported on line 7, 8, or 9, as applicable; (b)
Line 18. Unearned/Deferred Revenue abandonment losses, which must be reported on line 21e; and
Report on line 18, column (a), amounts of revenues included on (c) worthless stock losses, which must be reported on line 21f.
Part I, line 11, that were deferred from a prior financial
accounting year. Report on line 18, column (d), amounts of
revenues recognizable for U.S. income tax purposes in the
current tax year that are recognized for financial accounting
purposes in a different year. Also report on line 18, column (d),
any amount of revenues reported on line 18, column (a), that are

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Line 21d. Net Gain/Loss Reported on Form Line 23. Total Income (Loss) Items
4797, Line 17, Excluding Amounts From Combine lines 1 through 22 and enter the total on line 23.
Pass-Through Entities, Abandonment Losses,
Note. Line 15, Cost of goods sold, columns (a) and (d), are
and Worthless Stock Losses negative amounts that will affect the totals entered on line 23.
Report on line 21d the net gain or loss reported on line 17 of
Form 4797, excluding amounts from (a) pass-through entities, Line 24. Total Expense/ Deduction Items
which must be reported on line 7, 8, or 9, as applicable; (b) Report on line 24, columns (a) through (d), as applicable, the
abandonment losses, which must be reported on line 21e; and negative of the amounts reported on Part III, line 31, columns (a)
(c) worthless stock losses, which must be reported on line 21f. through (d). For example, if Part III, line 31, column (a), reflects
an amount of $1 million, then report on line 24, column (a),
Note. Traders in securities or commodities that have made a ($1,000,000). Similarly, if Part III, line 31, column (b), reflects an
valid election under section 475(f) to use the mark-to-market amount of ($50,000), then report on line 24, column (b),
method to account for securities or commodities, see the $50,000.
instructions for Part II, line 14, earlier.
Line 25. Other Items With No Differences
Line 21e. Abandonment Losses
If there is no difference between the financial accounting amount
Report on line 21e any abandonment losses, regardless of and the taxable amount of an entire item of income, gain, loss,
whether the loss is characterized as an ordinary loss or a capital expense, or deduction and the item isn't described or included
loss. on lines 1 through 22, or Part III, lines 1 through 30, report the
entire amount of the item in columns (a) and (d) of line 25. If a
Line 21f. Worthless Stock Losses portion of an item of income, loss, expense, or deduction has a
Report on line 21f any worthless stock loss, regardless of difference and a portion of the item doesn't have a difference,
whether the loss is characterized as an ordinary loss or a capital don't report any portion of the item on line 25. Instead, report the
loss. Attach a statement that separately states and adequately entire amount of the item (that is, both the portion with a
discloses each transaction that gives rise to a worthless stock difference and the portion without a difference) on the applicable
loss and the amount of each loss. line of lines 1 through 22, or Part III, lines 1 through 30. See
Example 11, earlier.
Line 21g. Other Gain/Loss on Disposition of
Assets Other Than Inventory
Part III. Reconciliation of Net Income
Report on line 21g any gains or losses from the sale or exchange
of property other than inventory that aren't reported on lines 21b (Loss) per Income Statement of
through 21f.
Partnership With Income (Loss) per
Line 22. Other Income (Loss) Items With Return— Expense/Deduction Items
Differences Note. Expense amounts that reduce financial income must be
Separately state and adequately disclose on line 22 all items of reported on Part III, column (a), as positive amounts. Deduction
income (loss) with differences that aren't otherwise listed on amounts that reduce taxable income must be reported on Part
lines 1 through 21. Attach a statement that describes and III, column (d), as positive amounts. Amounts reported on Part II,
itemizes the type of income (loss) and the amount of each item line 24, must be the negative of the amounts reported on Part III,
and provides a description that states the income (loss) name for line 31.
book purposes for the amount recorded in column (a) and
describes the adjustment being recorded in column (b) or (c). Lines 1 Through 4. Income Tax Expense
The entire description completes the tax description for the If the partnership doesn't distinguish between current and
amount included in column (d) for each item separately stated deferred income tax expense in its financial statements (or its
on this line. books and records, if applicable), report income tax expense as
current income tax expense using lines 1 and 3, as applicable.
The attached statement should have five columns. The first
column has the description for the next four columns. The Line 5. Equity-Based Compensation
second column is Column (a), Income (Loss) per Income
Statement. The third column is Column (b), Temporary Report on line 5 any amounts for equity-based compensation or
Difference. The fourth column is Column (c), Permanent consideration that are reflected as expense for financial
Difference. The fifth column is Column (d), Income (Loss) per accounting purposes (column (a)) or deducted in the U.S.
Tax Return. For every item listed on the attached statement for income tax return (column (d)) other than amounts reportable
line 22, columns (a) + (b) + (c) must equal column (d). Each item elsewhere on Schedule M-3, Parts II and III. Examples of
with amounts in columns (a), (b), (c), and (d) will be totaled and amounts reportable on line 5 include expense/deduction items
included as one line on line 22. attributable to options to acquire capital interest units, profits
interest units, and other rights to acquire partnership equity,
A partnership should include tax-exempt income from regardless of whether such payments are made to employees or
forgiven Paycheck Protection Program (PPP) loans on line 22, nonemployees, or as payment for property or compensation for
column (c), as a negative number if it was included on line 22 in services.
column (a) as Income per Income Statement.
Line 6. Meals and Entertainment
If any “comprehensive income,” as defined by Statement of Report on line 6, column (a), any amounts paid or accrued by the
Financial Accounting Standards (SFAS) No. 130, is reported on partnership during the tax year for meals, beverages, and
this line, describe the item(s) in detail. Examples of sufficiently entertainment that are accounted for in financial accounting
detailed descriptions include “Foreign currency translation income, regardless of the classification, nomenclature, or
adjustments—comprehensive income” and “Gains and losses terminology used for such amounts, and regardless of how or
on available-for-sale securities—comprehensive income.”

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where such amounts are classified in the partnership's financial financial accounting purposes, the amount reported in column
income statement or the income and expense accounts (c) as a permanent difference will be the negative of the
maintained in the partnership's books and records. Report only guaranteed payment income reported on Form 1065,
amounts not otherwise reportable elsewhere on Schedule M-3, Schedule K, line 4. If no guaranteed payment expense is
Parts II and III (for example, Part II, line 15). recognized for financial accounting purposes, the amount
reported in column (c) as a permanent difference will generally
Line 7. Fines and Penalties be zero. Any amount of guaranteed payments capitalized for tax
Report on line 7 any fines or similar penalties paid to a purposes on Form 1065, page 1, but not capitalized for financial
government or other authority for the violation of any law for accounting purposes, will generally be reported as a negative
which fines or penalties are assessed. All fines and penalties temporary difference amount in column (b).
expensed in financial accounting income (paid or accrued) must Example 19.
be included on line 7, column (a), regardless of the government 1. ArrowRoot is a calendar year partnership that files and
or other authority that imposed the fines or penalties, regardless entirely completes Schedule M-3 for its 2023 tax year.
of whether the fines and penalties are civil or criminal, regardless ArrowRoot has total income in 2023 of $5,000 for both financial
of the classification, nomenclature, or terminology used for the accounting and tax accounting purposes before taking into
fines or penalties by the imposing authority in its actions or account guaranteed payments expense or deductions. Partner
documents, and regardless of how or where the fines or Arrow is paid a deductible guaranteed payment of $3,000 for
penalties are classified in the partnership's financial income services rendered to the partnership during the tax year. Partner
statement or the income and expense accounts maintained in Root is paid a $1,000 guaranteed payment, which is capitalized
the partnership's books and records. Also report on line 7, to land for tax accounting. Both guaranteed payments, in the
column (a), the reversal of any over accrual of any amount total amount of $4,000, are treated as expenses in arriving at net
described in this paragraph. See sections 162(f) and 162(g) for financial accounting income. There are no other expenses or
additional guidance. deductions for financial accounting or tax accounting purposes.
Report on line 7, column (d), any such amounts described in The amount shown on Part I, line 11, Net income (loss) per
the preceding paragraph that are includible in taxable income, income statement of the partnership, is $1,000 ($5,000 − $3,000
regardless of the financial accounting period in which such − $1,000 = $1,000). The amount shown on line 9, column (a), is
amounts were or are included in financial accounting net $4,000, the amount of guaranteed payments expenses for
income. Complete columns (b) and (c), as appropriate. financial accounting purposes. The amount shown on line 9,
column (d), is ($1,000), the net amount deducted after taking
Don't report on line 7 amounts required to be reported in into consideration the $4,000 of total guaranteed payments
accordance with the instructions for line 8. allocated to the partners as income on Schedule K, netted
Don't report on line 7 amounts recovered from insurers or any against $3,000 deducted on Form 1065, page 1, line 10. The
other indemnitors for any fines and penalties described above. amount reported on line 9, column (b), is a temporary difference
of ($1,000), the negative of the amount of guaranteed payments
Line 8. Judgments, Damages, Awards, and capitalized for Form 1065, page 1. The amount reported on
Similar Costs line 9, column (c), is a permanent difference of ($4,000), equal to
the guaranteed payment income shown on Form 1065,
Report on line 8, column (a), the amount of any estimated or Schedule K, line 4, expressed as a negative amount. Part II,
actual judgments, damages, awards, settlements, and similar line 23, reports $5,000 in column (a), $0 in column (b), $0 in
costs, however named or classified, included in financial column (c), and $5,000 in column (d). Part II, line 24, reports
accounting income, regardless of whether the amount deducted ($4,000) in column (a), $1,000 in column (b), $4,000 in column
was attributable to an estimate of future anticipated payments or (c), and $1,000 in column (d). Part II, line 26, reports $1,000 in
actual payments. Also report on line 8, column (a), the reversal column (a), $1,000 in column (b), $4,000 in column (c), and
of any over accrual of any amount described in this paragraph. $6,000 in column (d).
Report on line 8, column (d), any such amounts described in 2. The facts are the same as in Example 19.1, except that no
the preceding paragraph that are includible in taxable income, guaranteed payments expense is recognized for financial
regardless of the financial accounting period in which such accounting purposes. The amount shown on Part I, line 11, is
amounts were or are included in financial accounting net $5,000. On line 9, ArrowRoot reports $0 in column (a), ($1,000)
income. Complete columns (b) and (c), as appropriate. in column (b), $0 in column (c), and ($1,000) in column (d). Part
Don't report on line 8 amounts required to be reported in II, line 23, reports $0 in column (a), $1,000 in column (b), $0 in
accordance with the instructions for line 7. column (c), and $1,000 in column (d). On Part II, line 25,
ArrowRoot reports $5,000 in column (a), $1,000 in column (b),
Don't report on line 8 amounts recovered from insurers or any $0 in column (c), and $6,000 in column (d).
other indemnitors for any judgments, damages, awards, or
similar costs described above. Line 10. Pension and Profit-Sharing
Report on line 10 any amounts attributable to the partnership's
Line 9. Guaranteed Payments pension plans, profit-sharing plans, and any other retirement
Include on line 9, column (a), the amount of guaranteed plans.
payments expense that is included on Part I, line 11. Report in
column (d) the net amount of guaranteed payments deduction. Line 11. Other Post-Retirement Benefits
The net amount of the deduction reported in column (d) is the Report on line 11 any amounts attributable to other
amount reported as a deduction on Form 1065, page 1, line 10, post-retirement benefits not otherwise includible on line 10 (for
reduced by the amount reported as income on Form 1065, example, retiree health and life insurance coverage, dental
Schedule K, line 4. The net amount of the guaranteed payments coverage, etc.).
reported in column (d) will be zero if no guaranteed payments
are capitalized and all are deducted on Form 1065, page 1, Line 12. Deferred Compensation
line 10, or a negative amount (reported in parentheses) if any of
the guaranteed payments are capitalized by the partnership. Report on line 12, column (a), any compensation expense
Generally, if guaranteed payments expense is recognized for included in the net income (loss) amount reported on Part I,

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line 11, that isn't deductible for U.S. income tax purposes in the Line 19. Amortization/Impairment of Goodwill
current tax year and that wasn't reported elsewhere on Report on line 19 amortization of goodwill or amounts
Schedule M-3, column (a). Report on line 12, column (d), any attributable to the impairment of goodwill.
compensation deductible in the current tax year that wasn't
included in the net income (loss) amount reported on Part I, Line 20. Amortization of Acquisition,
line 11, for the current tax year and that isn't reportable
elsewhere on Schedule M-3, including any compensation Reorganization, and Start-up Costs
deductions deferred in a prior tax year. For example, report Report on line 20 amortization of acquisition, reorganization, and
originations and reversals of deferred compensation subject to start-up costs. For purposes of columns (b), (c), and (d), include
section 409A on line 12. amounts amortizable under section 167 or 195.

Line 14. Charitable Contribution of Intangible Line 21. Other Amortization or Impairment
Property Write-Offs
Report on line 14 any charitable contribution of intangible Report on line 21 any amortization or impairment write-offs not
property, for example, contributions of: otherwise includible on Schedule M-3.
• Intellectual property, patents (including any amounts of
additional contributions allowable by virtue of income earned by Line 22. Reserved
donees subsequent to the year of donation), copyrights, When using this line to figure amounts on other tax forms or
trademarks; worksheets, this line should be considered to be zero.
• Securities (including stocks and their derivatives, stock
options, and bonds); Line 23a. Depletion—Oil & Gas
• Conservation easements (including scenic easements or air
Form 1065 filers report on line 23a, column (a), any oil and gas
rights);
depletion included on Part I, line 11.
• Railroad rights of way;
• Mineral rights; and
• Other intangible property. Line 23b. Depletion—Other Than Oil & Gas
Report on line 23b any depletion expense/deduction other than
Line 15. Organizational Expenses as per oil and gas that isn't required to be reported elsewhere on
Schedule M-3 (for example, on Part II, line 7, 8, 9, or 15).
Regulations Section 1.709-2(a)
Include on line 15, column (a), organizational expenses, as Line 24. Intangible Drilling and Development
defined in Regulations section 1.709-2(a). Include on line 15,
column (d), the amount of organizational expense deducted per Costs (IDC)
section 709(b). Intangible drilling and development costs (IDC) are costs of
developing oil, gas, or geothermal wells. Report on line 24,
Line 16. Syndication Expenses as per column (a), the total amount of intangible drilling and
development costs (or such equivalent costs as classified in the
Regulations Section 1.709-2(b) partnership's financial statements) included on Part I, line 11,
Include on line 16 syndication expenses, as defined in and report on line 24, column (d), the total amount of IDC paid or
Regulations section 1.709-2(b). incurred during the current tax year under section 263(c) and
Regulations section 1.612-4.
Line 17. Current Year Acquisition/
Reorganization Investment Banking Fees Line 25. Depreciation
Report on line 17 any investment banking fees paid or incurred in Report on line 25 any depreciation expense/deduction that isn't
connection with a taxable or tax-free acquisition of property (for required to be reported elsewhere on Schedule M-3 (for
example, ownership interests or assets) or a tax-free example, on Part II, line 7, 8, 9, or 15).
reorganization not otherwise reportable on Schedule M-3 (for
example, line 15 or 16). Report on this line any investment Line 26. Bad Debt Expense
banking fees paid or incurred at any stage of the acquisition or Report on line 26, column (a), any amounts attributable to an
reorganization process, including, for example, fees paid or allowance for uncollectible accounts receivable or actual
incurred to evaluate whether to investigate an acquisition, fees to write-offs of accounts receivable included on Part I, line 11.
conduct an actual investigation, and fees to consummate the Report in column (d) the amount of bad debt expense deductible
acquisition or reorganization. for federal income tax purposes under section 166.

Line 18. Current Year Acquisition/ Line 27. Interest Expense
Reorganization Legal and Accounting Fees Attach Form 8916-A. Complete Part III and enter the amounts
Report on line 18 any legal and accounting fees paid or incurred shown on line 5, columns (a) through (d), on Schedule M-3,
in connection with a taxable or tax-free acquisition of property line 27, columns (a) through (d), as applicable.
(for example, ownership interests or assets) or a tax-free
reorganization not otherwise reportable on Schedule M-3 (for An entity that (a) is required to file a Schedule M-3 and has
example, line 15 or 16). Report on this line any legal and less than $50 million in total assets at the end of the tax year, or
accounting fees paid or incurred at any stage of the acquisition (b) isn't required to file a Schedule M-3 and voluntarily files a
or reorganization process, including, for example, fees paid or Schedule M-3, isn't required to file Form 8916-A but may
incurred to evaluate whether to investigate an acquisition, fees to voluntarily do so.
conduct an actual investigation, and fees to consummate the Report on line 27, column (a), the total amount of interest
acquisition or reorganization. expense included on Part I, line 11, and report on line 27,
column (d), the total amount of interest deduction included on
line 1 of the Analysis of Net Income (Loss) found on Form 1065
that isn't reported elsewhere on Schedule M-3. In column (b) or

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(c), as applicable, adjust for any amounts treated for U.S. income specified expenditures attributable to foreign research),
tax purposes as interest deduction that are treated as some beginning with the midpoint of the tax year in which the
other form of expense for financial accounting purposes, or vice expenses are paid or incurred. See section 174.
versa. For example, adjustments to interest expense/deduction Report in column (a) the amount of expenses included in net
resulting from adjustments made in accordance with the income reported on Part I, line 11, that are related to research
instructions for line 28 should be made in columns (b) and (c), as and development expenses. Report in column (d) the amount of
applicable, of line 27. amortization deductions included in total deductions on page 1
Don't report on Form 8916-A and on line 27 amounts reported of the return and/or separately reported on Schedule K of the
in accordance with the instructions for (a) Part II, lines 7, 8, and return that are recognized and reported for section 174 research
9, Income (loss) from U.S. partnerships, foreign partnerships, and experimental expenditures. In column (c), as applicable,
and other pass-through entities; and (b) Part II, line 10, items include any adjustments for any amounts treated for U.S. income
relating to reportable transactions. tax purposes as research or experimental expenditures that are
treated as some other form of expense for financial accounting
Line 28. Purchase Versus Lease (for Purchasers purposes, or vice versa. Report any difference in timing
recognition in column (b).
and/or Lessees)
Note. Also see the instructions for Part II, line 16, for sellers Example 21.
and/or lessors. 1. Partnership Beech is a calendar year taxpayer that files
Asset transfer transactions with periodic payments and entirely completes Schedule M-3 for its 2023 tax year.
characterized for financial accounting purposes as either a During 2023, Beech incurred $100,000 of research and
purchase or a lease may, under some circumstances, be development costs that Beech recognized as an expense in its
characterized as the opposite for tax purposes. financial statements. In compliance with section 174, Beech
capitalizes and amortizes research and experimental
If a transaction is treated as a lease, the purchaser/lessee expenditures for U.S. income tax purposes. Accordingly, Beech
reports the periodic payments as gross rental expense. If the must report $100,000 in column (a), $90,000 in column (b), and
transaction is treated as a purchase, the purchaser/lessee $10,000 [($100,000/5 years) × 1/2] in column (d).
reports the periodic payments as payments of principal and
interest and also reports depreciation expense or deduction with 2. Partnership Flora is a calendar year taxpayer that files
respect to the purchased asset. and entirely completes Schedule M-3 for its 2023 tax year.
During 2023, Flora incurred $10,000 of research and
Report in column (a) gross rent expense for a transaction development costs related to social sciences that it recognized
treated as a lease for financial accounting purposes but as a sale as an expense in its financial statements. Flora amortizes
for U.S. income tax purposes. Report in column (d) gross rental research and experimental expenditures for U.S. income tax
deductions for a transaction treated as a lease for U.S. income purposes. Because such costs aren't allowable costs under
tax purposes but as a purchase for financial accounting section 174, Flora must report $10,000 in column (a), permanent
purposes. Report interest expense or deduction amounts for difference ($10,000) in column (c), and $0 in column (d). If such
such transactions on line 27, in column (a) or (d), as applicable. costs are otherwise deductible for U.S. income tax purposes,
Report depreciation expense or deductions for such transactions Flora must report this item of expense on Part III, line 30.
on line 25, in column (a) or (d), as applicable. Use columns (b) 3. Partnership Basil is a calendar year taxpayer that files and
and (c) of lines 25, 27, and 28, as applicable, to report the entirely completes Schedule M-3 for its 2023 tax year. During
differences between columns (a) and (d) for such 2023, Basil paid $75,000 to acquire or in-license intangible
recharacterized transactions. assets under a collaborative arrangement with another company
Example 20. Spruce is a calendar year U.S. partnership that Basil recognized as a research and development expense in
that files and entirely completes Schedule M-3 for its 2023 tax its financial statements. Because payments made to acquire
year. Spruce acquired property in a transaction that, for financial rights to a product or technology are excluded costs from the
accounting purposes, Spruce treats as a lease. Because of its definition of research and experimental expenditures, Basil must
terms, the transaction is treated for U.S. income tax purposes as report $75,000 in column (a), ($75,000) in column (c), and $0 in
a purchase, and Spruce must treat the periodic payments it column (d). Basil must report any amortization otherwise
makes partially as a payment of principal and partially as a allowable related to the payments on Part III, line 21.
payment of interest. In its financial statements, Spruce treats the
difference between the financial accounting and U.S. income tax Line 30. Other Expense/ Deduction Items With
treatment of this transaction as a temporary difference. During Differences
2023, Spruce reports in its financial statements $1,000 of gross Separately state and adequately disclose on line 30 all items of
rental expense that, for U.S. income tax purposes, is expense/deduction that aren't otherwise listed on lines 1 through
recharacterized as a $700 payment of principal and a $300 29.
payment of interest, accompanied by a depreciation deduction of
$1,200 (based on other facts). On its 2023 Schedule M-3, Attach a statement that describes and itemizes the type of
Spruce must report the following on line 28: column (a), $1,000, expense/deduction and the amount of each item, and provides a
its financial accounting gross rental expense; column (b), description that states the expense/deduction name for book
($1,000); and column (d), $0. On line 27, Spruce reports $0 in purposes for the amount recorded in column (a) and describes
column (a) and $300 in columns (b) and (d) for the interest the adjustment being recorded in column (b) or (c). The entire
deduction. On line 25, Spruce reports $0 in column (a) and description completes the tax description for the amount
$1,200 in columns (b) and (d) for the depreciation deduction. included in column (d) for each item separately stated on this
line.
Line 29. Research and Development Costs The statement of details attached to the return for line 30
For tax years beginning after December 31, 2021, for U.S. must separately state and adequately disclose the nature and
income tax purposes, research and experimental expenditures amount of the expense related to each reserve and/or contingent
paid or incurred by a taxpayer in connection with the taxpayer's liability. The appropriate level of disclosure depends upon each
trade or business must be amortized. The expenditures must be taxpayer's operational activity and the nature of its accounting
amortized ratably over the 5-year period (15-year period for records. For example, if a partnership's net income amount

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reported in the income statement includes anticipated expenses in net income reported on Part I, line 11, that are related to
for a discontinued operation as a single amount, and its general reserves and contingent liabilities. Report on line 30, column (d),
ledger or other books, records, and work papers provide details amounts related to liabilities for reserves and contingent
for the anticipated expenses under more explanatory and liabilities that are deductible in the current tax year for U.S.
defined categories such as employee termination costs, lease income tax purposes. Examples of items that must be reported
cancellation costs, loss on sale of equipment, etc., a supporting on line 30 include warranty reserves, restructuring reserves,
statement that lists those categories of expenses and their reserves for discontinued operations, and reserves for
details will satisfy the requirement to separately state and acquisitions and dispositions. Only report on line 30 items that
adequately disclose. In order to separately state and adequately aren't required to be reported elsewhere on Schedule M-3, Parts
disclose the employee termination costs, it isn't required that an II and III. For example, the expense for a reserve for inventory
anticipated termination cost amount be listed for each employee, obsolescence must be reported on Part II, line 15.
or that each asset (or category of asset) be listed along with the Example 22. Partnership Quail is a calendar year
anticipated loss on disposition. partnership that files and entirely completes Schedule M-3 for its
The attached statement should have five columns. The first 2023 tax year. On July 1 of each year, Quail has a fixed liability
column has the description for the next four columns; the second for its annual insurance premiums that provides a 12-month
column is Column (a), Expense per Income Statement; the third coverage period beginning July 1 through June 30. In addition,
column is Column (b), Temporary Difference; the fourth column Quail historically prepays 12 months of advertising expense on
is Column (c), Permanent Difference; and the fifth column is July 1. On July 1, 2023, Quail prepays its insurance premium of
Column (d), Deduction per Tax Return. For every item listed on $500,000 and advertising expenses of $800,000. For financial
the attached statement for line 30, columns (a) + (b) + (c) must accounting purposes, Quail capitalizes and amortizes the
equal column (d). Each item with amounts in columns (a), (b), prepaid insurance and advertising over 12 months. For U.S.
(c), and (d) will be totaled and included as one line on line 30 of income tax purposes, Quail deducts the insurance premium
the face of the schedule. when paid and amortizes the advertising over the 12-month
period. In its financial statements, Quail treats the differences
Comprehensive income. If any “comprehensive income,” as attributable to the financial statement treatment and U.S. income
defined by SFAS No. 130, is reported on this line, describe the tax treatment of the prepaid insurance and advertising as
item(s) in detail as, for example, “Foreign currency translation temporary differences.
adjustments—comprehensive income” and “Gains and losses
Quail also has a legal expense reserve where $300,000 was
on available-for-sale securities—comprehensive income.”
expensed for financial accounting purposes and a ($100,000)
Reserves and contingent liabilities. Report on line 30 temporary difference was calculated to arrive at the income tax
amounts related to the change in each reserve or contingent deduction of $200,000. The statement attached to Quail's return
liability that isn't required to be reported elsewhere on for Part III, line 30, must be separately stated and adequately
Schedule M-3. Report on line 30, column (a), expenses included disclosed as follows:

Column (a)
Expense per Income Column (b) Column (c) Column (d)
Description Statement Temporary Difference Permanent Difference Deduction per Tax Return
Prepaid insurance premium
expenses not capitalized $250,000 $250,000 -0- $500,000
Legal expense reserve 300,000 (100,000) -0- 200,000
Total line 30 $550,000 $150,000 -0- $700,000

Line 31. Total Expense/ Deduction Items reflects an amount of $1 million, then report on Part II, line 24,
Enter on Part II, line 24, columns (a) through (d), as applicable, column (a), ($1,000,000). Similarly, if line 31, column (b), reflects
positive amounts from line 31 as negative (in parentheses) and an amount of ($50,000), then report on Part II, line 24, column
negative amounts as positive. For example, if line 31, column (a), (b), $50,000.

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