Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More

2009

Department of the Treasury
Internal Revenue Service

Instructions for
Schedule M-3 (Form 1120)
Net Income (Loss) Reconciliation for Corporations With Total Assets of
$10 Million or More
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Purpose of Schedule
Schedule M-3, Part I, asks certain
questions about the corporation’s
financial statements and reconciles
financial statement net income (loss) for
the corporation (or consolidated
financial statement group, if applicable),
as reported on Part I, line 4a, to net
income (loss) of the corporation for U.S.
taxable income purposes, as reported
on Part I, line 11.
Schedule M-3 Parts II and III
reconcile financial statement net
income (loss) for the U.S. corporation
(or consolidated tax group, if
applicable), as reported on Schedule
M-3, Part I, line 11, to taxable income
on Form 1120, page 1, line 28.

Where To File
If the corporation is required to file (or
voluntarily files) Schedule M-3 (Form
1120), the corporation must file Form
1120 and all attachments and
schedules, including Schedule M-3
(Form 1120), with the Department of
the Treasury, Internal Revenue Service
Center, Ogden, UT 84201-0012.

Who Must File

• Any domestic corporation or group of

corporations required to file Form 1120,
U.S. Corporation Income Tax Return,
that reports on Form 1120, Schedule L,
Balance Sheets per Books, total assets
at the end of the corporation’s tax year
that equal or exceed $10 million must
complete and file Schedule M-3 instead
of Schedule M-1, Reconciliation of
Income (Loss) per Books With Income
per Return.
• A corporation filing a
non-consolidated Form 1120 that
reports on Schedule L total assets that
equal or exceed $10 million must
complete and file Schedule M-3 instead
of Schedule M-1 and must check box
(1) Non-consolidated return, at the top
of page 1 of Schedule M-3.

• Any U.S. consolidated tax group

consisting of a U.S. parent corporation
and additional includible corporations
listed on Form 851, Affiliations
Schedule, required to file Form 1120,
that reports on Schedule L total
consolidated assets at the end of the
tax year that equal or exceed $10
million must complete and file Schedule
M-3 instead of Schedule M-1, and must
check box (2) Consolidated return
(Form 1120 only), or box (3) Mixed
1120/L/PC group, as applicable, at the
top of page 1 of Schedule M-3.
A U.S. corporation filing Form 1120
that is not required to file Schedule M-3
may voluntarily file Schedule M-3
instead of Schedule M-1. A corporation
filing Schedule M-3 must check Item A,
box 4, on Form 1120, page 1, indicating
that Schedule M-3 is attached, whether
required or voluntary. A corporation
filing Schedule M-3 must not file
Schedule M-1.
Example 1.
1. U.S. corporation A owns U.S.
subsidiary B and foreign subsidiary F.
For its 2009 tax year, A prepares
consolidated financial statements with
B and F that report total assets of $12
million. A files a consolidated U.S.
income tax return with B and reports
total consolidated assets on Schedule L
of $8 million. A’s U.S. consolidated tax
group is not required to file Schedule
M-3 for the 2009 tax year.
2. U.S. corporation C owns U.S.
subsidiary D. For its 2009 tax year, C
prepares consolidated financial
statements with D, but C and D file
separate U.S. income tax returns. The
consolidated accrual basis financial
statements for C and D report total
assets at the end of the tax year of $12
million after intercompany eliminations.
C reports separate company total
year-end assets on its Schedule L of $7
million. D reports separate company
total year-end assets on its Schedule L
of $6 million. Neither C nor D is
required to file Schedule M-3 for the
2009 tax year.
3. Foreign corporation A owns 100
percent of both U.S. corporation B and
U.S. corporation C. C owns 100 percent
Cat. No. 38103Y

of U.S. corporation D. For its 2009 tax
year, A prepares a consolidated
worldwide financial statement for the
ABCD consolidated group. The ABCD
consolidated financial statement reports
total year-end assets of $25 million. A
is not required to file a U.S. income tax
return. B files a separate U.S. income
tax return and reports separate
company total year-end assets on its
Schedule L of $12 million. C files a
consolidated U.S. income tax return
with D and, after eliminating
intercompany transactions between C
and D, reports consolidated total
year-end assets on Schedule L of $8
million. B is required to file Schedule
M-3 because its total year-end assets
reported on Schedule L exceed $10
million. The CD U.S. consolidated tax
group is not required to file Schedule
M-3 because its total year-end assets
do not exceed $10 million.

Special Filing Requirements
for Certain Groups
Mixed groups. If the parent
corporation of a U.S. consolidated tax
group files Form 1120 and files
Schedule M-3, each member of the
group must file a Schedule M-3.
However, if the parent corporation of a
U.S. consolidated tax group files Form
1120 and any member of the group
files Form 1120-PC, U.S. Property and
Casualty Insurance Company Income
Tax Return, or Form 1120-L, U.S. Life
Insurance Company Income Tax
Return, that member must file Schedule
M-3 (Form 1120-PC) or Schedule M-3
(Form 1120-L), respectively, and the
group must comply with the mixed
group consolidated Schedule M-3
instructions under Schedule M-3
Consolidation for Mixed Groups (1120/
L/PC) on page 4. A mixed group must
also file Form 8916, Reconciliation of
Schedule M-3 Taxable Income with Tax
Return Taxable Income for Mixed
Groups and, if applicable, Form
8916-A, Supplemental Attachment to
Schedule M-3.
If the parent company of a U.S.
consolidated tax group files Form 1120

and any member of the group files
Form 1120-PC or Form 1120-L and the
consolidated Schedule L reported in the
return includes the assets of all of the
companies (the insurance companies
as well as the non-insurance
companies), in order to determine if the
group meets the $10 million threshold
test for the requirement to file Schedule
M-3, use the amount of total assets
reported on Schedule L of the
consolidated return. If the parent
company of a U.S. consolidated tax
group files Form 1120 and any member
of the group files Form 1120-PC or
Form 1120-L and the consolidated
Schedule L reported in the return does
not include the assets of one or more of
the insurance companies in the U.S.
consolidated tax group, in order to
determine if the group meets the $10
million threshold test, use the sum of
the amount of total assets reported on
the consolidated Schedule L plus the
amounts of all assets reported on
Forms 1120-PC and 1120-L that are
included in the consolidated return but
not included on the consolidated
Schedule L.
Other entities. There is a unique
separate Schedule M-3 for taxpayers
required to file Form 1065, U.S. Return
of Partnership Income; Form 1120S,
U.S. Income Tax Return for an S
Corporation; Form 1120-F, U.S. Income
Tax Return of a Foreign Corporation;
and for Forms 1120-PC or 1120-L. For
more information, see the instructions
for the applicable Schedule M-3.
Cooperatives filing Form 1120-C,
U.S. Income Tax Return for
Cooperative Associations, that report
end of year assets of $10 million or
more must complete Schedule M-3
(Form 1120) instead of Schedule M-1.
For insurance companies included in
the consolidated U.S. income tax
return, see the instructions for Part I,
lines 10 and 11, and Part II, line 7, for
guidance on Schedule M-3 reporting of
intercompany dividends and statutory
accounting adjustments.
Note. No Schedule M-3 is required for
taxpayers filing Form 1120-REIT, U.S.
Income Tax Return for Real Estate
Investment Trusts; Form 1120-RIC,
U.S. Income Tax Return for Regulated
Investment Companies; Form 1120-H,
U.S. Income Tax Return for
Homeowners Associations; and Form
1120-SF, U.S. Income Tax Return for
Settlement Funds.

Other Issues Affecting
Schedule M-3 Filing
Requirements
If a corporation was required to file
Schedule M-3 for the preceding tax

year, but reports on Form 1120, page
1, Item D, and on Form 1120, Schedule
L, total consolidated assets at the end
of the current tax year of less than $10
million, the corporation is not required
to file Schedule M-3 for the current tax
year. The corporation may either (a) file
Schedule M-3, or (b) file Schedule M-1,
for the current tax year. However, if the
corporation chooses to file Schedule
M-1 for the current tax year, and for a
subsequent tax year the corporation is
required to file Schedule M-3, the
corporation must complete Schedule
M-3 in its entirety (Part I and all
columns in Parts II and III) for that
subsequent tax year.
In the case of a U.S. consolidated
tax group, total assets at the end of the
tax year must be determined based on
the total year-end assets of all
includible corporations listed on Form
851, net of eliminations for
intercompany transactions and
balances between the includible
corporations. In addition, for purposes
of determining whether the corporation
(or U.S. consolidated tax group) has
total assets at the end of the current tax
year of $10 million or more, the
corporation’s total consolidated assets
must be determined on an overall
accrual method of accounting unless
both of the following apply: (a) the tax
returns of all includible corporations in
the U.S. consolidated tax group are
prepared using an overall cash method
of accounting, and (b) no includible
corporation in the U.S. consolidated tax
group prepares or is included in
financial statements prepared on an
accrual basis.
Note. See the instructions for Part I,
line 1, for a discussion of non-tax-basis
income statements and related
non-tax-basis balance sheets to be
used in the preparation of Schedule
M-3 and of Form 1120, Schedule L.

Other Form 1120
Schedules Affected by
Schedule M-3
Requirements
Schedule B
A corporation or group of corporations
that files a Form 1120 and is required
to file Schedule M-3, must also file
Schedule B (Form 1120), Additional
Information for Schedule M-3 filers.

Schedule L
If a non-tax-basis income statement
and related non-tax-basis balance
sheet is prepared for any purpose for a
period ending with or within the tax
year, Schedule L must be prepared
showing non-tax-basis amounts. See

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the instructions for Part I, line 1, for the
discussion of non-tax-basis income
statements and related non-tax-basis
balance sheets prepared for any
purpose and the impact on the
selection of the income statement used
for Schedule M-3 and the related
non-tax-basis balance sheet amounts
that must be used for Schedule L.
Total assets shown on Schedule L,
line 15, column (d) (or, in the case of
some consolidated mixed groups with a
Form 1120 parent and an insurance
subsidiary, the assets reported on Form
1120, page 1, Item D), must equal the
total assets of the corporation (or, in the
case of a U.S. consolidated tax group,
the total assets of all members of the
group listed on Form 851) as of the last
day of the tax year, and must be the
same total assets reported by the
corporation (or by each member of the
U.S. consolidated tax group) in the
non-tax-basis financial statements, if
any, used for Schedule M-3. If the
corporation prepares non-tax-basis
financial statements, Schedule L must
equal the sum of the financial
statement total assets for each
corporation listed on Form 851 and
included in the consolidated U.S.
income tax return (includible
corporation) net of eliminations for
intercompany transactions between
includible corporations. If the
corporation does not prepare
non-tax-basis financial statements,
Schedule L must be based on the
corporation’s books and records. The
Schedule L balance sheet can show
tax-basis balance sheet amounts if the
corporation is allowed to use books and
records for Schedule M-3 and the
corporation’s books and records reflect
only tax-basis amounts.
Generally, total assets at the
beginning of the year (Schedule L, line
15, column (b)) must equal total assets
at the close of the prior year (Schedule
L, line 15, column (d)). For each
Schedule L balance sheet item reported
for which there is a difference between
the current opening balance sheet
amount and the prior closing balance
sheet amount; attach a schedule that
reports the balance sheet item, the
prior closing amount, the current
opening amount, and a short
explanation of the change. Such
reasons for these differences include
mergers and acquisitions.
For purposes of measuring total
assets at the end of the year, the
corporation’s assets may not be netted
or reduced by the corporation’s
liabilities. In addition, total assets may
not be reported as a negative amount.
If Schedule L is prepared on a
non-tax-basis method, an investment in
a partnership may be shown as
Instructions for Schedule M-3 (Form 1120)

appropriate under the corporation’s
non-tax-basis method of accounting,
including, if required by the
corporation’s reporting methodology,
the equity method of accounting for
investments. If Schedule L is prepared
on a tax-basis, an investment by the
corporation in a partnership must be
shown as an asset and measured by
the corporation’s adjusted basis in its
partnership interest. Any liabilities
contributing to such adjusted basis
must be shown on Schedule L as
corporate liabilities.

Schedule M-2
The amount shown on Schedule M-2,
line 2, Net income (loss) per books,
must equal the amount shown on
Schedule M-3, Part I, line 11. Schedule
M-2 must reflect activity only of
corporations included in the
consolidated U.S. income tax return.

Consolidated Return
(Form 1120, Page 1)
Report on Form 1120, page 1, each
item of income, gain, loss, expense, or
deduction net of elimination entries for
intercompany transactions between
includible corporations. The corporation
must not report as dividends on Form
1120, Schedule C, any amounts
received from an includible corporation.
In general, dividends received from an
includible corporation must be
eliminated in consolidation rather than
offset by the dividends-received
deduction.

Entity Considerations for
Schedule M-3
For purposes of Schedule M-3,
references to the classification of an
entity (for example, as a corporation, a
partnership, or a trust) are references to
the treatment of the entity for U.S.
income tax purposes. An entity that
generally is disregarded as separate
from its owner for U.S. income tax
purposes (disregarded entity) must not
be separately reported on Schedule
M-3 except, if required, on Part I, line
7a or 7b. On Schedule M-3, Parts II
and III, any item of income, gain, loss,
deduction, or credit of a disregarded
entity must be reported as an item of its
owner. In particular, the income or loss
of a disregarded entity must not be
reported on Part II, lines 9, 10, or 11 as
from a separate partnership or other
pass-through entity. The financial
statement income or loss of a
disregarded entity is included on Part I,
line 7a or 7b, only if its financial
statement income or loss is included on
Part I, line 11, but not on Part I, line 4a.

Reportable Entity Partner
Reporting Responsibilities
A reportable entity partner with respect
to a partnership filing Form 1065 is an
entity that: (1) owns or is deemed to
own, directly or indirectly, under these
instructions a 50 percent or greater
interest in the income, loss or capital of
the partnership on any day of the tax
year; and (2) was required to complete
Schedule M-3 on its most recently filed
U.S. income tax return or return of
income filed prior to that day.
For the purposes of these
instructions, the following rules apply.
1. The parent corporation of a
consolidated tax group is deemed to
own all corporate and partnership
interests owned or deemed to be
owned under these instructions by any
member of the tax consolidated group.
2. The owner of a disregarded entity
is deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions
by the disregarded entity.
3. The owner of 50 percent or more
of a corporation by vote on any day of
the corporation tax year is deemed to
own all corporate and partnership
interests owned or deemed to be
owned under these instructions by the
corporation during the corporation tax
year.
4. The owner of 50 percent or more
of partnership income, loss, or capital
on any day of the partnership tax year
is deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions
by the partnership during the
partnership tax year.
5. The beneficial owner of 50
percent or more of the beneficial
interest of a trust or nominee
arrangement on any day of the trust or
nominee arrangement tax year is
deemed to own all corporate and
partnership interests owned or deemed
to be owned under these instructions
by the trust or nominee arrangement.
A reportable entity partner with
respect to a partnership (as defined
above) must report the following to the
partnership within 30 days of first
becoming a reportable entity partner
and, after first reporting to the
partnership under these instructions,
thereafter within 30 days of the date of
any change in the interest it owns or is
deemed to own, directly or indirectly,
under these instructions, in the
partnership.
1. Name.
2. Mailing address.
3. Taxpayer identification number
(TIN or EIN), if applicable.
4. Entity or organization type.

Instructions for Schedule M-3 (Form 1120)

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5. State or country in which it is
organized.
6. Date on which it first became a
reportable entity partner.
7. Date with respect to which it is
reporting a change in its ownership
interest in the partnership, if applicable.
8. The interest in the partnership it
owns or is deemed to own in the
partnership, directly or indirectly (as
defined under these instructions) as of
the date with respect to which it is
reporting.
9. Any change in that interest as of
the date with respect to which it is
reporting.
The reportable entity partner must
retain copies of required reports it
makes to partnerships under these
instructions. Each partnership must
retain copies of the required reports it
receives under these instructions from
reportable entity partners.
Example 2.
1. A, an LLC filing a Form 1065 for
2009, is owned 50 percent by U.S.
corporation Z. A owns 50 percent of B,
C, D, and E, which are also LLCs filing
a Form 1065 for calendar year 2009. Z
was first required to complete Schedule
M-3 (Form 1120) for its corporate tax
year ended December 31, 2008, and
filed its Form 1120 with Schedule M-3
for 2008 on September 15, 2009. As of
September 16, 2009, Z was a
reportable entity partner with respect to
A and, through A, with respect to B, C,
D, and E. On October 5, 2009, Z
reports to A, B, C, D, and E, as it is
required to do within 30 days of
September 16, that Z is a reportable
entity partner directly owning (with
respect to A) or deemed to own
indirectly (with respect to B, C, D, and
E) a 50 percent interest. Therefore,
because Z was a reportable entity
partner for 2009, each of A, B, C, D,
and E is required to complete Schedule
M-3 (Form 1065) for 2009, regardless
of whether they would otherwise be
required to complete Schedule M-3 for
that year.
2. P, a U.S. corporation, is the
parent of a financial consolidation group
with 50 domestic subsidiaries DS1
through DS50 and 50 foreign
subsidiaries FS1 through FS50, all 100
percent owned on September 16, 2009.
On September 15, 2009, P filed a
consolidated tax return on Form 1120
and was required to complete Schedule
M-3 for the tax year ending December
31, 2008. On September 16, 2009,
DS1, DS2, DS3, FS1, and FS2 each
acquires a 10 percent partnership
interest in partnership K which files
Form 1065 for the tax year ending
December 31, 2009. P is deemed to
own, directly or indirectly (under these
instructions) all corporate and

partnership interests of DS1, DS2, DS3,
as the parent of the tax consolidation
group and therefore is deemed to own
30 percent of K on September 16,
2009. P is deemed to own, directly or
indirectly, (under these instructions) all
corporate and partnership interests of
FS1 and FS2 as the owner of 50
percent or more of each corporation by
vote and therefore is deemed to own 20
percent of K on September 16, 2009. P
is therefore deemed to own 50 percent
of K on September 16, 2009. Since P
owns or is deemed to own, directly or
indirectly, (under these instructions) 50
percent or more of K on September 16,
2009, and was required to complete
Schedule M-3 on its most recently filed
U.S. income tax return filed prior to that
date. P is a reportable entity partner of
K as of September 16, 2009. On
October 5, 2009, P reports to K, as it is
required to do, that P is a reportable
entity partner as of September 16,
2009, deemed to own (under these
instructions) a 50 percent interest in K.
K is therefore required to complete
Schedule M-3 when it files its Form
1065 for its tax year ending December
31, 2009.

Consolidated Schedule
M-3 Versus
Consolidating Schedules
M-3 for Form 1120
Groups
A consolidated tax return group with a
parent corporation that files a Form
1120 is a mixed group if any member is
a life insurance company (files using
Form 1120-L) or a property and
casualty insurance company (files using
1120-PC). See Schedule M-3
Consolidation for Mixed Groups (1120/
L/PC) below.
A U.S. consolidated tax group must
file a consolidated Schedule M-3. Parts
I, II, and III of the consolidated
Schedule M-3 must reflect the activity
of the entire U.S. consolidated tax
group. The parent corporation also
must complete Parts II and III of a
separate Schedule M-3 to reflect the
parent’s own activity. In addition, Parts
II and III of a separate Schedule M-3
must be completed by each includible
corporation to reflect the activity of that
includible corporation. Lastly, it
generally will be necessary to complete
Parts II and III of a separate Schedule
M-3 for consolidation eliminations.
If a U.S. consolidated tax group that
is not a mixed group consists of four
includible corporations (the parent and
three subsidiaries) all filing Form 1120,
the U.S. consolidated tax group must
complete six Schedules M-3 as follows:

• One consolidated Schedule M-3 with
Parts I, II, and III completed to reflect
the activity of the entire U.S.
consolidated tax group.
• Parts II and III of a separate
Schedule M-3 for each of the four
includible corporations to reflect the
activity of each includible corporation.
• Parts II and III of a separate
Schedule M-3 to eliminate
intercompany transactions between
includible corporations and to include
limitations on deductions (charitable
contribution limitations and capital loss
limitations) and carryover amounts
(charitable contribution carryovers and
capital loss carryovers).
See Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers on page 5.

Note. Complete only one Schedule
M-3, Part I, for each consolidated
group. A subsidiary of a consolidated
group does not complete Schedule
M-3, Part I. Enter on Schedule M-3,
Part I, the name and EIN of the
common parent of the consolidated
group. Indicate on Schedule M-3, Parts
II and III, on the line after the common
parent’s name and EIN, whether the
Schedule M-3, Parts II and III, is for the:
(1) consolidated group; (2) parent
corporation; (3) consolidation
eliminations; or (4) subsidiary
corporation, by checking the
appropriate box. If Schedule M-3, Parts
II and III, are for a subsidiary in a
consolidated return, also enter the
name and EIN of the subsidiary.

Schedule M-3 Consolidation
for Mixed Groups (1120/L/
PC)
Special Schedule M-3 consolidation
rules apply to a mixed group, that is, a
consolidated tax group that includes:
(a) both a corporation that is an
insurance company and a corporation
that is not an insurance company; or (b)
both a life insurance company and a
property and casualty insurance
company; or (c) a life insurance
company, a property and casualty
insurance company, and a corporation
that is not an insurance company.
Mixed group consolidation for
Schedule M-3, Parts II and III, requires
(a) subgroup sub-consolidation of the
1120 subgroup, the 1120-PC subgroup,
and the 1120-L subgroup, each with its
own sub-consolidated Schedule M-3,
Parts II and III, and (b) consolidation of
the subgroup sub-consolidation totals
on a consolidated Schedule M-3, Part II
that ties to a consolidated Schedule
M-3, Part I, and a consolidated Form
8916, Reconciliation of Schedule M-3
Taxable Income with Tax Return
Taxable Income for Mixed Groups.

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In addition to one Schedule M-3,
Part II, and one Schedule M-3, Part III,
for each corporation in the three
subgroup sub-consolidations, there will
be generally a total of six additional
Schedule M-3, Parts II, and six
additional Schedule M-3, Parts III, for
the subgroup sub-consolidations.
Specifically, there must be one Part II
and one Part III for each subgroup’s
sub-consolidated amounts and one Part
II and one Part III for each subgroup’s
sub-consolidation eliminations
amounts.
At the mixed group consolidated
level, there must be a consolidated
Schedule M-3, Part II, and, if
applicable, a Part II for consolidation
eliminations not includible in the
subgroup eliminations. At the
consolidated level, there must also be a
consolidated Schedule M-3, Part I, and
a consolidated Form 8916. For a mixed
group, there is no Schedule M-3, Part
III, at the consolidated level.
The corporation must check the
applicable mixed group checkboxes on
all Schedules M-3, Parts I, II, and III, as
discussed below.

Subgroup Sub-Consolidation:
1120 Subgroup, 1120-PC
Subgroup, and 1120-L
Subgroup
A subgroup Schedule M-3, Parts II and
III, sub-consolidation must be prepared
with all necessary eliminations within
the subgroup for each of the three
possible subgroups that are in fact
present: one subgroup for those
corporations reporting on Form 1120;
one subgroup for those corporations
reporting on Form 1120-PC; and one
subgroup for those reporting on Form
1120-L. The parent corporation is
included in the subgroup that
corresponds to the form on which it
reports and the entire consolidated
group files. For example, in the case of
a Form 1120 parent and Form 1120
consolidated group, the parent is
included in the Form 1120 subgroup
sub-consolidation. Each subgroup uses
its own Schedule M-3 (Forms 1120,
1120-PC, or 1120-L), Parts II and III, for
each corporation within the subgroup
and for the subgroup sub-consolidation
and the subgroup eliminations.
The three subgroup
sub-consolidation taxable income
calculations on Schedule M-3 must
follow the separate return requirements
of the regulation under Section 1502
and all other applicable regulations
taking into account the amounts
separately reported on Form 8916.
Capital loss limitation and carryforward
used and charitable deduction limitation
and carryforward used are not taken
into account in the determination of the
Instructions for Schedule M-3 (Form 1120)

three subgroup sub-consolidated
taxable incomes on Schedule M-3, but
are reflected on Form 8916 and in the
calculation of the life/non-life loss
limitation and carryforward used. See
Life/Non-Life Loss Limitation and
Carryforward Used Calculations on this
page.
The reconciliation totals for book,
temporary difference, permanent
difference, and taxable income for each
subgroup are reported on Forms 1120,
1120-PC, or 1120-L, as applicable,
Schedule M-3, Part II, line 29a,
columns (a), (b), (c), and (d), and equal
the sum of the line amounts on Part II,
lines 26 through 28. For a mixed group,
Schedule M-3, Part II, lines 29b, 29c,
and 30 are blank on the Forms 1120,
1120-PC, or 1120-L, as applicable, for
the separate corporations (parent and
subsidiary) and for the three subgroup
sub-consolidations.
Note. A sub-consolidation is required
for every subgroup, even if the
subgroup consists of only one
corporation. In addition, Form 8916-A, if
applicable, is required at the
sub-consolidated level and the
sub-consolidated elimination level.

Reconciliation of Mixed Group
Subgroup Sub-Consolidation
Amounts to Schedule M-3, Part
I, line 11, and to Tax Return
Taxable Income
At the consolidated level, use the
Schedule M-3 (Forms 1120, 1120-PC,
or 1120-L), Parts I and II, that matches
the form on which the parent
corporation reports and the entire
consolidated group files. For a mixed
group, the consolidated Schedule M-3,
Part II, lines 29a, 29b, and 29c, report
the applicable amounts from the three
subgroup sub-consolidation Part II, line
29a, amounts. (If a consolidated level
Part II for consolidation eliminations not
includible in the subgroup eliminations
is applicable, the applicable amounts
must be adjusted by the applicable
elimination amounts.) The consolidated
Schedule M-3, Part II, line 30, amounts
are the sum of the applicable amounts
on the consolidated Part II, lines 29a,
29b, and 29c. For a mixed group, the
consolidated Part II, lines 1 through 28,
are blank and no consolidated Part III is
required to be completed.
For mixed groups, the consolidated
Part II, line 30, column (a), must equal
Part I, line 11, with appropriate
adjustments for statutory accounting
requirements reflected on Part I, line
10b. The consolidated taxable income
indicated on Part II, line 30, column (d),
must equal the amount shown on Form
8916, line 1. Form 8916, line 8, must
equal taxable income reported on the
tax return.

Completion of Mixed Group
Checkboxes for Schedule M-3,
Part II and Part III
Note. The following discussion of
checkboxes will assume that the 1120
subgroup includes the corporate parent
of the mixed group.
Forms 1120, 1120-PC, and 1120-L,
Schedule M-3, Parts II and III, each
have a checkbox (5) at the top
indicating a mixed group. Checkbox (5)
and one or more other applicable
checkboxes must be checked.
For example, an 1120 parent
corporation included in the 1120
subgroup must check Schedule M-3
(Form 1120), Parts II and III, box (2)
Parent corporation, and box (5) Mixed
1120/L/PC group. An 1120 subsidiary
corporation within the 1120 subgroup
must check Schedule M-3 (Form 1120),
Parts II and III, box (4) Subsidiary
corporation, and box (5) Mixed 1120/L/
PC group. An 1120-PC subsidiary
corporation within the 1120-PC
subgroup must check Schedule M-3
(Form 1120-PC), Parts II and III, box
(4) Subsidiary corporation, and box (5)
Mixed 1120/L/PC group. An 1120-L
subsidiary corporation within the 1120-L
subgroup must check Schedule M-3
(Form 1120-L), Parts II and III, box (4)
Subsidiary corporation, and box (5)
Mixed 1120/L/PC group.
The 1120 subgroup
sub-consolidation Schedule M-3 (Form
1120), Parts II and III, must be
indicated by checking box (5) Mixed
1120/L/PC group, and box (6) 1120
group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC
group, and box (7) 1120 eliminations
for the eliminations. The 1120-PC
subgroup sub-consolidation Form
1120-PC, Schedule M-3, Parts II and
III, must be indicated by checking box
(5) Mixed 1120/L/PC group, and box (6)
1120-PC group for the
sub-consolidation, and by checking box
(5) Mixed 1120/L/PC group, and box (7)
1120-PC eliminations for the
eliminations. The 1120-L subgroup
sub-consolidation Schedule M-3 (Form
1120-L), Parts II and III, must be
indicated by checking box (5) Mixed
1120/L/PC group, and box (6) 1120-L
group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC
group, and box (7) 1120-L eliminations
for the eliminations.
A mixed group with a Form 1120
parent corporation completes a
consolidated level Schedule M-3 (Form
1120), Parts I and II, and a
consolidated Form 8916. The mixed
group consolidated Schedule M-3, Part
II, must be indicated by checking box
(1) Consolidated group, and box (5)
Mixed 1120/L/PC group. (If a

Instructions for Schedule M-3 (Form 1120)

-5-

consolidated level Part II for
consolidation eliminations not includible
in the subgroup eliminations is
applicable, that Part II must be
indicated by checking box (3)
Consolidated eliminations, and box (5)
Mixed 1120/L/PC group.)

Life/Non-Life Loss Limitation
and Carryforward Used
Calculations
The applicable life/non-life loss
limitation and all carryforward used
calculations are made using the
amounts determined for taxable income
in the three subgroup
sub-consolidations and other applicable
amounts separately reported on Form
8916. The calculated life/non-life loss
limitation or carryforward used
amounts, if any, are not entered on
Schedule M-3. The calculated amounts,
if any, are entered on Form 8916.

Completion of Schedule
M-3 and Certain
Allocations, Limitations,
and Carryovers
A corporation (or any member of a U.S.
consolidated tax group) required to file
Schedule M-3 must complete the form
in its entirety. In particular, a
corporation filing a nonconsolidated
return that meets the filing requirements
for Schedule M-3 must complete Parts
I, II, and III. Such a corporation does
not check any of the checkboxes at the
top of Parts II and III. In the case of a
U.S. consolidated tax group, Part I
must be completed once, on the
consolidated Schedule M-3, by the
parent corporation. Parts II and III must
be completed by the parent corporation,
each includible corporation, and a
consolidating eliminations entity.
At the time the Form 1120 is filed, all
applicable questions must be answered
on Part I, all columns must be
completed on Parts II and III, and all
numerical data required by Schedule
M-3 must be provided. Any schedule
required to support a line item on
Schedule M-3 must be attached at the
time Schedule M-3 is filed and must
provide the information required for that
line item.
All detailed schedules for Part II and
Part III of Schedule M-3 must be
attached for each separate entity
included in the consolidated Part II and
Part III, including those for the parent
company and the eliminations entity, if
applicable. It is not required that the
same supporting detailed information
be presented for Part II and Part III of
the consolidated Schedule M-3.
If an item attributable to an includible
corporation is not shared by or

allocated to the appropriate member of
the group but is retained in the parent
corporation’s financial statements (or
books and records, if applicable), then
the item must be reported by the parent
corporation in its separate Schedule
M-3. For example, if the parent of a
U.S. consolidated tax group prepares
financial statements that include all
members of the U.S. consolidated tax
group and the parent does not allocate
the group’s income tax expense as
reflected in the financial statements
among the members of the group but
retains it in the parent corporation, the
parent corporation must report on its
separate Schedule M-3 the U.S.
consolidated tax group’s income tax
expense as reflected in the financial
statements.
Any adjustments made at the
consolidated group level that are not
attributable to any specific member of
the U.S. consolidated tax group (for
example, disallowance of net capital
losses, contribution deduction
carryovers, and limitation of contribution
deductions) must not be reported on
the separate consolidating parent or
subsidiary Schedules M-3 but rather on
the consolidated Schedule M-3 and on
the consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group).
If an includible corporation has: (1)
no activity for the tax year (for example,
because the corporation is a dormant
or inactive corporation); (2) no amount
for the corporation to include in Part I,
line 11; and (3) the corporation has no
amounts to report on Part II and Part III
of Schedule M-3 for the tax year; the
parent corporation of the U.S.
consolidated tax group may attach to
the consolidated Schedule M-3 a
statement that provides the name and
EIN of the includible corporation in lieu
of filing a blank Part II and Part III of
Schedule M-3 for such entity. On Part I,
check box (4), Dormant subsidiaries
schedule attached.

Specific Instructions
for Part I
Part I. Financial
Information and Net
Income (Loss)
Reconciliation
When To Complete Part I
Part I must be completed for any tax
year for which the corporation files
Schedule M-3. Check either box (1)
Non-consolidated return, (2)

Consolidated return (Form 1120 only),
or (3) Mixed 1120/L/PC group, as
applicable. In addition, check box (4),
Dormant subsidiaries schedule
attached, if applicable.

Line 1. Questions Regarding
the Type of Income
Statement Prepared
For Part I, lines 1 through 12, use only
the financial statements of the U.S.
corporation filing the U.S. income tax
return (the consolidated financial
statements for the U.S. parent
corporation of a U.S. consolidated tax
group). If the U.S. corporation filing a
U.S. income tax return (or the U.S.
parent corporation of a U.S.
consolidated tax group) prepares its
own financial statements but is
controlled by another corporation (U.S.
or foreign) that prepares financial
statements that include the U.S.
corporation, the U.S. corporation (or the
U.S. parent corporation of a U.S.
consolidated tax group) must use for its
Schedule M-3, Part I, its own financial
statements and not the financial
statements of the controlling
corporation.
If a non-publicly traded U.S. parent
corporation of a U.S. consolidated tax
group prepares financial statements
and that group includes a publicly
traded subsidiary that files financial
statements with the Securities and
Exchange Commission (SEC), the
consolidated financial statements of the
parent corporation are the appropriate
financial statements for purposes of
completing Part I. Do not use any
separate company financial statements
that might be prepared for publicly
traded subsidiaries.

Non-Tax-Basis Financial
Statements and Tax-Basis
Financial Statements
A tax-basis income statement is
allowed for Schedule M-3, and a
tax-basis balance sheet for Schedule L,
only if no non-tax-basis income
statement and no non-tax-basis
balance sheet were prepared for any
purpose and the books and records of
the corporation reflect only tax-basis
amounts. The corporation is deemed to
have non-tax-basis income statements
and the related non-tax-basis balance
sheets for the current tax year for
purposes of Schedule M-3 and
Schedule L if such non-tax-basis
financial statements were prepared for
and presented to management,
creditors, shareholders, government
regulators, or any other third parties for
a period ending with or within the tax
year.
If a Form 10-K is filed with the SEC
for the period ending with or within the

-6-

tax year, the corporation must check
“Yes” for Part I, line 1a, and use that
income statement for Schedule M-3. If
Form 10-K is not filed and a
non-tax-basis income statement is
prepared that is a certified
non-tax-basis income statement for the
period ending with or within the tax
year, the corporation must check “Yes”
for Part I, line 1b, and use that income
statement for Schedule M-3. If Form
10-K is not filed and no certified
non-tax-basis income statement is
prepared but an unaudited
non-tax-basis income statement is
prepared for the period ending with or
within the tax year, the corporation
must check “Yes” for Part I, line 1c, and
use that income statement for Schedule
M-3.
Order of priority in accounting
standards. If no Form 10-K is filed
and two or more non-tax-basis income
statements are both certified
non-tax-basis income statements for
the period, the income statement
prepared according to the following
order of priority in accounting standards
shall be used.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Any other International
Accounting Standards (IAS).
4. Statutory accounting for
insurance companies.
5. Other regulatory accrual
accounting.
6. Any other accrual accounting
standard.
7. Any fair market value standard.
8. Any cash basis standard.
If no non-tax-basis income statement
is certified and two or more
non-tax-basis income statements are
prepared, the income statement
prepared according to the first listed of
the accounting standards listed above
shall be used.
If no non-tax-basis financial
statements are prepared for a U.S.
corporation (or, in the case of a U.S.
consolidated tax group, for the U.S.
parent corporation’s consolidated
group) filing Schedule M-3 (Form
1120), the U.S. corporation (or the U.S.
parent corporation of a U.S.
consolidated tax group) must check
“No” on questions 1a, 1b, and 1c, skip
Part I, lines 2a through 3c, and enter
the net income (loss) per the books and
records of the U.S. corporation (or U.S.
consolidated tax group) on Part I,
line 4a.
If no non-tax-basis financial
statements are prepared for a U.S.
corporation (or, in the case of a U.S.
consolidated tax group, for the U.S.
Instructions for Schedule M-3 (Form 1120)

parent corporation’s consolidated
group) filing Schedule M-3 (Form
1120), and the U.S. corporation is
owned by a foreign corporation that
prepares financial statements that
includes the U.S. corporation (or the
U.S. parent corporation’s consolidated
group), the U.S. corporation (or the
U.S. parent corporation of the U.S.
consolidated tax group) must enter “No”
on questions 1a, 1b, and 1c, skip Part I,
lines 2a through 3c, and enter the net
income (loss) per the books and
records of the U.S. corporation (or U.S.
consolidated tax group) on Part I,
line 4a.

Line 2. Questions Regarding
Income Statement Period
and Restatements
Enter the beginning and ending dates
on line 2a for the corporation’s annual
income statement period ending with or
within the current tax year.
The questions on Part I, lines 2b and
2c, regarding income statement
restatements refer to the worldwide
consolidated income statement issued
by the corporation filing the U.S.
income tax return (the consolidated
financial statements for the U.S. parent
corporation of a U.S. consolidated tax
group) and used to prepare Schedule
M-3. Answer “Yes” on lines 2b and/or
2c if the corporation’s annual income
statement has been restated for any
reason. Attach a short explanation of
the reasons for the restatement in net
income for each annual income
statement period that is restated,
including the original amount and
restated amount of each annual
statement period’s net income. The
attached schedule is not required to
report restatements on an
entity-by-entity basis.

Line 3. Questions Regarding
Publicly Traded Voting
Common Stock
The primary U.S. publicly traded voting
common stock class is the most widely
held or most heavily traded within the
U.S. as determined by the corporation.
If the corporation has more than one
class of publicly traded voting common
stock, attach a list of the classes of
publicly traded voting common stock
and the trading symbol and the
nine-digit CUSIP number of each class.

Line 4a. Worldwide
Consolidated Net Income
(Loss) per Income Statement
Report on Part I, line 4a, the worldwide
consolidated net income (loss) per the
income statement (or books and
records, if applicable) of the
corporation. A corporation filing a

non-consolidated Form 1120 for itself
must report its worldwide income on
Part I, line 4a.
In completing Schedule M-3, the
corporation must use financial
statement amounts from the financial
statement type checked “Yes” on Part I,
line 1, or from its books and records if
Part I, line 1c is checked “No.” If Part I,
line 1a, is checked “Yes,” report on Part
I, line 4a, the net income amount
reported in the income statement
presented to the SEC on the
corporation’s Form 10-K (the Form
10-K for the security identified on Part I,
line 3b, if applicable).
If a corporation prepares
non-tax-basis financial statements, the
amount on line 4a must equal the
financial statement net income (loss) for
the income statement period ending
with or within the tax year as indicated
on Part I, line 2a.
If the corporation prepares
non-tax-basis financial statements and
the income statement period differs
from the corporation’s tax year, the
income statement period indicated on
Part I, line 2a, applies for purposes of
Part I, lines 4a through 8.
If the corporation does not prepare
non-tax-basis financial statements and
has checked “No” on Part I, line 1c,
enter the net income (loss) per the
books and records of the U.S.
corporation or the U.S. consolidated tax
group on Part I, line 4a.
Indicate on Part 1, line 4b, which of
the following accounting standards
were used for line 4a.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Statutory.
4. Tax Basis.
5. Other (Specify).
Report on Part I, lines 5a through 10,
as instructed below, all adjustment
amounts required to adjust worldwide
net income (loss) reported on this Part
I, line 4a (whether from financial
statements or books and records), to
net income (loss) of includible
corporations that must be reported on
Part I, line 11.
Report on line 12a the worldwide
consolidated total assets and total
liabilities amounts for the corporation
using the same financial statements (or
books and records) used for the
worldwide consolidated income (loss)
amount reported on Part 1, line 4a.
If a U.S. corporation: (a) has net
income (loss) included on Part I, line
4a, and removed on Part I, line 6a or
6b, on another U.S. corporation’s
Schedule M-3; (b) files its own Form

Instructions for Schedule M-3 (Form 1120)

-7-

1120 (separate or consolidated); (c)
does not have a separate non-tax-basis
financial statement (certified or
otherwise) of its own; and (d) reports on
Schedule L of its own Form 1120 total
consolidated assets that equal or
exceed $10 million at the end of the
corporation’s tax year, the corporation
must answer questions 1a, 1b, and 1c
of Part I as appropriate for its own Form
1120 and must report on Part I, line 4a,
the amount for the corporation’s net
income (loss) that is removed on Part I,
line 6a or 6b, of the other corporation’s
Schedule M-3. However, if in the
circumstances described immediately
above, the corporation does have
separate non-tax-basis financial
statements (certified or otherwise) of its
own, independent of the amount of the
corporation’s net income included in
Part I, line 4a, of the other U.S.
corporation, the corporation must
answer questions 1a, 1b, and 1c of Part
I, as appropriate, for its own Form
1120, based on its own separate
income statement, and must report on
Part I, line 4a, the net income amounts
shown on its separate income
statement.
If line 4a includes net income (loss)
for a corporation that files Form
1120-PC or Form 1120-L, see the
instructions for Part I, line 10, for
adjustments that may be necessary to
reconcile financial statement income to
statutory income.

Line 5. Net Income (Loss) of
Nonincludible Foreign
Entities
Remove the financial net income (line
5a) or loss (line 5b) of each foreign
entity that is included on line 4a and is
not an includible corporation in the U.S.
consolidated tax group (nonincludible
foreign entity). In addition, on Part I,
line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends
between any nonincludible foreign
entity and any includible corporation.
Do not remove in Part I the financial net
income (loss) of any nonincludible
foreign entity accounted for on line 4a
using the equity method.
Attach a supporting schedule that
provides the name, EIN (if applicable),
and net income (loss) included on line
4a that is removed on this line 5 for
each separate nonincludible foreign
entity. Also state the total assets and
total liabilities for each such separate
nonincludible U.S. entity and include
those assets and liabilities amounts in
the total assets and total liabilities
reported on Part 1, line 12b. The
amounts of income (loss) detailed on
the supporting schedule should be
reported for each separate

nonincludible foreign entity without
regard to the effect of consolidation or
elimination entries. If there are
consolidation or elimination entries
relating to nonincludible foreign entities
whose income (loss) is reported on the
attached schedule that are not
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
schedule, so that the separate financial
accounting income (loss) of each
nonincludible foreign entity remains
separately stated.
For example, if the net income (after
consolidation and elimination entries) of
a nonincludible foreign
sub-consolidated group is being
reported on line 5a, the attached
supporting schedule should report the
income (loss) of each separate
nonincludible foreign legal entity from
each such entity’s own financial
accounting net income statement or
books and records, and any
consolidation or elimination entries (for
intercompany dividends, minority
interests, etc.) not reportable on Part I,
line 8, should be reported on the
attached supporting schedule as a net
amount on a line separate and apart
from lines that report each
nonincludible foreign entity’s separate
net income (loss).

Line 6. Net Income (Loss) of
Nonincludible U.S. Entities
Remove the financial net income (line
6a) or loss (line 6b) of each U.S. entity
that is included on line 4a and is not an
includible corporation in the U.S.
consolidated tax group (nonincludible
U.S. entity). In addition, on Part I, line
8, adjust for consolidation eliminations
and correct for minority interest and
intercompany dividends between any
nonincludible U.S. entity and any
includible corporation. Do not remove in
Part I the financial net income (loss) of
any nonincludible U.S. entity accounted
for on line 4a using the equity method.
Attach a supporting schedule that
provides the name, EIN, and net
income (loss) included on line 4a that is
removed on this line 6 for each
separate nonincludible U.S. entity. Also,
state the total assets and total liabilities
for each such separate nonincludible
U.S. entity and include those assets
and liabilities amounts in the total
assets and total liabilities reported on
Part I, line 12c. The amounts of income
(loss) detailed on the supporting
schedule should be reported for each
separate nonincludible U.S. entity
without regard to the effect of
consolidation or elimination entries. If
there are consolidation or elimination
entries relating to nonincludible U.S.

entities whose income (loss) is reported
on the attached schedule that are not
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
schedule, so that the separate financial
accounting income (loss) of each
nonincludible U.S. entity remains
separately stated. For example, if the
net income (after consolidation and
elimination entries) of a nonincludible
U.S. sub-consolidated group is being
reported on line 6a, the attached
supporting schedule should report the
income (loss) of each separate
nonincludible U.S. legal entity from
each such entity’s own financial
accounting net income statement or
books and records, and any
consolidation or elimination entries (for
intercompany dividends, minority
interests, etc.) not reportable on Part I,
line 8, should be reported on the
attached supporting schedule as a net
amount on a line separate and apart
from lines that report each
nonincludible U.S. entity’s separate net
income (loss).

Line 7. Net Income (Loss) of
Other Includible Foreign
Disregarded Entities, Other
Includible U.S. Disregarded
Entities, and
Other Includible Entities
Include on line 7a, 7b, or 7c the
financial net income or (loss) of each
foreign or U.S. disregarded entity or
other includible entity that is not
included in the consolidated financial
group and therefore not included in the
income reported on Part I, line 4a.
Include on line 7a or 7b financial
income of any disregarded entity that is
not included in the income reported on
Part I, line 4a, but is included in Part I,
line 11 (other disregarded entities).
Include on line 7c the financial income
of any entity not a disregarded entity
that is not included in the income
reported on line 4a, but is included on
line 11 (other includible entities). In
addition, on Part I, line 8, adjust for
consolidation eliminations and correct
for minority interest and intercompany
dividends for any other disregarded
entity or other includible entities.
Attach a supporting schedule that
provides the name, EIN, and net
income (loss) per the financial
statement or books and records on
lines 7a, 7b, and 7c for each separate
other U.S. disregarded entity or other
includible entity. Also, state the total
assets and total liabilities for each such
separate included entity and include
those assets and liabilities amounts in
the total assets and total liabilities

-8-

reported on Part I, line 12d. The
amounts of income (loss) detailed on
the supporting schedule should be
reported for each separate other
disregarded entity or other includible
entity without regard to the effect of
consolidation or elimination entries
solely between or among the entities
listed. If there are consolidation or
elimination entries relating to such
disregarded entity or other includible
entities whose income (loss) is reported
on the attached schedule that are not
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on
a separate line on the attached
schedule, so that the separate financial
accounting income (loss) of each other
disregarded entity or other includible
entity remains separately stated. For
example, if the net income (after
consolidation and elimination entries) of
a sub-consolidated group of other U.S.
disregarded entities is being reported
on line 7b, the attached supporting
schedule should report the income
(loss) of each separate other U.S.
disregarded entity from each entity’s
own financial accounting net income
statement or books and records, and
any consolidation or elimination entries
(for intercompany dividends, minority
interests, etc.) not reportable on Part I,
line 8, should be reported on the
attached supporting schedule as a net
amount on a line separate and apart
from lines that report each other
includible corporation’s or entity’s
separate net income (loss).

Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities
and Nonincludible Entities
Adjustments on Part I, line 8, to reverse
certain financial accounting
consolidation or elimination entries are
necessary to ensure that transactions
between includible entities and
nonincludible U.S. or foreign entities
are not eliminated, in order to report the
correct total amount on Part I, line 11.
Also, additional consolidation entries
and elimination entries may be
necessary on Part I, line 8, related to
transactions between includible entities
that are in the consolidated financial
group and other disregarded entities
and other includible entities that are not
in the consolidated financial group but
that are reported on Part I, line 7a, 7b,
or 7c in order to report the correct total
amount on Part I, line 11.
Include on Part I, line 8, the total of
the following: (a) amounts of any
adjustments to consolidation entries
and elimination entries that are
contained in the amount reported on
Part I, line 4a, required as a result of
Instructions for Schedule M-3 (Form 1120)

removing amounts on Part I, line 5 or 6;
and (b) amounts of any additional
consolidation entries and elimination
entries that are required as a result of
including amounts on Part I, line 7a, 7b,
or 7c. This is necessary in order that
the consolidation entries and
intercompany elimination entries
included in the amount reported on Part
I, line 11, are only those applicable to
the financial net income (loss) of
includible entities for the financial
statement period. For example,
adjustments must be reported on line 8
to remove minority interest and to
reverse the elimination of intercompany
dividends included on Part I, line 4a,
that relate to the net income of entities
removed on Part I, line 5 or 6, because
the income to which the consolidation
or elimination entries relate has been
removed. Also, for example,
consolidation or elimination entries
must be reported on line 8 to reflect any
minority interest ownership in the net
income of other disregarded entities or
other includible entities reported on Part
I, line 7b or 7c, and to eliminate any
intercompany dividends between
entities whose income is included on
Part I, line 7b or 7c, and other entities
included in the consolidated U.S.
income tax return. See Examples 3, 4,
and 5 in the instructions for line 11.
If a corporate owner of an interest in
another entity: (a) accounts for the
interest in entity in the owner
corporation’s separate general ledger
on the equity method, and (b) fully
consolidates entity in the owner
corporation’s consolidated financial
statements, but entity is not includible
in the owner corporation’s consolidated
U.S. income tax return, then, as part of
reversing all consolidation and
elimination entries for the nonincludible
entity, the corporate owner must
reverse on Schedule M-3, Part I, line 8,
the elimination of the equity income
inclusion from entity. If the owner
corporation does not account for entity
on the equity method on its own
general ledger, it will not have
eliminated the equity income for
consolidated financial statement
purposes, and therefore will have no
elimination of equity income to reverse.
The attached supporting schedule
for Part I, line 8, must identify the type
(for example, minority interest,
intercompany dividends, etc.) and
amount of consolidation or elimination
entries reported, as well as the names
of the entities to which they pertain. It is
not necessary, but it is permitted, to
report intercompany eliminations that
net to zero on Part I, line 8, such as
intercompany interest income and
expense.

Line 9. Adjustment To
Reconcile Income Statement
Period To Tax Year
Include on line 9 any adjustments
necessary to the income (loss) of
includible corporations to reconcile
differences between the corporation’s
income statement period reported on
line 2a and the corporation’s tax year.
Attach a schedule describing the
adjustment.
Statutory accounting for an
insurance company subsidiary acquired
or merged may require the use of a
financial statement period for income
reported on Part I, line 11, that differs
from the period reported on Part I, line
4a or line 7. Report on Part I, line 10b,
adjustments to income because of such
differences in accounting period.

Line 10a. Intercompany
Dividend Adjustments To
Reconcile to Line 11,
Line 10b. Other Statutory
Accounting Adjustments To
Reconcile to Line 11, and
Line 10c. Other Adjustments
To Reconcile to Amount on
Line 11
Include on lines 10a, 10b, and 10c any
other adjustments to reconcile net
income (loss) on Part I, line 4a, through
Part I, line 9, with net income (loss) on
Part I, line 11. Include on line 10a the
amount of any intercompany dividend
adjustment required by statutory
accounting. Include on line 10b the
amount of any other required statutory
accounting adjustment. Include on line
10c the amount of any other adjustment
not required by statutory accounting.
Normally, all intercompany dividends
will have been eliminated or excluded
from the financial accounting
consolidated net income (loss) reported
on Part I, line 4a. However, an
insurance company may be required to
include certain intercompany dividends
on Part I, line 11, so that the amount
reported on Part I, line 11, agrees with
statutory accounting net income
(Annual Statement). If the net income
(loss) of a corporation that files Form
1120-PC or Form 1120-L is included on
Part I, line 4a or line 7, and is computed
on a basis other than statutory
accounting, include on line 10a the
adjustments necessary such that Part I,
line 11, includes intercompany
dividends in the net income (loss) for
such corporation to the extent required
by statutory accounting principles. (For
insurance companies included in the
consolidated U.S. income tax return,
see instructions for Part I, line 11, and
Part II, line 7.)

Instructions for Schedule M-3 (Form 1120)

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Statutory accounting for an
insurance company subsidiary acquired
or merged may require the use of a
financial statement period for income
reported on Part I, line 11, that differs
from the period reported on Part I, line
4a or line 7. Report on Part I, line 10b,
adjustments to income because of such
differences in accounting period.
For any adjustments reported on
Part I, lines 10a, 10b, and 10c, attach a
supporting schedule that provides, for
each corporation to which an
adjustment relates: the name and EIN
of the corporation; the amount of net
income included in Part I before any
adjustments on line 10; the amount of
net income included on Part I, line 11;
the amount of the net adjustment that is
attributable to intercompany dividend
adjustments required to be reported by
statutory accounting and included on
Part I, line 10a; the amount of the net
adjustment attributable to other
statutory accounting requirements and
included on Part I, line 10b; and the
amount of the remainder of the net
adjustment not required because of
statutory accounting and included on
Part I, line 10c. If any net adjustment is
included for the corporation on Part I,
lines 10b or 10c, attach a supplemental
supporting schedule identifying the line
(10b or 10c), the type of each
adjustment included in the net
adjustment, and the amount of each
adjustment included in the net
adjustment.

Line 11. Net Income (Loss)
per Income Statement of
Includible Corporations
Report on line 11 the net income (loss)
per the income statement (or books
and records, if applicable) of the
corporation. In the case of a U.S.
consolidated tax group, report the
consolidated income statement net
income (loss) of all corporations listed
on Form 851 and included in the
consolidated U.S. income tax return for
the tax year. Amounts reported in
column (a) of Parts II and III (see
instructions below) must be reported on
the same accounting method used to
report the amount of net income (loss)
per income statement of includible
corporations on Part I, line 11, which for
insurance companies is statutory
accounting. If an insurance company is
included in a consolidated Form 1120,
the amount of net income reported on
Part I, Line 11, will include the statutory
accounting net income for the
insurance corporation and the GAAP
net income for the non-insurance
corporations included in the U.S.
consolidated tax group. (For insurance
companies included in the consolidated

U.S. income tax return, see instructions
for Part I, line 10, and Part II, line 7.)
Do not, in any event, report on this
line 11 the net income of entities not
listed on Form 851 and not included in
the consolidated U.S. income tax return
for the tax year. For example, it is not
permissible to remove the income of
nonincludible entities on lines 5 and/or
6, discussed earlier; then to add back
such income on lines 7 through 10,
such that the amount reported at line
11 includes the net income of entities
not includible in the consolidated U.S.
income tax return. A principal purpose
of Schedule M-3 is to report on this Part
I, line 11, only the financial accounting
net income of only the corporations
included in the consolidated U.S.
income tax return.
Whether or not the corporation
prepares financial statements, Part I,
line 11, must include all items that
impact the net income (loss) of the
corporation even if they are not
recorded in the profit and loss accounts
in the corporation’s general ledger,
including, for example, all post-closing
adjusting entries (including workpaper
adjustments) and dividend income or
other income received from
nonincludible corporations.
Example 3.
1. U.S. corporation P is publicly
traded and files Form 10-K with the
SEC. P owns 80% or more of the stock
of 75 U.S. corporations, DS1 through
DS75, between 51% and 79% of the
stock of 25 U.S. corporations DS76
through DS100, and 100% of the stock
of 50 foreign subsidiaries FS1 through
FS50. P eliminates all dividend income
from DS1 through DS100 and FS1
through FS50 in financial statement
consolidation entries. Furthermore, P
eliminates the minority interest
ownership, if any, of DS1 through
DS100 in financial statement
consolidation entries. P’s SEC Form
10-K includes P, DS1 through DS100
and FS1 through FS50 on a fully
consolidated basis. P files a
consolidated U.S. income tax return
with DS1 through DS75.
P must check “Yes” on Part I, line
1a. On Part I, line 4a, P must report the
consolidated net income from the SEC
Form 10-K for the consolidated financial
statement group of P, DS1 through
DS100, and FS1 through FS50. P must
remove the net income (loss) of FS1
through FS50 on Part I, line 5a or 5b,
as applicable. P must remove the net
income (loss) before minority interests
of DS76 through DS100 on Part I, line
6a or 6b, as applicable. P must reverse
on Part I, line 8:
a. The elimination of dividends
received by P and DS1 through DS75

from DS76 through DS100 and FS1
through FS50; and
b. The recognition of minority
interests’ share of the net income (loss)
of DS76 through DS100. (Note: The
minority interests’ share, if any, of the
income of DS1 through DS75 must be
reported in Part II, line 8, Minority
interest for includible corporations.)
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the
includible corporations. Intercompany
transactions between the includible
corporations that had been eliminated
in the net income amount on line 4a
remain eliminated in the net income
amount on line 11. Transactions
between the includible corporations and
the nonincludible entities that are
eliminated in the net income amount on
line 4a are included in the net income
amount on line 11 since the elimination
of those transactions was reversed on
line 8.
2. Foreign corporation F owns 100%
of the stock of U.S. corporation P. P
owns 100% of the stock of DS1, 60% of
the stock of DS2, and 100% of the
stock of FS1. F prepares certified
audited financial statements. P does
not prepare any financial statements. P
files a consolidated U.S. income tax
return with DS1.
P must not complete Schedule M-3,
Part I, with reference to the financial
statements of its foreign parent F. P
must check “No” on Part I, lines 1a, 1b,
and 1c, skip lines 2a through 3c of Part
I, and enter worldwide net income (loss)
per the books and records of the
includible corporations (P and DS1) on
Part I, line 4a. P must enter any
necessary adjustments on lines 5a
through 10 in order for Part I, line 11, to
report the net income (loss) of
includible corporations P and DS1, net
of eliminations for transactions between
P and DS1.
Example 4.
1. U.S. corporation P owns 60% of
corporation DS1 which is fully
consolidated in P’s financial
statements. P does not account for
DS1 in P’s separate general ledger on
the equity method. DS1 has net income
of $100 (before minority interests) and
pays dividends of $50, of which P
receives $30. The dividend is
eliminated in the consolidated financial
statements. In its financial statements,
P consolidates DS1 and includes $60
of net income ($100 less the minority
interest of $40) on Part I, line 4a.
P must remove the $100 net income
of DS1 on Part I, line 6a. P must
reverse on Part I, line 8, the elimination
of the $40 minority interest net income
of DS1. In addition, P reverses its

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elimination of the $30 intercompany
dividend in its financial statements on
Part I, line 8. The net result is that P
includes the $30 dividend from DS1 at
Part I, line 11, and on Part II, line 7,
column (a). P’s taxable dividend income
from DS1 must be reported on Part II,
line 7, column (d).
2. U.S. corporation C owns 60% of
the capital and profits interests in U.S.
LLC N. C does not account for N in C’s
separate general ledger on the equity
method. N has net income of $100
(before minority interests) and makes
no distributions during the tax year. C
treats N as a corporation for financial
statement purposes; and as a
partnership for U.S. income tax
purposes. In its financial statements, C
consolidates N and includes $60 of net
income ($100 less the minority interest
of $40) on Part I, line 4a.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse
on Part I, line 8, the elimination of the
$40 minority interest net income of N.
The result is that C includes no income
for N either on Part I, line 11, or on Part
II, line 9, column (a). C’s taxable
income from N must be reported by C
on Part II, line 9.
3. U.S. corporation P owns 60% of
corporation DS1, which is fully
consolidated in P’s financial
statements. P accounts for DS1 in P’s
separate general ledger on the equity
method. DS1 has net income of $100
(before minority interests) and pays
dividends of $50, of which P receives
$30. The dividend reduces P’s
investment in DS1 for equity method
reporting on P’s separate general
ledger where P includes its 60% equity
share of DS1 income, which is $60. In
its financial statements, P eliminates
the DS1 equity method income of $60
and consolidates DS1, including $60 of
net income ($100 less the minority
interest of $40) on Part I, line 4a.
P must remove the $100 net income
of DS1 on Part I, line 6a. P must
reverse on Part I, line 8, the elimination
of the $40 minority interest net income
of DS1 and the elimination of the $60 of
DS1 equity income. The net result is
that P includes the $60 of equity
method income from DS1 at Part I, line
11, and on Part II, line 6, column (a).
P’s taxable dividend income from its
investment in DS1 must be reported on
Part II, line 7, column (d).
4. U.S. corporation C owns 60% of
the capital and profits interests in U.S.
LLC N. C accounts for N in C’s
separate general ledger on the equity
method. N has net income of $100
(before minority interests) and makes
no distributions during the tax year. C
treats N as a corporation for financial
statement purposes and as a

Instructions for Schedule M-3 (Form 1120)

partnership for U.S. income tax
purposes. For equity method reporting
on C’s separate general ledger, C
includes its 60% equity share of N
income, which is $60. In its financial
statements, C eliminates the $60 of N
equity method income and consolidates
N, including $60 of net income ($100
less the minority interest of $40) on
Part I, line 4a.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse
on Part I, line 8, the elimination of the
$40 minority interest net income of N
and the elimination of the $60 of N
equity method income. The result is
that C includes the $60 of equity
method income for N on Part I, line 11,
and on Part II, line 9, column (a). C’s
taxable income from N must be
reported by C on Part II, line 9, column
(d).
5. U.S. corporation C owns 60% of
the capital and profits interests in U.S.
LLC N. C accounts for N in C’s
separate general ledger on the equity
method. N has net income of $100
(before minority interests) and pays a
$50 cash distribution, of which C
receives $30. The distribution reduces
C’s investment in N for equity method
reporting on C’s separate general
ledger. C treats N as a corporation for
financial statement purposes and as a
partnership for U.S. income tax
purposes. For equity method reporting
on C’s separate general ledger, C
includes its 60% equity share of N
income, which is $60. In its financial
statements, C eliminates the $60 of N
equity method income and consolidates
N and includes $60 of net income
($100 less the minority interest of $40)
on Part I, line 4a.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse
on Part I, line 8, the elimination of the
$40 minority interest net income of N
and the elimination of the $60 of N
equity method income. The result is
that C includes the $60 of equity
method income for N on Part I, line 11,
and on Part II, line 9, column (a). C’s
taxable income from N must be
reported by C on Part II, line 9,
column (d).
Example 5. U.S. corporation P
owns 80% of the stock of corporation
DS1. DS1 is included in P’s
consolidated income tax return, even
though DS1 is not included in P’s
consolidated financial statements on
either a consolidated basis or on the
equity method. DS1 has current year
net income of $100 after taking into
account its $40 interest payment to P.
P has net income of $1,040 after
recognition of the interest income from
DS1. Because DS1 is an includible
corporation, 100% of the net income of

both P and DS1 must be reported on
Form 1120, page 1, of the PDS
consolidated U.S. income tax return,
and the intercompany interest income
and expense must be removed by
consolidation elimination entries.
P must report its financial statement
net income of $1,040 on Part I, line 4a,
and reports DS1’s net income of $100
on Part I, line 7c. Then, in order to
reflect the full consolidation of the
financial accounting net income of P
and DS1 at Part I, line 11, the following
consolidation and elimination entries
are reported on Part I, line 8: (a)
offsetting entries to remove the $40 of
interest income received from DS1
included by P on line 4a, and to remove
the $40 of interest expense of DS1
included in line 7c for a net change of
zero; and (b) an entry to reflect the $20
minority interest in the net income of
DS1 (DS1 net income of $100 times
20% minority interest). The result is that
Part I, line 11, reports $1,120: $1,040
from line 4a, $100 from line 7c, and
($20) from line 8. Stated another way,
Part I, line 11, includes the entire
$1,000 net income of P, measured
before recognition of the intercompany
interest income from DS1 and the
consolidation of DS1 operations, plus
the entire $140 net income of DS1,
measured before interest expense to P,
less the minority interest ownership of
$20 in DS1’s separate net income
($100). The consolidated U.S. income
tax group is required to include on the
attached supporting schedule for Part I,
line 8, the details of the adjustment to
the minority interest in the net income
of DS1, but is not required to report the
offsetting adjustment to the
intercompany elimination of interest
income and interest expense (though it
is permitted to do so).

Line 12. Total Assets and
Liabilities of Entities
Included or Removed on Part
I, Lines 4, 5, 6, and 7
Line 12 must be completed by all
corporations that file Schedule M-3.
Report on lines 12a, 12b, 12c, and 12d
the total amount (not just the
corporation’s share) of assets and
liabilities of entities included or removed
on Part I, lines 4, 5, 6, and 7. On line
12a, enter the worldwide consolidated
total assets and total liabilities of all of
the entities included in completing Part
I, line 4a. On line 12b, enter the total
assets and total liabilities of the entities
removed in completing Part I, line 5. On
line 12c, enter the total assets and total
liabilities removed in completing Part I,
line 6. On line 12d, enter total assets
and total liabilities included in
completing Part I, line 7.

Instructions for Schedule M-3 (Form 1120)

-11-

Specific Instructions for
Parts II and III
For consolidated U.S. income tax
returns, file supporting schedules for
each includible corporation. See
“Consolidated return” in the Instructions
for Form 1120.

General Format of Parts
II and III
Check the applicable box(es) at the top
of pages 2 and 3 of Schedule M-3 to
indicate whether the Schedule M-3 is
for the:
1. Consolidated group;
2. Parent corporation;
3. Consolidated eliminations;
4. Subsidiary corporation; or
5. Mixed 1120/L/PC group.
Also check the applicable box to
indicate whether the Schedule M-3 is
for a sub-consolidated: (6) 1120 group;
or (7) 1120 eliminations. See
Consolidated Schedule M-3 Versus
Consolidating Schedules M-3 for Form
1120 Groups and Schedule M-3
Consolidation for Mixed Groups (1120/
L/PC) on page 4.
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included in Part I, line 11,
and report in column (d) the amount
included in taxable income on Form
1120, page 1, line 28.
Note. A schedule or explanation may
be attached to any line even if none is
required.

When To Complete Columns
(a) and (d)
A corporation is not required to
complete columns (a) and (d) of Parts II
and III for the first tax year the
corporation is required to file Schedule
M-3. However, the corporation must
complete columns (a) and (d) for all tax
years subsequent to the first tax year
the corporation is required to file
Schedule M-3. For example, if a
corporation was required to file
Schedule M-3 as a member of a U.S.
consolidated tax group and the
corporation leaves the U.S.
consolidated tax group, the corporation
is required to complete Schedule M-3 in
its entirety in any succeeding tax year
that the corporation is required to
complete Schedule M-3. However, if
the corporation joins in filing a different
consolidated U.S. income tax return,
then the corporation must complete its
Schedule M-3 in its entirety in any year
that the U.S. consolidated tax group
must complete its Schedule M-3 in its
entirety.

If, for any tax year (or tax years)
prior to the first tax year a corporation is
required to file Schedule M-3, a
corporation voluntarily files Schedule
M-3 instead of Schedule M-1, then in
those voluntary filing years the
corporation is not required to complete
columns (a) and (d) of Parts II and III.
In addition, in the first tax year the
corporation is required to file Schedule
M-3, the corporation is not required to
complete columns (a) and (d) of Parts II
and III.

the amount reported on Part II, line 30,
column (d), of the consolidated
Schedule M-3 must equal the amount
reported on the consolidated Form
1120, page 1, line 28.

If a corporation that is not a mixed
group chooses not to complete columns
(a) and (d) of Parts II and III in the first
tax year the corporation is required to
file Schedule M-3 (or in any year in
which the corporation voluntarily files
Schedule M-3), then Part II, line 30, is
reconciled by the corporation (or, in the
case of a U.S. consolidated tax group,
by the group’s parent corporation on
Part II, line 30, of the group’s
consolidated Schedule M-3) in the
following manner:
1. Report the amount from Part I,
line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1
through 29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and
4. Report on Part II, line 30, column
(d), the sum of Part II, line 30, columns
(a), (b), and (c).

For any item of income, gain, loss,
expense, or deduction for which there
is a difference between columns (a)
and (d), the portion of the difference
that is temporary must be entered in
column (b) and the portion of the
difference that is permanent must be
entered in column (c).

Note. Mixed groups should see
Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC) on page 4.
In the case of a U.S. consolidated
tax group that is not a mixed group, the
reconciliation described in the
preceding paragraph must be
performed by each member of the U.S.
consolidated tax group. However,
because Part I must be completed only
once on the consolidated Schedule M-3
by the parent corporation of the U.S.
consolidated tax group, the amount
reported on Part II, line 30, column (a),
by each member of the U.S.
consolidated tax group on its respective
Schedule M-3 is the amount attributable
to that member that is reported on the
consolidated Schedule M-3, Part I, line
11, completed by the parent
corporation. Accordingly, the amount
reported on Part II, line 30, columns (a)
through (d), of the consolidated
Schedule M-3 is the sum of the
amounts reported by each member of
the U.S. consolidated tax group on its
respective Schedule M-3 (including a
Schedule M-3 for consolidation
eliminations, if necessary). Note that
the amount reported on Part II, line 30,
column (a), of the consolidated
Schedule M-3 must equal the amount
reported on Part I, line 11, of the
consolidated Schedule M-3, and that

When To Complete Columns
(b) and (c)
Columns (b) and (c) of Parts II and III
must be completed for any tax year for
which the corporation files Schedule
M-3.

If financial statements are prepared
by the corporation in accordance with
generally accepted accounting
principles (GAAP), differences that are
treated as temporary for GAAP must be
reported in column (b) and differences
that are permanent (that is, not
temporary for GAAP) must be reported
in column (c). Generally, pursuant to
GAAP, a temporary difference affects
(creates, increases, or decreases) a
deferred tax asset or liability.
If the corporation does not prepare
financial statements, or the financial
statements are not prepared in
accordance with GAAP, report in
column (b) any difference that the
corporation believes will reverse in a
future tax year (that is, have an
opposite effect on taxable income in a
future tax year (or years) due to the
difference in timing of recognition for
financial accounting and U.S. income
tax purposes) or is the reversal of such
a difference that arose in a prior tax
year. Report in column (c) any
difference that the corporation believes
will not reverse in a future tax year (and
is not the reversal of such a difference
that arose in a prior tax year).
If the corporation is unable to
determine whether a difference
between column (a) and column (d) for
an item will reverse in a future tax year
or is the reversal of a difference that
arose in a prior tax year, report the
difference for that item in column (c).
Example 6. For the 2007, 2008,
and 2009 tax years, corporation A has
total consolidated assets on the last
day of the tax year as reported on
Schedule L, line 15, column (d), of $8
million, $11 million, and $12 million,
respectively. A is required to file
Schedule M-3 for its 2008 and 2009 tax
years.
For its 2007 tax year, A voluntarily
files Schedule M-3 instead of Schedule

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M-1 and does not complete columns (a)
and (d) of Parts II and III.
For A’s 2008 tax year, the first tax
year that A is required to file Schedule
M-3, A is only required to complete Part
I and columns (b) and (c) of Parts II and
III.
For A’s 2009 tax year, A is required
to complete Schedule M-3 in its
entirety.
Example 7. Corporation B is a U.S.
publicly traded corporation that files a
consolidated U.S. income tax return
and prepares consolidated GAAP
financial statements. In prior years, B
acquired intellectual property (IP) and
goodwill through several corporate
acquisitions. The IP is amortizable for
both U.S. income tax and financial
statement purposes. In the current
year, B’s annual amortization expense
for IP is $9,000 for U.S. income tax
purposes and $6,000 for financial
statement purposes. In its financial
statements, B treats the difference in IP
amortization as a temporary difference.
The goodwill is not amortizable for U.S.
income tax purposes and is subject to
impairment for financial statement
purposes. In the current year, B records
an impairment charge on the goodwill
of $5,000. In its financial statements, B
treats the goodwill impairment as a
permanent difference. B must report the
amortization attributable to the IP on
Part III, line 28, and report $6,000 in
column (a), a temporary difference of
$3,000 in column (b), and $9,000 in
column (d). B must report the goodwill
impairment on Part III, line 26, and
report $5,000 in column (a), a
permanent difference of ($5,000) in
column (c), and $0 in column (d).

Reporting Requirements
for Parts II and III
Except for mixed group consolidation,
the number of Parts II must equal the
number of Parts III filed by the
corporation. Mixed groups should see
Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC) on page 4.

General Reporting
Requirements
If an amount is attributable to a
reportable transaction described in
Regulations section 1.6011-4(b), the
amount must be reported in columns
(a), (b), (c), and (d), as applicable, of
Part II, line 12, regardless of whether
the amount would otherwise be
reported on Part II or Part III of
Schedule M-3. Thus, if a taxpayer files
Form 8886, Reportable Transaction
Disclosure Statement, the amounts
attributable to that reportable
transaction must be reported on Part II,
line 12.
Instructions for Schedule M-3 (Form 1120)

A corporation is required to report in
column (a) of Parts II and III the amount
of any item specifically listed on
Schedule M-3 that is in any manner
included in the corporation’s current
year financial statement net income
(loss) or in an income or expense
account maintained in the corporation’s
books and records, even if there is no
difference between that amount and the
amount included in taxable income
unless (a) otherwise provided in these
instructions or (b) the amount is
attributable to a reportable transaction
described in Regulations section
1.6011-4(b) and is therefore reported
on Part II, line 12. For example, with
the exception of interest income
reflected on a Schedule K-1 received
by a corporation as a result of the
corporation’s investment in a
partnership or other pass-through
entity, all interest income, included on
Part I, line 11, whether from
unconsolidated affiliated companies,
third parties, banks, or other entities,
whether from foreign or domestic
sources, whether taxable or exempt
from tax, and whether classified as
some other type of income for U.S.
income tax purposes (such as
dividends), must be included on Part II,
line 13, column (a). Likewise, all fines
and penalties included in Part I, line 11,
paid to a government or other authority
for the violation of any law for which
fines or penalties are assessed must be
included on Part III, line 12, column (a),
regardless of the government authority
that imposed the fines or penalties,
regardless of whether the fines or
penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology attached
to the fines or penalties by the imposing
authority in its actions or documents.
If a corporation would be required to
report in column (a) of Parts II and III
the amount of any item specifically
listed on Schedule M-3 in accordance
with the preceding paragraph, except
that the corporation has capitalized the
item of income or expense and reports
the amount in its financial statement
balance sheet or in asset and liability
accounts maintained in the
corporation’s books and records, the
corporation must report the proper tax
treatment of the item in columns (b),
(c), and (d), as applicable.
Furthermore, in applying the two
preceding paragraphs, a corporation is
required to report in column (a) of Parts
II and III the amount of any item
specifically listed on Schedule M-3 that
is included in the corporation’s financial
statements or exists in the corporation’s
books and records, regardless of the
nomenclature associated with that item
in the financial statements or books and

records. Accurate completion of
Schedule M-3 requires reporting
amounts according to the substantive
nature of the specific line items
included in Schedule M-3 and
consistent reporting of all transactions
of like substantive nature that occurred
during the tax year. For example, all
expense amounts that are included in
the financial statements or exist in the
books and records that represent some
form of “Bad debt expense,” must be
reported on Part III, line 32, in column
(a), regardless of whether the amounts
are recorded or stated under different
nomenclature in the financial
statements or the books and records
such as: “Provision for doubtful
accounts;” “Expense for uncollectible
notes receivable;” or “Impairment of
trade accounts receivable.” Likewise,
as stated in the preceding paragraph,
all fines and penalties must be included
on Part III, line 12, column (a),
regardless of the terminology or
nomenclature attached to them by the
corporation in its books and records or
financial statements.
With limited exceptions, Part II
includes lines for specific items of
income, gain, or loss (income items).
(See Part II, lines 1 through 24.) If an
income item is described in Part II, lines
1 through 24, report the amount of the
item on the applicable line, regardless
of whether there is a difference for the
item. If there is a difference for the
income item, or only a portion of the
income item has a difference and a
portion of the item does not have a
difference, and the item is not
described in Part II, lines 1 through 24,
report and describe the entire amount
of the item on Part II, line 25.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
(See Part III, lines 1 through 34.) If an
expense item is described on Part III,
lines 1 through 34, report the amount of
the item on the applicable line,
regardless of whether there is a
difference for the item. If there is a
difference for the expense item, or only
a portion of the expense item has a
difference and a portion of the item
does not have a difference and the item
is not described in Part III, lines 1
through 34, report and describe the
entire amount of the item on Part III,
line 35.
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, loss, expense, or deduction
and the item is not described or
included in Part II, lines 1 through 25,
or Part III, lines 1 through 35, report the
entire amount of the item in columns (a)
and (d) of Part II, line 28.

Instructions for Schedule M-3 (Form 1120)

-13-

Separately stated and adequately
disclosed. Each difference reported in
Parts II and III must be separately
stated and adequately disclosed. In
general, a difference is adequately
disclosed if the difference is labeled in
a manner that clearly identifies the item
or transaction from which the difference
arises. For further guidance about
adequate disclosure, see Regulations
section 1.6662-4(f). If a specific item of
income, gain, loss, expense, or
deduction is described on Part II, lines
9 through 24, or Part III, lines 1 through
34, and the line does not indicate to
“attach schedule” or “attach details,”
and the specific instructions for the line
do not call for an attachment of a
schedule or statement, then the item is
considered separately stated and
adequately disclosed if the item is
reported on the applicable line and the
amount(s) of the item(s) are reported in
the applicable columns of the
applicable line. See the instructions for
Part II, lines 1 through 8, for specific
additional information required to be
provided for these particular lines.
Note. A schedule or explanation may
be attached to any line even if none is
required.
Except as otherwise provided,
differences for the same item must be
combined or netted together and
reported as one amount on the
applicable line of Schedule M-3.
However, differences for separate items
must not be combined or netted
together. Each item (and corresponding
amount attributable to that item) must
be separately stated and adequately
disclosed on the applicable line of
Schedule M-3, or any schedule
required to be attached, even if the
amounts are below a certain dollar
amount.
Example 8. Corporation C is a
calendar year taxpayer that placed in
service ten depreciable fixed assets in
2003. C was required to file Schedule
M-3 for its 2008 tax year and is
required to file Schedule M-3 for its
2009 tax year. C’s total depreciation
expense for its 2009 tax year for five of
the assets is $50,000 for income
statement purposes and $70,000 for
U.S. income tax purposes. C’s total
annual depreciation expense for its
2009 tax year for the other five assets
is $40,000 for income statement
purposes and $30,000 for U.S. income
tax purposes. In its financial
statements, C treats the differences
between financial statement and U.S.
income tax depreciation expense as
giving rise to temporary differences that
will reverse in future years. C must
combine all of its depreciation
adjustments. Accordingly, C must
report on Part III, line 31, for its 2009

tax year income statement depreciation
expense of $90,000 in column (a), a
temporary difference of $10,000 in
column (b), and U.S. income tax
depreciation expense of $100,000 in
column (d).
Example 9. Corporation D is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. On
December 31, 2009, D establishes
three reserve accounts in the amount of
$100,000 for each account. One
reserve account is an allowance for
accounts receivable that are estimated
to be uncollectible. The second reserve
is an estimate of coupons outstanding
that may have to be paid. The third
reserve is an estimate of future
warranty expenses. In its financial
statements, D treats the three reserve
accounts as giving rise to temporary
differences that will reverse in future
years. The three reserves are expenses
in D’s 2009 financial statements but are
not deductions for U.S. income tax
purposes in 2009. D must not combine
the Schedule M-3 differences for the
three reserve accounts. D must report
the amounts attributable to the
allowance for uncollectible accounts
receivable on Part III, line 32, Bad debt
expense, and must separately state
and adequately disclose the amounts
attributable to each of the other two
reserves, coupons outstanding and
warranty costs, on a required, attached
schedule that supports the amounts at
Part III, line 35.
Example 10. Corporation E is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. On
January 2, 2009, E establishes an
allowance for uncollectible accounts
receivable (bad debt reserve) of
$100,000. During 2009, E increased
the reserve by $250,000 for additional
accounts receivable that may become
uncollectible. Additionally, during 2009
E decreases the reserve by $75,000 for
accounts receivable that were
discharged in bankruptcy during 2009.
The balance in the reserve account on
December 31, 2009, is $275,000. The
$100,000 amount to establish the
reserve account and the $250,000 to
increase the reserve account are
expenses on E’s 2009 financial
statements but are not deductible for
U.S. income tax purposes in 2009.
However, the $75,000 decrease to the
reserve is deductible for U.S. income
tax purposes in 2009. In its financial
statements, E treats the reserve
account as giving rise to a temporary
difference that will reverse in future tax
years. E must report on Part III, line 32,
for its 2009 tax year income statement

bad debt expense of $350,000 in
column (a), a temporary difference of
($275,000) in column (b), and U.S.
income tax bad debt expense of
$75,000 in column (d).
Example 11. Corporation F is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year.
During 2009, F incurs $200 of meals
and entertainment expenses that F
deducts in computing net income per
the income statement. $50 of the $200
is subject to the 50% limitation under
section 274(n). In its financial
statements, F treats the limitation on
deductions for meals and entertainment
as a permanent difference. Because
meals and entertainment expenses are
specifically described in Part III, line 11,
F must report all of its meals and
entertainment expenses on this line,
regardless of whether there is a
difference. Accordingly, F must report
$200 in column (a), $25 in column (c),
and $175 in column (d). F must not
report the $150 of meals and
entertainment expenses that are
deducted in F’s financial statement net
income and are fully deductible for U.S.
income tax purposes on Part II, line 28,
Other items with no differences, and
the $50 subject to the limitation under
section 274(n) on Part III, line 11.

Part II. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return
For any item reported on Part II, lines 1,
3 through 6, or 8, attach a supporting
schedule that provides the name of the
entity for which the item is reported, the
entity’s EIN (if applicable), the type of
entity (corporation, partnership, etc.),
and the item amounts for columns (a)
through (d). See the instructions for
Part II, lines 2 and 7, for the specific
information required for those particular
lines.

Line 1. Income (Loss) From
Equity Method Foreign
Corporations
Report on line 1, column (a), the
financial income (loss) included in Part
I, line 11, for any foreign corporation
accounted for on the equity method and
remove such amount in column (b) or
(c), as applicable. Report the amount of
dividends received and other taxable
amounts received or includible from
foreign corporations on Part II, lines 2
through 5, as applicable.

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Line 2. Gross Foreign
Dividends Not Previously
Taxed
Except as otherwise provided in this
paragraph, report on line 2, column (d),
the amount (before any withholding tax)
of any foreign dividends included in
current year taxable income on Form
1120, page 1, line 28, and report on
line 2, column (a), the amount of
dividends from any foreign corporation
included in Part I, line 11. Do not report
on line 2 any amounts that must be
reported on Part II, line 3 or 4, or
dividends that were previously taxed
and must be reported on Part II, line 5.
(See the instructions below for Part II,
lines 3, 4, and 5.)
For any dividends reported on Part
II, line 2, that are received on a class of
voting stock of which the corporation
directly or indirectly owned 10% or
more of the outstanding shares of that
class at any time during the tax year,
report on an attached supporting
schedule; (1) the name of the dividend
payer, (2) the payer’s EIN (if
applicable), (3) the class of voting stock
on which the dividend was paid, (4) the
percentage of the class directly or
indirectly owned, and (5) the amounts
for columns (a) through (d).

Line 3. Subpart F, QEF, and
Similar Income Inclusions
Report on line 3, column (d), the
amount included in taxable income
under section 951 (relating to Subpart
F), gains or other income inclusions
resulting from elections under sections
1291(d)(2) and 1298(b)(1), and any
amount included in taxable income
pursuant to section 1293 (relating to
qualified electing funds). The amount of
Subpart F income corresponds to the
total of the amounts reported by the
corporation on line 6, Schedule I, of all
Forms 5471, Information Return of U.S.
Persons With Respect To Certain
Foreign Corporations. The amount of
qualified electing fund income
corresponds to the total of the amounts
reported by the corporation on line 3(a),
Part II, of all Forms 8621, Return by a
Shareholder of a Passive Foreign
Investment Company (PFIC) or
Qualified Electing Fund.
Also include on line 3 PFIC
mark-to-market gains and losses under
section 1296. Do not report such gains
and losses on Part II, line 16.

Line 4. Section 78 Gross-Up
Report on line 4, column (d), the
amount of any section 78 gross-up not
included in column (d) of Part II, lines 9,
10, and 11, Income (loss) from U.S.
partnerships, foreign partnerships, and
other pass-through entities. The section
Instructions for Schedule M-3 (Form 1120)

78 gross-up amount on this line 4 must
correspond to the total section 78
gross-up amounts reported by the
corporation on all Forms 1118, Foreign
Tax Credit — Corporations, excluding
the amounts reported in column (d) of
Part II, lines 9, 10, and 11.

Line 5. Gross Foreign
Distributions Previously
Taxed
Report on line 5, column (a), any
distributions received from foreign
corporations that were included in Part
I, line 11, and that were previously
taxed for U.S. income tax purposes. For
example, include in column (a) amounts
that are excluded from taxable income
under sections 959 and 1293(c).
Remove such amount in column (b) or
(c), as applicable. Report the full
amount of the distribution before any
withholding tax. Since previously taxed
foreign distributions are not currently
taxable, line 5, column (d), is shaded.
(Also, see instructions on page 14 for
Part II, line 2.)

Line 6. Income (Loss) From
Equity Method U.S.
Corporations
Report on line 6, column (a), the
financial income (loss) included in Part
I, line 11, for any U.S. corporation
accounted for on the equity method and
remove such amount in column (b) or
(c), as applicable. Report on Part II, line
7, dividends received from any U.S.
corporation accounted for on the equity
method.

Line 7. U.S. Dividends Not
Eliminated in Tax
Consolidation
Report on line 7, column (a), the
amount of dividends included in Part I,
line 11, that were received from any
U.S. corporation. Report on line 7,
column (d), the amount of any U.S.
dividends included in taxable income on
Form 1120, page 1, line 28.
Usually, the amounts included on
line 7, columns (a) and (d) include only
dividends received from U.S.
corporations that are not included in the
U.S. consolidated tax group because
intercompany dividends (dividends
received from includible corporations
listed on Form 851) are eliminated or
excluded for financial accounting
purposes and eliminated for the
calculation of U.S. taxable income. In
the case of an insurance company
included in the consolidated U.S.
income tax return required to report
intercompany dividends as part of
statutory accounting net income,
include such intercompany dividends
on Part II, line 7, column (a) and the

taxable amount of those dividends on
Part II, line 7, column (d). (For
insurance companies included in the
consolidated U.S. income tax return,
see the instructions for Part I, lines 10
and 11.)
For any intercompany dividends
(dividends received from includible
corporations listed on Form 851)
included on Part II, line 7, report on an
attached supporting schedule: (1) the
name of the dividend payer, (2) the
payer’s EIN, (3) the class of stock or
security on which the dividends were
paid, (4) the amount of any net
adjustment included on Part I, line 10a,
for such dividends, and (5) the item
amounts for columns (a) through (d).
For any dividends included on Part
II, line 7, that are not intercompany
dividends (dividends received from
includible corporations listed on Form
851) that are received on classes of
voting stock in which the corporation
directly or indirectly owned 10% or
more of the outstanding shares of that
class at any time during the tax year,
report on an attached supporting
schedule for Part II, line 7, (1) the name
of the dividend payer, (2) the payer’s
EIN (if applicable), (3) the class of
voting stock on which the dividend was
paid, (4) the percentage of the class
directly or indirectly owned, and (5) the
item amounts for columns (a) through
(d).

Line 8. Minority Interest for
Includible Corporations
Report on line 8, column (a), the
minority interest included in the
financial income (loss) on Part I, line
11, for any member of the U.S.
consolidated tax group that is less than
100% owned.
Example 12. Corporation G is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. G
owns 90% of the stock of U.S.
corporation DS1. G files a consolidated
U.S. income tax return with DS1 as the
GDS1 U.S. consolidated group. G
prepares certified GAAP financial
statements for the consolidated
financial statement group consisting of
G and DS1. G has no net income of its
own, and G does not report its equity
interest in the income of DS1 on its
separate financial statements. DS1 has
financial statement net income (before
minority interests) and taxable income
of $1,000 ($2,500 of revenue less
$1,500 cost of goods sold).
On the consolidated Schedule M-3,
Part I, line 4, Worldwide consolidated
net income (loss) per income
statement, and on line 11, Net income
(loss) per income statement of

Instructions for Schedule M-3 (Form 1120)

-15-

includible corporations, the U.S.
consolidated tax group GDS1 must
report $900 of financial statement net
income ($1,000 net income less $100
minority interest).
The GDS1 group must prepare one
consolidated Schedule M-3, Parts II
and III, and three additional Schedules
M-3, Parts II and III: one for G, one for
DS1, and one for consolidation
eliminations.
On the Schedule M-3, Parts II and
III, for DS1, $1,000 is reported on Part
II, line 28 and line 30, in both columns
(a) and (d). On G’s Schedule M-3,
Parts II and III, zero is reported on Part
II, line 30, in both columns (a) and (d).
On the consolidation eliminations
Schedule M-3, Parts II and III, on Part
II, line 8 and line 30, the minority
interest elimination for the U.S.
consolidated tax group is reported as
($100) in column (a), $100 in column
(c), and $0 in column (d).
On the Schedule M-3, Parts II and
III, for the U.S. consolidated tax group,
on Part II, line 8, Minority interest for
includible corporations, ($100) is
reported in column (a), $100 in column
(c), and $0 in column (d). On Part II,
line 28, the U.S. consolidated tax group
reports $1,000 in both columns (a) and
(d). As a result, financial statement net
income on Part II, line 30, column (a),
will total $900, net permanent
differences on Part II, line 30, column
(c), will total $100, and taxable income
on line 30, column (d), will total $1,000.

Line 9. Income (Loss) From
U.S. Partnerships and
Line 10. Income (Loss) From
Foreign Partnerships
For any interest owned by the
corporation or a member of the U.S.
consolidated tax group that is treated
as an investment in a partnership for
U.S. income tax purposes (other than
an interest in a disregarded entity),
report amounts on Part II, line 9 or 10,
as described below:
1. In column (a) the sum of the
corporation’s distributive share of
income or loss from a U.S. or foreign
partnership that is included in Part I,
line 11;
2. In column (b) or (c), as
applicable, except for amounts
described in item 4, on page 16, the
sum of all differences, if any,
attributable to the corporation’s
distributive share of income or loss from
a U.S. or foreign partnership; and
3. In column (d), except for amounts
described in item 4, on page 16, the
sum of all amounts of income, gain,
loss, or deduction attributable to the
corporation’s distributive share of
income or loss from a U.S. or foreign

partnership (that is, the sum of all
amounts reportable on the corporation’s
Schedule(s) K-1 received from the
partnership (if applicable)), without
regard to any limitations computed at
the partner level (for example,
limitations on utilization of charitable
contributions, capital losses, and
interest expense).
4. Do not report on Part II, line 9 or
10, as applicable, any portion of a
corporation’s domestic production
activities deduction under section 199
even if some or all of the corporation’s
deduction is attributable to a
partnership interest held by the
corporation. A corporation must report
this deduction only on Part III, line 22.
For each partnership reported on
line 9 or 10, attach a supporting
schedule that provides the name, EIN
(if applicable), end of year profit-sharing
percentage (if applicable), end of year
loss-sharing percentage (if applicable),
and the amount reported in column (a),
(b), (c), or (d) of lines 9 or 10, as
applicable.
Example 13. U.S. corporation H is
a calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. H
has an investment in a U.S. partnership
USP. H prepares financial statements
in accordance with GAAP. In its
financial statements, H treats the
difference between financial statement
net income and taxable income from its
investment in USP as a permanent
difference. For its 2009 tax year, H’s
financial statement net income includes
$10,000 of income attributable to its
share of USP’s net income. H’s
Schedule K-1 from USP reports $5,000
of ordinary income, $7,000 of long-term
capital gains, $4,000 of charitable
contributions, and $200 of section 179
expense. H must report on Part II, line
9, $10,000 in column (a), a permanent
difference of ($2,200) in column (c),
and $7,800 in column (d).
Example 14. Same facts as
Example 13 except that corporation H’s
charitable contribution deduction is
wholly attributable to its partnership
interest in USP and is limited to $90
pursuant to section 170(b)(2) due to
other investment losses incurred by H.
In its financial statements, H treated
this limitation as a temporary difference.
H must not report the charitable
contribution limitation of $3,910 ($4,000
-$90) on Part II, line 9. H must report
the limitation on Part III, line 21, and
report the disallowed charitable
contributions of ($3,910) in columns (b)
and (d).

Line 11. Income (Loss) From
Other Pass-Through Entities
For any interest in a pass-through entity
(other than an interest in a partnership
reportable on Part II, line 9 or 10, as
applicable) owned by a member of the
U.S. consolidated tax group (other than
an interest in a disregarded entity),
report the following on line 11:
1. In column (a) the sum of the
corporation’s distributive share of
income or loss from the pass-through
entity that is included in Part I, line 11;
2. In column (b) or (c), as
applicable, except for amounts
described in item 4, below, the sum of
all differences, if any, attributable to the
pass-through entity; and
3. In column (d), except for amounts
described in item 4, below, the sum of
all taxable amounts of income, gain,
loss, or deduction reportable on the
corporation’s Schedules K-1 received
from the pass-through entity (if
applicable).
4. Do not report on Part II, line 11,
any portion of a corporation’s domestic
production activities deduction even if
some or all of the corporation’s
deduction is attributable to an interest
in a pass-through entity held by the
corporation. A corporation must report
this deduction only on Part III, line 22.
For each pass-through entity
reported on line 11, attach a supporting
schedule that provides that entity’s
name, EIN (if applicable), the
corporation’s end of year profit-sharing
percentage (if applicable), the
corporation’s end of year loss-sharing
percentage (if applicable), and the
amounts reported by the corporation in
column (a), (b), (c), or (d) of line 11, as
applicable.

Line 12. Items Relating to
Reportable Transactions
Any amounts attributable to any
reportable transactions (as described in
Regulations section 1.6011-4) must be
included on Part II, line 12, regardless
of whether the difference, or
differences, would otherwise be
reported elsewhere in Part II or Part III.
Thus, if a taxpayer files Form 8886 for
any reportable transaction described in
Regulations section 1.6011-4, the
amounts attributable to that reportable
transaction must be reported on Part II,
line 12. In addition, all income and
expense amounts attributable to a
reportable transaction must be reported
on Part II, line 12, columns (a) and (d)
even if there is no difference between
the financial amounts and the taxable
amounts.
Each difference attributable to a
reportable transaction must be
separately stated and adequately

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disclosed. A corporation will be
considered to have separately stated
and adequately disclosed a reportable
transaction on line 12 if the corporation
sequentially numbers each Form 8886
and lists by identifying number on the
supporting schedule for Part II, line 12,
each sequentially numbered reportable
transaction and the amounts required
for Part II, line 12, columns (a) through
(d).
In lieu of the requirements of the
preceding paragraph, a corporation will
be considered to have separately
stated and adequately disclosed a
reportable transaction if the corporation
attaches a supporting schedule that
provides the following for each
reportable transaction:
1. A description of the reportable
transaction disclosed on Form 8886 for
which amounts are reported on Part II,
line 12;
2. The name and tax shelter
registration number, if applicable, as
reported on lines 1a and 1b,
respectively, of Form 8886; and
3. The type of reportable transaction
(that is, listed transaction, confidential
transaction, transaction with contractual
protection, etc.) as reported on line 2 of
Form 8886.
If a transaction is a listed transaction
described in Regulations section
1.6011-4(b)(2), the description also
must include the description provided
on line 3 of Form 8886. In addition, if
the reportable transaction involves an
investment in the transaction through
another entity such as a partnership,
the description must include the name
and EIN (if applicable) of that entity as
reported on line 5 of Form 8886.
Example 15. Corporation J is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. J
incurred seven different abandonment
losses during its 2009 tax year. One
loss of $12 million results from a
reportable transaction described in
Regulations section 1.6011-4(b)(5),
another loss of $5 million results from a
reportable transaction described in
Regulations section 1.6011-4(b)(4), and
the remaining five abandonment losses
are not reportable transactions. J
discloses the reportable transactions
giving rise to the $12 million and $5
million losses on separate Forms 8886
and sequentially numbers them X1 and
X2, respectively. J must separately
state and adequately disclose the $12
million and $5 million losses on Part II,
line 12. The $12 million loss and the $5
million loss will be adequately disclosed
if J attaches a supporting schedule for
line 12 that lists each of the
Instructions for Schedule M-3 (Form 1120)

sequentially numbered forms, Form
8886-X1 and Form 8886-X2, and with
respect to each reportable transaction
reports the appropriate amounts
required for Part II, line 12, columns (a)
through (d). Alternatively, J’s
disclosures will be adequate if the
description provided for each loss on
the supporting schedule includes the
names and tax shelter registration
numbers, if any, disclosed on the
applicable Form 8886, identifies the
type of reportable transaction for the
loss, and reports the appropriate
amounts required for Part II, line 12,
columns (a) through (d). J must report
the losses attributable to the other five
abandonment losses on Part II, line
23e, regardless of whether a difference
exists for any or all of those
abandonment losses.
Example 16. Corporation K is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. K
enters into a transaction with
contractual protection that is a
reportable transaction described in
Regulations section 1.6011-4(b)(4).
This reportable transaction is the only
reportable transaction for K’s 2009 tax
year and results in a $7 million capital
loss for both financial accounting
purposes and U.S. income tax
purposes. Although the transaction
does not result in a difference, K is
required to report on Part II, line 12, the
following amounts: ($7 million) in
column (a), zero in columns (b) and (c),
and ($7 million) in column (d). The
transaction will be adequately disclosed
if K attaches a supporting schedule for
line 12 that (a) sequentially numbers
the Form 8886 and refers to the
sequentially-numbered Form 8886-X1
and (b) reports the applicable amounts
required for line 12, columns (a)
through (d). Alternatively, the
transaction will be adequately disclosed
if the supporting statement for line 12
includes a description of the
transaction, the name and tax shelter
registration number, if any, and the type
of reportable transaction disclosed on
Form 8886.

Line 13. Interest Income
Report on Part II, line 13, column (a),
the total amount of interest income
included on Part I, line 11, and report
on Part II, line 13, column (d), the total
amount of interest income included on
Form 1120, page 1, line 28, that is not
required to be reported elsewhere on
Schedule M-3. In columns (b) or (c), as
applicable, adjust for any amounts
treated for U.S. income tax purposes as
interest income that are treated as
some other form of income for financial
accounting purposes, or vice versa. For

example, adjustments to interest
income resulting from adjustments
made in accordance with the
instructions for Part II, line 18, should
be made in columns (b) and (c) of this
line 13.
Complete Part II of Form 8916-A.
Enter the amounts from line 6, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 13, columns
(a) through (d), as applicable. Attach
Form 8916-A.
Do not report on this line 13 or
include on Form 8916-A amounts
reported in accordance with the
instructions for Part II, lines 9, 10, 11,
12, and 22.

Line 14. Total Accrual to
Cash Adjustment
This line is completed by a corporation
that prepares financial statements (or
books and records, if permitted) using
an overall accrual method of accounting
and uses an overall cash method of
accounting for U.S. income tax
purposes (or vice versa). With the
exception of amounts required to be
reported on Part II, line 12, the
corporation must report on Part II, line
14, a single amount net of all
adjustments attributable solely to the
use of the different overall methods of
accounting (for example, adjustments
related to accounts receivable,
accounts payable, compensation,
accrued liabilities, etc.), regardless of
whether a separate line on Schedule
M-3 corresponds to an item within the
accrual to cash reconciliation.
Differences not attributable to the use
of the different overall methods of
accounting must be reported on the
appropriate lines of Schedule M-3 (for
example, a depreciation difference
must be reported on Part III, line 31).
Example 17. Corporation L is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. L
prepares financial statements in
accordance with GAAP using an overall
accrual method of accounting. L uses
an overall cash method of accounting
for U.S. income tax purposes. L’s
financial statements for the year ending
December 31, 2009, report accounts
receivable of $35,000, an allowance for
bad debts of $10,000, and accounts
payable of $17,000 related to current
year acquisition and reorganization
legal and accounting fees. In addition,
for L’s year ending December 31, 2009,
L reported financial statement
depreciation expense of $15,000 and
depreciation for U.S. income tax
purposes of $25,000. For L’s 2009 tax
year using an overall cash method of
accounting, L does not recognize the

Instructions for Schedule M-3 (Form 1120)

-17-

$35,000 of revenue attributable to the
accounts receivable, cannot deduct the
$10,000 allowance for bad debt, and
cannot deduct the $17,000 of accounts
payable. In its financial statements, L
treats both the difference in overall
accounting methods used for financial
statement and U.S. income tax
purposes and the difference in
depreciation expense as temporary
differences. L must combine all
adjustments attributable to the
differences related to the overall
accounting methods on Part II, line 14.
As a result, L must report on Part II, line
14, $8,000 in column (a) ($35,000
-$10,000 - $17,000), ($8,000) in column
(b), and zero in column (d). L must not
report the accrual to cash adjustment
attributable to the legal and accounting
fees on Part III, line 24, Current year
acquisition or reorganization legal and
accounting fees. Because the
difference in depreciation expense does
not relate to the use of the cash or
accrual method of accounting, L must
report the depreciation difference on
Part III, line 31, Depreciation, and
report $15,000 in column (a), $10,000
in column (b), and $25,000 in column
(d).

Line 15. Hedging
Transactions
Report on line 15, column (a), the net
gain or loss from hedging transactions
included on Part I, line 11. Report in
column (d) the amount of taxable
income from hedging transactions as
defined in section 1221(b)(2). Use
columns (b) and (c) to report all
differences caused by treating hedging
transactions differently for financial
accounting purposes and for U.S.
income tax purposes. For example, if a
portion of a hedge is considered
ineffective under GAAP but still is a
valid hedge under section 1221(b)(2),
the difference must be reported on line
15. The hedge of a capital asset, which
is not a valid hedge for U.S. income tax
purposes but may be considered a
hedge for GAAP purposes, must also
be reported here.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 15 and
not on Part II, line 16.
Report any gain or loss from
inventory hedging transactions on line
15 and not on Part II, line 17.

Line 16. Mark-to-Market
Income (Loss)
Report on line 16 any amount
representing the mark-to-market
income or loss for any securities held
by a dealer in securities, a dealer in
commodities having made a valid
election under section 475(e), or a

trader in securities or commodities
having made a valid election under
section 475(f). “Securities” for these
purposes are securities described in
section 475(c)(2) and section 475(e)(2).
“Securities” do not include any items
specifically excluded from sections
475(c)(2) and 475(e)(2), such as certain
contracts to which section 1256(a)
applies.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line
15, Hedging transactions, and not on
line 16.

Line 17. Cost of Goods Sold
Report on line 17 any amounts
deducted as part of cost of goods sold
during the tax year, regardless of
whether the amounts would otherwise
be reported elsewhere in Part II or Part
III.
Examples of amounts that must be
included as cost of goods sold items
are amounts attributable to inventory
valuation, such as amounts attributable
to cost-flow assumptions, additional
costs required to be capitalized
(including depreciation) such as section
263A costs, inventory shrinkage
accruals, inventory obsolescence
reserves, and lower of cost or market
(LCM) write-downs.
Complete Part I of Form 8916-A.
Enter the amounts from line 8, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 17, columns
(a) through (d), as applicable. Attach
Form 8916-A.
Note. The entries in columns (a) and
(d) of Schedule M-3, line 17, are
negative amounts.
Do not report the following on this
line 17 or on Form 8916-A:
• Amounts reportable on Part II, line
12;
• Any gain or loss from inventory
hedging transactions reportable on Part
II, line 15;
• Amounts reportable on Part II, line
18;
• Amounts reportable on Part II, line
21;
• Mark-to-market income or (loss)
associated with the inventories of
dealers in securities under section 475,
reportable on Part II, line 16;
• Section 481(a) adjustments related to
cost of goods sold or inventory
valuation, reportable on Part II, line 19;
• Fines and penalties reportable on
Part III, line 12;
• Judgments, damages, awards, and
similar costs, reportable on Part III, line
13; and
• Amounts included on Part III, line 34.
Example 18. Corporation C is a
calendar year taxpayer that placed in

service ten depreciable fixed assets in
2003. C was required to file Schedule
M-3 for its 2008 tax year and is
required to file Schedule M-3 for its
2009 tax year. C’s total depreciation
expense for its 2009 tax year for five of
the assets is $50,000 for financial
accounting purposes and $70,000 for
U.S. income tax purposes. C’s total
annual depreciation expense for its
2009 tax year for the other five assets
is $40,000 for financial accounting
purposes and $30,000 for U.S. income
tax purposes. In addition, C incurs $200
of meals and entertainment expenses
that C deducts in computing net income
for financial accounting purposes. All
$200 of the meals and entertainment
expenses is subject to the 50%
limitation under section 274(n). In its
financial statements, C treats the
$50,000 depreciation and $100 of the
meals and entertainment as other costs
in computing cost of goods sold. C
must include on Form 8916-A and on
Schedule M-3, Part II, line 17, in
column (a), the $50,000 of depreciation
and $100 of meals and entertainment.
C must also include a temporary
difference of $20,000 in column (b), a
permanent difference of ($50) in
column (c), and $70,050 in column (d)
($70,000 depreciation and $50 meals
and entertainment expenses). In
addition, C must report on Part III, line
31, for its 2009 tax year income
statement, depreciation expense of
$40,000 in column (a), a temporary
difference of ($10,000) in column (b)
and $30,000 in column (d); and on Part
III, line 11, meals and entertainment
expense of $100 in column (a), a
permanent difference of ($50) in
column (c), and $50 in column (d). All
other cost of goods sold items would be
added to the amounts included on Part
II, line 17, detailed in this example and
reported on Form 8916-A and on Part
II, line 17, in the appropriate columns.

reports the periodic payments as
payments of principal and interest
income.

Line 18. Sale Versus Lease
(for Sellers and/or Lessors)
Note. Also see the instructions at Part
III, line 34, Purchase Versus Lease (for
Purchasers and/or Lessees), on page
23.
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a sale or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes. If the
transaction is treated as a lease, the
seller/lessor reports the periodic
payments as gross rental income and
also reports depreciation expense or
deduction. If the transaction is treated
as a sale, the seller/lessor reports gross
profit (sale price less cost of goods
sold) from the sale of assets and

-18-

On Part II, line 18, column (a), report
the gross profit or gross rental income
for financial accounting purposes for all
sale or lease transactions that must be
given the opposite characterization for
U.S. income tax purposes. On Part II,
line 18, column (d), report the gross
profit or gross rental income for federal
income tax purposes. Interest income
amounts for such transactions must be
reported on Part II, line 13, in column
(a) or (d), as applicable. Depreciation
expense for such transactions must be
reported on Part III, line 31, in column
(a) or (d), as applicable. Use columns
(b) and (c) of Part II, lines 13 and 18,
and Part III, line 31, as applicable to
report the differences between column
(a) and (d).
Example 19. Corporation M sells
and leases property to customers. M is
a calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. For
financial accounting purposes, M
accounts for each transaction as a sale.
For U.S. income tax purposes, each of
M’s transactions must be treated as a
lease. In its financial statements, M
treats the difference in the financial
accounting and the U.S. income tax
treatment of these transactions as
temporary. During 2009, M reports in its
financial statements $1,000 of sales
and $700 of cost of goods sold with
respect to 2009 lease transactions. M
receives periodic payments of $500 in
2009 with respect to these 2009
transactions and similar transactions
from prior years and treats $400 as
principal and $100 as interest income.
For financial accounting purposes, M
reports gross profit of $300 ($1,000
-$700) and interest income of $100
from these transactions. For U.S.
income tax purposes, M reports $500 of
gross rental income (the periodic
payments) and (based on other facts)
$200 of depreciation deduction on the
property. On its 2009 Schedule M-3, M
must report on Part II, line 13, $100 in
column (a), ($100) in column (b), and
zero in column (d). In addition, M must
report on Part II, line 18, $300 of gross
profit in column (a), $200 in column (b),
and $500 of gross rental income in
column (d). Lastly, M must report on
Part III, line 31, $200 in column (b) and
(d).

Line 19. Section 481(a)
Adjustments
With the exception of a section 481(a)
adjustment that is required to be
reported on Part II, line 12, for
reportable transactions, any difference

Instructions for Schedule M-3 (Form 1120)

between an income or expense item
attributable to an authorized (or
unauthorized) change in method of
accounting made for U.S. income tax
purposes that results in a section
481(a) adjustment must be reported on
Part II, line 19, regardless of whether a
separate line for that income or
expense item exists in Part II or Part III.
Example 20. Corporation N is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. N
was depreciating certain fixed assets
over an erroneous recovery period and,
effective for its 2009 tax year, N
receives IRS consent to change its
method of accounting for the
depreciable fixed assets and begins
using the proper recovery period. The
change in method of accounting results
in a positive section 481(a) adjustment
of $100,000 that is required to be
spread over four tax years, beginning
with the 2009 tax year. In its financial
statements, N treats the section 481(a)
adjustment as a temporary difference.
N must report on Part II, line 19,
$25,000 in columns (b) and (d) for its
2009 tax year and each of the
subsequent three tax years (unless N is
otherwise required to recognize the
remainder of the 481(a) adjustment
earlier). N must not report the section
481(a) adjustment on Part III, line 31.

Line 20. Unearned/Deferred
Revenue
Report on line 20, column (a), amounts
of revenues included in Part I, line 11,
that were deferred from a prior financial
accounting year. Report on line 20,
column (d), amounts of revenues
recognizable for U.S. income tax
purposes in the current tax year that
are recognized for financial accounting
purposes in a different year. Also,
report on line 20, column (d), any
amount of revenues reported on line
20, column (a), that are recognizable
for U.S. income tax purposes in the
current tax year. Use columns (b) and
(c) of line 20, as applicable, to report
the differences between column (a) and
(d).
Line 20 must not be used to report
income recognized from long-term
contracts. Instead, use line 21.

Line 21. Income Recognition
From Long-Term Contracts
Report on line 21 the amount of net
income or loss for financial statement
purposes (or books and records, if
applicable) or U.S. income tax
purposes for any contract accounted for
under a long-term contract method of
accounting.

Line 22. Original Issue
Discount and Other Imputed
Interest
Report on line 22 any amounts of
original issue discount (OID) and other
imputed interest. The term “original
issue discount and other imputed
interest” includes, but is not limited to:
1. The difference between issue
price and the stated redemption price at
maturity of a debt instrument, which
may be wholly or partially realized on
the disposition of a debt instrument
under section 1273;
2. Amounts that are imputed
interest on a deferred sales contract
under section 483;
3. Amounts treated as interest or
OID under the stripped bond rules
under section 1286; and
4. Amounts treated as OID under
the below-market interest rate rules
under section 7872.

Line 23a. Income Statement
Gain/Loss on Sale,
Exchange, Abandonment,
Worthlessness, or Other
Disposition of Assets Other
Than Inventory and
Pass-Through Entities
Report on line 23a, column (a), all
gains and losses on the disposition of
assets except for (a) gains and losses
on the disposition of inventory, and (b)
gains and losses allocated to the
corporation from a pass-through entity
(for example, on Schedule K-1) that are
included in the net income (loss) of
includible corporations reported on Part
I, line 11. Reverse the amount reported
in column (a) in column (b) or (c), as
applicable. The corresponding gains
and losses for U.S. income tax
purposes are reported on Part II, lines
23b through 23g, as applicable.

Line 23b. Gross Capital
Gains From Schedule D,
Excluding Amounts From
Pass-Through Entities
Report on line 23b gross capital gains
reported on Schedule D (Form 1120),
Capital Gains and Losses, excluding
capital gains from pass-through entities,
which must be reported on Part II, lines
9, 10, or 11, as applicable.

Line 23c. Gross Capital
Losses From Schedule D,
Excluding Amounts From
Pass-Through Entities,

Instructions for Schedule M-3 (Form 1120)

-19-

Abandonment Losses, and
Worthless Stock Losses
Report on line 23c gross capital losses
reported on Schedule D (Form 1120),
excluding capital losses from (a)
pass-through entities, which must be
reported on Part II, lines 9, 10, or 11, as
applicable; (b) abandonment losses,
which must be reported on Part II, line
23e; and (c) worthless stock losses,
which must be reported on Part II, line
23f. Do not report on line 23c capital
losses carried over from a prior tax year
and utilized in the current tax year. See
the instructions for Part II, line 24,
regarding the reporting requirements for
capital loss carryovers utilized in the
current tax year.

Line 23d. Net Gain/Loss
Reported on Form 4797, Line
17, Excluding Amounts From
Pass-Through Entities,
Abandonment Losses, and
Worthless Stock Losses
Report on line 23d the net gain or loss
reported on line 17 of Form 4797, Sales
of Business Property, excluding
amounts from (a) pass-through entities,
which must be reported on Part II, lines
9, 10, or 11, as applicable; (b)
abandonment losses, which must be
reported on Part II, line 23e; and (c)
worthless stock losses, which must be
reported on Part II, line 23f.

Line 23e. Abandonment
Losses
Report on line 23e any abandonment
losses, regardless of whether the loss
is characterized as an ordinary loss or
a capital loss.

Line 23f. Worthless Stock
Losses
Report on line 23f any worthless stock
loss, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss. Attach a schedule that
separately states and adequately
discloses each transaction that gives
rise to a worthless stock loss and the
amount of each loss.

Line 23g. Other Gain/Loss on
Disposition of Assets Other
Than Inventory
Report on line 23g any gains or losses
from the sale or exchange of property
other than inventory that are not
reported on lines 23b through 23f.

Line 24. Capital Loss
Limitation and Carryforward
Used
Report as a positive amount on line 24,
columns (b) or (c), as applicable, and

(d) the excess of the net capital losses
over the net capital gains reported on
Schedule D (Form 1120) by the
corporation. For a U.S. consolidated tax
group, the Schedule M-3 adjustment for
the amount of the consolidated net
capital loss that is disallowed should
not be made on the separate
consolidating Schedules M-3 of the
includible corporations, but on the
separate Schedule M-3 for consolidated
eliminations (or on Form 8916 in the
case of a mixed group) as described
under Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers on page 5.
If the corporation utilizes a capital
loss carryforward on Schedule D in the
current tax year, report the carryforward
utilized as a negative amount on Part II,
line 24, columns (b) or (c), as
applicable, and column (d). For a U.S.
consolidated tax group, the Schedule
M-3 adjustment for the amount of the
consolidated capital loss carryforward
should not be made on the separate
consolidating Schedules M-3 of the
includible corporations, but on the
separate Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group) as
described under Completion of
Schedule M-3 and Certain Allocations,
Limitations, and Carryovers on page 5.

Line 25. Other Income (Loss)
Items With Differences
Separately state and adequately
disclose on Part II, line 25, all items of
income (loss) with differences that are
not otherwise listed on Part II, lines 1
through 24. Attach a schedule that
itemizes the type of income (loss) and
the amount of each item.
If any “comprehensive income” as
defined by Statement of Financial
Accounting Standards (SFAS) No. 130
is reported on this line, describe the
item(s) in detail. Examples of
sufficiently detailed descriptions include
“foreign currency translation
adjustments” and “gains and losses on
available-for-sale securities.”
Whether an item of income (loss) is
reported on line 25, or is reported on
Part II, line 28, is determined separately
by each member of the U.S.
consolidated tax group and not at the
U.S. consolidated tax group level. For
example, U.S. corporation P has two
subsidiaries, corporations A and B, that
are included in P’s consolidated
financial statements and in P’s
consolidated U.S. income tax return.
For financial statement purposes, P, A,
and B recognize revenue from the sale
of inventory upon delivery to the
customer. For U.S. income tax
purposes, P and A recognize such
revenue consistent with the method

used for financial statement purposes,
whereas B recognizes such revenue
based upon customer acceptance. P
and A must report this revenue in
column (a) and (d) on Part II, line 28. B
must report the following on Part II, line
25: in column (a), B’s revenue
recognized in the financial statements
based upon delivery to the customer; in
column (d), B’s revenue recognized for
U.S. income tax purposes based upon
customer acceptance; and in column
(b) or (c), as applicable, the difference
between B’s revenue recognized in its
financial statements and in its U.S.
taxable income.

lines 29b and 29c. On the
sub-consolidated Schedule M-3 for a
mixed group, combine lines 26 through
28 and skip lines 29b and 29c. For the
consolidated Schedule M-3 of a mixed
group, complete only lines 29a through
29c and line 30 of Part II. No Part III is
required to be completed for the
consolidated Schedule M-3 of a mixed
group.

Line 29b. PC Insurance
Subgroup Reconciliation
Totals
Line 29b is only used by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC) on page 4.

Line 26. Total Income (Loss)
Items

Line 29c. Life Insurance
Subgroup Reconciliation
Totals

Combine lines 1 through 25 and enter
the total on line 26.
Note. Line 17, Cost of goods sold,
columns (a) and (d), are negative
amounts which will affect the totals
entered on line 26.

Line 29c is only used by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC) on page 4.

Line 30. Reconciliation
Totals

Line 27. Total Expense/
Deduction Items
Report on Part II, line 27, columns (a)
through (d), as applicable, the negative
of the amounts reported on Part III, line
36, columns (a) through (d), as
applicable. Report positive amounts as
negative and negative amounts as
positive. For example, if Part III, line 36,
column (a), reflects an amount of $1
million, then report on Part II, line 27,
column (a), ($1 million). Similarly, if Part
III, line 36, column (b), reflects an
amount of ($50,000), then report on
Part II, line 27, column (b), $50,000.

Line 28. Other Items With No
Differences
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or
deduction and the item is not described
or included in Part II, lines 1 through
25, or Part III, lines 1 through 35, report
the entire amount of the item in
columns (a) and (d) of line 28. If a
portion of an item of income, loss,
expense, or deduction has a difference
and a portion of the item does not have
a difference, do not report any portion
of the item on line 28. Instead, report
the entire amount of the item (that is,
both the portion with a difference and
the portion without a difference) on the
applicable line of Part II, lines 1 through
25, or Part III, lines 1 through 35. See
Example 11 on page 14.

Line 29a. 1120 Subgroup
Reconciliation Totals
For filers other than a mixed group,
combine lines 26 through 28 and skip

-20-

If a corporation that is not a mixed
group chooses not to complete columns
(a) and (d) of Parts II and III in the first
tax year the corporation is required to
file Schedule M-3 (or for any year in
which the corporation voluntarily files
Schedule M-3), Part II, line 30, is
reconciled by the corporation (or, in the
case of a U.S. consolidated tax group,
on the group’s consolidated Schedule
M-3) in the following manner:
1. Report the amount from Part I,
line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1
through 29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and
4. Report on Part II, line 30, column
(d), the sum of Part II, line 30, columns
(a), (b), and (c).
Note. Mixed groups see Schedule M-3
Consolidation for Mixed Groups (1120/
L/PC) on page 4.

Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return—Expense/
Deduction Items
Note. Expense amounts that reduce
financial accounting income must be
reported on Part III, column (a), as
positive amounts. Deduction amounts
that reduce taxable income must be
reported on Part III, column (d), as
Instructions for Schedule M-3 (Form 1120)

positive amounts. Amounts reported on
Part II, line 27, must be the negative of
the amounts reported on Part III, line
36.

Lines 1 Through 6. Income
Tax Expense
If the corporation does not distinguish
between current and deferred income
tax expense in its financial statements
(or its books and records, if applicable),
report income tax expense as current
income tax expense using lines 1, 3,
and 5, as applicable.
A U.S. consolidated tax group must
complete lines 1 through 6 in
accordance with the allocation of tax
expense among the members of the
U.S. consolidated tax group in the
financial statements (or its books and
records, if applicable). If the current and
deferred U.S., state, and foreign
income tax expense for the U.S.
consolidated tax group (income tax
expense) is allocated among the
members of the U.S. consolidated tax
group in the group’s financial
statements (or its books and records, if
applicable), then each member must
report its allocated income tax expense
on Part III, lines 1 through 6, of that
member’s separate Schedule M-3.
However, if the income tax expense is
not shared or allocated among
members of the U.S. consolidated tax
group but is retained in the parent
corporation’s financial statements (or
books and records, if applicable), then
amounts are reported only on Part III,
lines 1 through 6, of the parent’s
separate Schedule M-3.

Line 7. Foreign Withholding
Taxes
Report on line 7, column (a), the
amount of foreign withholding taxes
included in financial accounting net
income on Part I, line 11. If the
corporation is deducting foreign tax,
use column (b) or (c), as applicable, to
correct for any difference between
foreign withholding tax included in
financial accounting net income and the
amount of foreign withholding taxes
being deducted in the return. If the
corporation is crediting foreign
withholding taxes against the U.S.
income tax liability, use column (b) or
(c), as applicable, to negate the amount
reported in column (a).

Line 8. Interest Expense
Report on Part III, line 8, column (a),
the total amount of interest expense
included on Part I, line 11, and report
on Part III, line 8, column (d), the total
amount of interest deduction included
on Form 1120, page 1, line 28, that is
not required to be reported elsewhere
on Schedule M-3. In columns (b) or (c),

as applicable, include any adjustments
for any amounts treated for U.S.
income tax purposes as interest
deduction that are treated as some
other form of expense for financial
accounting purposes, or vice versa. For
example, adjustments to interest
expense/deduction resulting from
adjustments made in accordance with
the instructions for Part III, line 34,
Purchase versus lease (for purchasers
and/or lessees), should be made in
columns (b) and (c), as applicable, on
this line 8.
Complete Part III of Form 8916-A.
Enter the amounts from line 5, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part III, line 8, columns
(a) through (d), as applicable. Attach
Form 8916-A.
Do not report on Form 8916-A and
this line 8 amounts reported in
accordance with the instructions for
Part II, lines 9, 10, 11, and 12.

Line 9. Stock Option
Expense
Report on line 9, column (a), amounts
expensed on Part I, line 11, net income
per the income statement, that are
attributable to all stock options. Report
on line 9, column (d), deduction
amounts attributable to all stock
options.

Line 10. Other Equity-Based
Compensation
Report on line 10 any amounts for
equity-based compensation or
consideration that are reflected as
expense for financial accounting
purposes (column (a)) or deducted in
the U.S. income tax return (column (d))
other than amounts reportable
elsewhere on Schedule M-3, Parts II
and III (for example, on Part III, line 9,
for stock options expense). Examples
of amounts reportable on line 10
include payments attributable to
employee stock purchase plans
(ESPPs), phantom stock options,
phantom stock units, stock warrants,
stock appreciation rights, and restricted
stock, regardless of whether such
payments are made to employees or
non-employees, or as payment for
property or compensation for services.

Line 11. Meals and
Entertainment
Report on line 11, column (a), any
amounts paid or accrued by the
corporation during the tax year for
meals, beverages, and entertainment
that are accounted for in financial
accounting income, regardless of the
classification, nomenclature, or
terminology used for such amounts,
and regardless of how or where such
amounts are classified in the

Instructions for Schedule M-3 (Form 1120)

-21-

corporation’s financial income
statement or the income and expense
accounts maintained in the
corporation’s books and records.
Report only amounts not otherwise
reportable elsewhere on Schedule M-3,
Parts II and III (for example, Part II, line
17).

Line 12. Fines and Penalties
Report on line 12 any fines or similar
penalties paid to a government or other
authority for the violation of any law for
which fines or penalties are assessed.
All fines and penalties expensed in
financial accounting income (paid or
accrued) must be included on this line
12, column (a), regardless of the
government or other authority that
imposed the fines or penalties,
regardless of whether the fines and
penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology used for
the fines or penalties by the imposing
authority in its actions or documents,
and regardless of how or where the
fines or penalties are classified in the
corporation’s financial income
statement or the income and expense
accounts maintained in the
corporation’s books and records. Also
report on line 12, column (a), the
reversal of any overaccrual of any
amount described in this paragraph.
See section 162(f) for additional
guidance.
Report on line 12, column (d), any
such amounts as described in the
preceding paragraph that are includible
in taxable income, regardless of the
financial accounting period in which
such amounts were or are included in
financial accounting net income.
Complete columns (b) and (c) as
appropriate.
Do not report on this Part III, line 12,
amounts required to be reported in
accordance with instructions for Part III,
line 13.
Do not report on this Part III, line 12,
amounts recovered from insurers or
any other indemnitors for any fines and
penalties described above.

Line 13. Judgments,
Damages, Awards, and
Similar Costs
Report on line 13, column (a), the
amount of any estimated or actual
judgments, damages, awards,
settlements, and similar costs, however
named or classified, included in
financial accounting income, regardless
of whether the amount deducted was
attributable to an estimate of future
anticipated payments or actual
payments. Also report on line 13,
column (a), the reversal of any

overaccrual of any amount described in
this paragraph.

Line 17. Other
Post-Retirement Benefits

Report on line 13, column (d), any
such amounts as are described in the
preceding paragraph that are includible
in taxable income, regardless of the
financial accounting period in which
such amounts were or are included in
financial accounting net income.
Complete columns (b) and (c) as
appropriate.

Report on line 17 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 16 (for example, retiree health
and life insurance coverage, dental
coverage, etc.).

Do not report on this Part III, line 13,
amounts required to be reported in
accordance with instructions for Part III,
line 12.
Do not report on this Part III, line 13,
amounts recovered from insurers or
any other indemnitors for any
judgments, damages, awards, or similar
costs described above.

Line 14. Parachute Payments
Report on line 14, column (a), the total
expense included in financial
accounting net income on Part I, line
11, that is subject to section 280G.
Report in column (b) or (c), as
applicable, the amount of nondeductible
parachute payments pursuant to
section 280G, and report in column (d)
the deductible amount of compensation
after any excess parachute payment
limitations under section 280G. If a
payment is subject to limitation under
both sections 162(m) and 280G, report
the total payment on this line 14.

Line 15. Compensation With
Section 162(m) Limitation
Report on line 15, column (a), the total
amount of non-performance-based
current compensation expense for the
corporate officers to whom section
162(m) applies. Report in column (b) or
(c) as applicable, the nondeductible
amount of current compensation in
excess of $1 million ($500,000 if the
corporation receives or has received
financial assistance under the Treasury
Troubled Asset Relief Program
(TARP)). Report the deductible
compensation in column (d). If a
payment is subject to limitation under
both sections 162(m) and 280G, report
the total payment on Part III, line 14,
Parachute payments. See Regulations
section 1.162-27(g) for the interaction
between sections 162(m) and 280G.

Line 16. Pension and
Profit-Sharing
Report on line 16 any amounts
attributable to the corporation’s pension
plans, profit-sharing plans, and any
other retirement plans.

Line 18. Deferred
Compensation
Report on line 18, column (a), any
compensation expense included in the
net income (loss) amount reported in
Part I, line 11, that is not deductible for
U.S. income tax purposes in the current
tax year and that was not reported
elsewhere on Schedule M-3, column
(a). Report on line 18, column (d), any
compensation deductible in the current
tax year that was not included in the net
income (loss) amount reported in Part I,
line 11, for the current tax year and that
is not reportable elsewhere on
Schedule M-3. For example, report
originations and reversals of deferred
compensation subject to section 409A
on line 18.

Line 20. Charitable
Contribution of Intangible
Property
Report on line 20 any charitable
contribution of intangible property, for
example, contributions of:
• Intellectual property, patents
(including any amounts of additional
contributions allowable by virtue of
income earned by donees subsequent
to the year of donation), copyrights,
trademarks;
• Securities (including stocks and their
derivatives, stock options, and bonds);
• Conservation easements (including
scenic easements or air rights);
• Railroad rights of way;
• Mineral rights; and
• Other intangible property.

Line 21. Charitable
Contribution Limitation/
Carryforward
Report as a negative amount on this
line 21, columns (b), (c), and (d), as
applicable, the excess of charitable
contributions made during the tax year
over the amount of the charitable
contribution limitation amount.
If the corporation utilizes a
contribution carryforward in the current
tax year, report the carryforward utilized
as a positive amount on columns (b),
(c), and (d), as applicable.
When a consolidated income tax
return is being filed, Schedule M-3
adjustments for the amount of
charitable contributions in excess of the
limitation, or for charitable contribution

-22-

carryforward utilized, should not be
made on the separate consolidating
Schedules M-3 of the includible
corporations, but on the separate
consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group).
See Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers on page 5.

Line 22. Domestic
Production Activities
Deduction
Report on Part III, line 22, column (d),
the corporation’s domestic production
activities deduction under section 199
that is reported on Form 1120, page 1,
line 25. Complete columns (b) and (c)
as appropriate. Do not report any
portion of the corporation’s domestic
production activities deduction on any
other line of Schedule M-3.

Line 23. Current Year
Acquisition or
Reorganization Investment
Banking Fees
Report on line 23 any investment
banking fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (for example,
stock or assets) or a tax-free
reorganization. Report on this line any
investment banking fees incurred at any
stage of the acquisition or
reorganization process including, for
example, fees paid or incurred to
evaluate whether to investigate an
acquisition, fees to conduct an actual
investigation, and fees to consummate
the acquisition. Also include on this line
23 investment banking fees incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.

Line 24. Current Year
Acquisition or
Reorganization Legal and
Accounting Fees
Report on line 24 any legal and
accounting fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (for example,
stock or assets) or tax-free
reorganization. Report on this line any
legal and accounting fees incurred at
any stage of the acquisition or
reorganization process including, for
example, fees paid or incurred to
evaluate whether to investigate an
acquisition, fees to conduct an actual
investigation, and fees to consummate
the acquisition. Also include on this line
legal and accounting fees incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.
Instructions for Schedule M-3 (Form 1120)

Line 25. Current Year
Acquisition/Reorganization
Other Costs
Report on line 25 any other fees paid or
incurred in connection with a taxable or
tax-free acquisition of property (for
example, stock or assets) or a tax-free
reorganization not otherwise reportable
on Schedule M-3 (for example, Part III,
line 23 or 24). Report on this line any
fees paid or incurred at any stage of the
acquisition or reorganization process
including, for example, fees paid or
incurred to evaluate whether to
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line other
acquisition/reorganization costs
incurred in connection with the
liquidation of a subsidiary, a spin-off of
a subsidiary, or an initial public stock
offering.

Line 26. Amortization/
Impairment of Goodwill
Report on line 26 amortization of
goodwill or amounts attributable to the
impairment of goodwill.

Line 27. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
Report on line 27 amortization of
acquisition, reorganization, and start-up
costs. For purposes of column (b), (c),
and (d), include amounts amortizable
under section 167, 195, or 248.

Line 28. Other Amortization
or Impairment Write-Offs
Report on line 28 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 29. Section 198
Environmental Remediation
Costs
Report on line 29, column (a), any
amounts attributable to environmental
remediation costs included on Part I,
line 11. Report in columns (b), (c), and
(d), as applicable, any deductible
amounts attributable to environmental
remediation costs described in section
198 that are paid or incurred during the
current tax year.

Line 31. Depreciation
Report on line 31 any depreciation
expense that is not required to be
reported elsewhere on Schedule M-3
(for example, on Part II, line 9, 10, 11,
or 17).

Line 32. Bad Debt Expense
Report on line 32, column (a), any
amounts attributable to an allowance

for uncollectible accounts receivable or
actual write-offs of accounts receivable
included on Part I, line 11. Report in
column (d) the amount of bad debt
expense deductible for federal income
tax purposes under section 166.

Line 33. Corporate Owned
Life Insurance Premiums
Report on line 33 all amounts of
insurance premiums attributable to any
life insurance policy if the corporation is
directly or indirectly a beneficiary under
the policy or if the policy has a cash
value. Report in column (d) the amount
of the premiums that are deductible for
federal income tax purposes.

Line 34. Purchase Versus
Lease (for Purchasers and/or
Lessees)
Note. Also see the instructions for
sellers and/or lessors in the instructions
for Part II, line 18.
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a purchase or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes.
If a transaction is treated as a lease,
the purchaser/lessee reports the
periodic payments as gross rental
expense. If the transaction is treated as
a purchase, the purchaser/lessee
reports the periodic payments as
payments of principal and interest and
also reports depreciation expense or
deduction with respect to the purchased
asset.
Report in column (a), gross rent
expense for a transaction treated as a
lease for financial accounting purposes
but as a sale for U.S. income tax
purposes. Report in column (d), gross
rental deductions for a transaction
treated as a lease for U.S. income tax
purposes but as a purchase for
financial accounting purposes. Report
interest expense for such transactions
on Part III, line 8, column (a) or (d), as
applicable. Report depreciation
expense or deductions for such
transactions on Part III, line 31, column
(a) or (d), as applicable. Use columns
(b) and (c) of Part III, lines 8, 31, and
34, as applicable, to report the
differences between column (a) and (d)
for such recharacterized transactions.
Example 21. U.S. corporation X
acquired property in a transaction that,
for financial accounting purposes, X
treats as a lease. X is a calendar year
taxpayer that was required to file
Schedule M-3 for its 2008 tax year and
is required to file Schedule M-3 for its
2009 tax year. Because of its terms, the
transaction is treated for U.S. income
tax purposes as a purchase and X must

Instructions for Schedule M-3 (Form 1120)

-23-

treat the periodic payments it makes
partially as payment of principal and
partially as payment of interest. In its
financial statements, X treats the
difference between the financial
accounting and U.S. income tax
treatment of this transaction as a
temporary difference. During 2009, X
reports in its financial statements
$1,000 of gross rental expense that, for
U.S. income tax purposes, is
recharacterized as a $700 payment of
principal and a $300 payment of
interest, accompanied by a depreciation
deduction of $1,200 (based on other
facts). On its 2009 Schedule M-3, X
must report the following on Part III, line
34: column (a) $1,000, its financial
accounting gross rental expense;
column (b), ($1,000); and column (d),
zero. On Part III, line 8, X reports zero
in column (a) and $300 in columns (b)
and (d) for the interest deduction. On
Part III, line 31, X reports zero in
column (a) and $1,200 in columns (b)
and (d) for the depreciation deduction.

Line 35. Other Expense/
Deduction Items With
Differences
Report on Part III, line 35, all items of
expense/deduction that are not
otherwise listed on Part III, lines 1
through 34.
Whether an expense/deduction item
is reported on this line 35, or reported
on Part II, line 28, is determined
separately by each member of the U.S.
consolidated tax group and not at the
U.S. consolidated tax group level. For
example, U.S. corporation P has two
subsidiaries, A and B, that are included
in P’s consolidated financial statements
and in P’s consolidated U.S. income tax
return. For financial statement
purposes, P, A, and B recognize real
estate tax expense when accrued. For
U.S. income tax purposes, P and A
recognize such expense consistent with
the method used for financial statement
purposes, whereas B recognizes such
deduction based on a method different
from that used for financial statement
purposes. P and A must report this
expense/deduction in column (a) and
(d) on Part II, line 28. B must report the
following on Part III, line 35, in column
(a), B’s expense recognized in the
financial statements when accrued; in
column (d), B’s real estate tax expense
recognized for U.S. income tax
purposes; and in column (b) or (c), as
applicable, the difference between B’s
real estate tax expense in its financial
statements and its real estate tax
deduction recognized for U.S. taxable
income purposes.
Comprehensive income. If any
“comprehensive income” as defined by
SFAS No. 130 is reported on this line,

describe the item(s) in detail as, for
example, “Foreign currency translation
adjustments” and “Gains and losses on
available-for-sale securities.”
Reserves and contingent liabilities.
Report on line 35 amounts related to
the change in each reserve or
contingent liability that is not required to
be reported elsewhere on Schedule
M-3. For example, amounts relating to
changes in reserves for litigation must
be reported on Part III, line 13, and
amounts relating to changes in
reserves for uncollectible accounts
receivable must be reported on Part III,
line 32. See Examples 9, 21, and 22.
Report on line 35 the amortization of
various items of prepaid expense, such
as prepaid subscriptions and license
fees, prepaid insurance, etc.
Report on line 35, column (a),
expenses included in net income
reported on Part I, line 11, that are
related to reserves and contingent
liabilities. Report on line 35, column (d),
amounts related to liabilities for
reserves and contingent liabilities that
are deductible in the current tax year
for U.S. income tax purposes.
Examples of items that must be
reported on line 35 include warranty
reserves, restructuring reserves,
reserves for discontinued operations,
and reserves for acquisitions and
dispositions. Only report on line 35
items that are not required to be
reported elsewhere on Schedule M-3,
Parts II and III. For example, the
expense for a reserve for inventory
obsolescence must be reported on Part
II, line 17.
The schedule of details attached to
the return for line 35 must separately

state and adequately disclose the
nature and amount of the expense
related to each reserve and/or
contingent liability. The appropriate
level of disclosure depends upon each
taxpayer’s operational activity and the
nature of its accounting records. For
example, if a corporation’s net income
amount reported in the income
statement includes anticipated
expenses for a discontinued operation
as a single amount, and its general
ledger or other books, records, and
workpapers provide details for the
anticipated expenses under more
explanatory and defined categories
such as employee termination costs,
lease cancellation costs, loss on sale of
equipment, etc., a supporting schedule
that lists those categories of expenses
and their details will satisfy the
requirement to separately state and
adequately disclose. In order to
separately state and adequately
disclose the employee termination
costs, it is not required that an
anticipated termination cost amount be
listed for each employee, or that each
asset (or category of asset) be listed
along with the anticipated loss on
disposition.
Example 22. Corporation Q is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2008 tax year and is required to file
Schedule M-3 for its 2009 tax year. On
July 1 of each year, Q has a fixed
liability for its annual insurance
premiums that provides a 12-month
coverage period beginning July 1
through June 30. In addition, Q
historically prepays 12 months of
advertising expense on July 1. On July

-24-

1, 2009, Q prepays its insurance
premium of $500,000 and advertising
expenses of $800,000. For financial
accounting purposes, Q capitalizes and
amortizes the prepaid insurance and
advertising over 12 months. For U.S.
income tax purposes, Q deducts the
insurance premium when paid and
amortizes the advertising over the
12-month period. In its financial
statements, Q treats the differences
attributable to the financial statement
treatment and U.S. income tax
treatment of the prepaid insurance and
advertising as temporary differences. Q
must separately state and adequately
disclose on Part III, line 35, its prepaid
insurance premium and report
$250,000 in column (a) ($500,000/12
months X 6 months), $250,000 in
column (b), and $500,000 in column
(d). Q must also separately state and
adequately disclose on Part II, line 28,
its prepaid advertising and report
$400,000 in column (a) and (d).

Line 36. Total Expense/
Deduction Items
Report on Part II, line 27, columns (a)
though (d), as applicable, the negative
of the amounts reported on Part III, line
36, columns (a) through (d), as
applicable. Report positive amounts as
negative and negative amounts as
positive. For example, if Part III, line 36,
column (a), reflects an amount of $1
million, then report on Part II, line 27,
column (a), ($1 million). Similarly, if Part
III, line 36, column (b), reflects an
amount of ($50,000), then report on
Part II, line 27, column (b), $50,000.

Instructions for Schedule M-3 (Form 1120)

Index

A
Abandonment . . . . . . . . . . . . . 19
Accounting standards, order of
priority . . . . . . . . . . . . . . . . . . . 6
Accrual to cash
adjustment . . . . . . . . . . . . . . 17
Acquisition:
Amortization . . . . . . . . . . . . . 23
Investment banking
fees . . . . . . . . . . . . . . . . . . . 22
Legal and accounting
fees . . . . . . . . . . . . . . . . . . . 22
Other costs . . . . . . . . . . . . . . 23
Adequately disclosed,
separately stated
and . . . . . . . . . . . . . . . . . . . . . 13
Adjustments . . . . . . . . . . . . . . . . 9
Allocations, limitations, and
carryovers . . . . . . . . . . . . . . . . 5
Amortization of
goodwill . . . . . . . . . . . . . . . . . 23
Amortization write-offs . . . . . 23
Awards . . . . . . . . . . . . . . . . . . . . 21
B
Bad debt expense . . . . . . . . . 23
C
Capital gains . . . . . . . . . . . . . . 19
Capital loss . . . . . . . . . . . . . . . . 19
Carryovers . . . . . . . . . . . . . . . . . 5
Charitable contribution . . . . . 22
Carryforward . . . . . . . . . . . . 22
Limitation . . . . . . . . . . . . . . . . 22
Compensation with section
162(m) limitation . . . . . . . . . 22
Comprehensive
income . . . . . . . . . . . . . . . . . . 23
Consolidated return . . . . . . . . . 3
Consolidated vs.
consolidating . . . . . . . . . . . . . 4
Consolidation . . . . . . . . . . . . . . 15
Consolidation for mixed
groups:
1120/L/PC . . . . . . . . . . . . . . . . 4
Contingent liabilities, reserves
and . . . . . . . . . . . . . . . . . . . . . 24
Corporate owned life
insurance premiums . . . . . 23
Cost of goods sold . . . . . . . . . 18
D
Damages . . . . . . . . . . . . . . . . . . 21
Deferred
compensation . . . . . . . . . . . 22
Deferred revenue . . . . . . . . . . 19
Depreciation . . . . . . . . . . . . . . . 23
Disposition of assets . . . . . . . 19
Disregarded entities . . . . . . . . 8
Dividend adjustments . . . . . . . 9
Dividends . . . . . . . . . . . . . . . . . . 14
Domestic production activities
deduction . . . . . . . . . . . . . . . 22

E
Entities:
Disregarded . . . . . . . . . . . . . . 8
Includible . . . . . . . . . . . . . . . . . 8
Entity considerations . . . . . . . . 3
Environmental remediation
costs . . . . . . . . . . . . . . . . . . . . 23
Equity method . . . . . . . . . . . . . 15
Equity method foreign
corporations . . . . . . . . . . . . . 14
Equity-based
compensation . . . . . . . . . . . 21
Exchange . . . . . . . . . . . . . . . . . 19
Expense/deduction:
Items with
differences . . . . . . . . . . . . 23
Expense/deduction items:
Total . . . . . . . . . . . . . . . . 20, 24
F
Filing requirements, other
issues . . . . . . . . . . . . . . . . . . . . 2
Financial information and net
income (loss)
reconciliation . . . . . . . . . . . . . 6
Financial statements:
Non-tax-basis . . . . . . . . . . . . 6
Tax-basis . . . . . . . . . . . . . . . . 6
Fines and penalties . . . . . . . . 21
Foreign:
Corporations . . . . . . . . . . . . 14
Distributions . . . . . . . . . . . . . 15
Dividends . . . . . . . . . . . . . . . 14
Entities, nonincludible . . . . 7
Partnerships . . . . . . . . . . . . . 15
Withholding taxes . . . . . . . 21
Form 4797 . . . . . . . . . . . . . . . . . 19
G
Gain/loss on disposition of
assets . . . . . . . . . . . . . . . . . . . 19
Gain/loss on sale . . . . . . . . . . 19
General instructions . . . . . . . . 1
Goodwill . . . . . . . . . . . . . . . . . . . 23
Groups, consolidated vs.
consolidating . . . . . . . . . . . . . 4
H
Hedging transactions . . . . . . 17
I
Includible corporations . . . . . 9,
15
Includible entities:
Eliminations . . . . . . . . . . . . . . 8
Other . . . . . . . . . . . . . . . . . . . . . 8
Inclusions . . . . . . . . . . . . . . . . . 14
Income:
Statement . . . . . . . . . . . . . . . . 6
Statement period . . . . . . . . . 7
Income (loss):
Differences . . . . . . . . . . . . . . 20
Equity method . . . . . . . . . . . 15
Income statement
period . . . . . . . . . . . . . . . . . . . . 9

Instructions for Schedule M-3 (Form 1120)

Interest:
Expense . . . . . . . . . . . . . . . . 21
Imputed . . . . . . . . . . . . . . . . . 19
Income . . . . . . . . . . . . . . . . . . 17
J
Judgments . . . . . . . . . . . . . . . . 21
L
Lease vs. purchase . . . . . . . . 23
Lease, sale vs. . . . . . . . . . . . . 18
Life insurance premiums,
corporate owned . . . . . . . . 23
Life insurance subgroup
reconciliation totals . . . . . . 20
Life/non-life loss limitation and
carryforward . . . . . . . . . . . . . . 5
Limitations . . . . . . . . . . . . . . . . . . 5
Long-term contracts . . . . . . . 19
M
Mark-to-market . . . . . . . . . . . . 17
Meals and
entertainment . . . . . . . . . . . 21
Minority interest . . . . . . . . . . . . 15
Mixed group:
1120/L/PC . . . . . . . . . . . . . . . . 4
Checkboxes . . . . . . . . . . . . . . 5
Subgroup
sub-consolidation . . . . . . 5
N
Nonincludible:
Foreign entities . . . . . . . . . . . 7
U.S. entities . . . . . . . . . . . . . . 8
Nonincludible entities:
Eliminations . . . . . . . . . . . . . . 8
Non-tax-basis financial
statements and tax-basis
financial statements . . . . . . 6
O
Original issue discount . . . . . 19
P
Parachute payments . . . . . . . 22
Partnerships:
Foreign . . . . . . . . . . . . . . . . . . 15
U.S. . . . . . . . . . . . . . . . . . . . . . 15
Pass-through entities . . . . . . 16
PC insurance subgroup
reconciliation totals . . . . . . 20
Pension and
profit-sharing . . . . . . . . . . . . 22
Post-retirement
benefits . . . . . . . . . . . . . . . . . 22
Publicly traded common
stock . . . . . . . . . . . . . . . . . . . . . 7
Purchase vs. lease . . . . . . . . 23
R
Reconciliation:
1120 subgroup . . . . . . . . . . 20
Life insurance . . . . . . . . . . . 20

-25-

Mixed group subgroup
sub-consolidation . . . . . . 5
PC insurance . . . . . . . . . . . . 20
Totals . . . . . . . . . . . . . . . . . . . 20
Reorganization:
Amortization . . . . . . . . . . . . . 23
Investment banking
fees . . . . . . . . . . . . . . . . . . . 22
Legal and accounting
fees . . . . . . . . . . . . . . . . . . . 22
Other costs . . . . . . . . . . . . . . 23
Reportable
transactions . . . . . . . . . . . . . 16
Reserves and contingent
liabilities . . . . . . . . . . . . . . . . . 24
Restatements . . . . . . . . . . . . . . . 7
Revenue,
unearned/deferred . . . . . . . 19
S
Sale vs. lease . . . . . . . . . . . . . 18
Schedule:
L ......................... 2
M-2 . . . . . . . . . . . . . . . . . . . . . . 3
Section 198 environmental
remediation costs . . . . . . . . 23
Section 481(a)
adjustments . . . . . . . . . . . . . 18
Section 78 gross-up . . . . . . . 14
Separately stated and
adequately disclosed . . . . 13
Start-up costs:
Amortization . . . . . . . . . . . . . 23
Statutory accounting
adjustments . . . . . . . . . . . . . . 9
Stock option expense . . . . . . 21
Subgroup sub-consolidation
1120 subgroup, 1120-PC
subgroup, and 1120-L
subgroup . . . . . . . . . . . . . . . . . 4
T
Tax-basis financial
statements . . . . . . . . . . . . . . . 6
U
U.S.:
Dividends . . . . . . . . . . . . . . . 15
Entities, nonincludible . . . . 8
Partnerships . . . . . . . . . . . . . 15
Unearned revenue . . . . . . . . . 19
W
Worldwide consolidated net
income (loss) . . . . . . . . . . . . . 7
Worthless stock losses . . . . . 19
Worthlessness . . . . . . . . . . . . . 19

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