1065 Schedule M-3 Instructions for Form 1065 Schedule M-3

2019

Department of the Treasury
Internal Revenue Service

Instructions for
Schedule M-3 (Form 1065)
Net Income (Loss) Reconciliation for Certain Partnerships
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Schedule M-3
(Form 1065) and its instructions, such as
legislation enacted after they were
published, go to IRS.gov/Form1065.

General Instructions
Applicable schedule and instructions.
Use the 2019 Schedule M-3 (Form 1065)
with these instructions for tax years ending
December 31, 2019, through December
30, 2020. For previous tax years, see the
applicable Schedule M-3 (Form 1065) and
instructions. (For example, use the 2018
Schedule M-3 (Form 1065) with the 2018
instructions for tax years ending
December 31, 2018, through December
30, 2019.)

Purpose of Schedule

1. The amount of total assets at the
end of the tax year reported on
Schedule L, line 14, column (d), is equal to
$10 million or more.
2. The amount of adjusted total assets
for the tax year is equal to $10 million or
more. See Total Assets and Adjusted
Total Assets, later.
3. The amount of total receipts for the
tax year is equal to $35 million or more.
Total receipts is defined in the instructions
for Codes for Principal Business Activity
and Principal Product or Service in the
Instructions for Form 1065.
4. An entity that is a reportable entity
partner with respect to the partnership (as
defined under these instructions) owns or
is deemed to own, directly or indirectly, an
interest of 50% or more in the
partnership's capital, profit, or loss on any
day during the tax year of the partnership.
A common trust fund or foreign
partnership must file Schedule M-3 if it
meets any of the tests discussed above.

Schedule M-3, Part I, asks certain
questions about the partnership's financial
statements and reconciles financial
statement net income (loss) for the
consolidated financial statement group to
income (loss) per the income statement
for the partnership.

Note. All references to a U.S. partnership
in these instructions refer to any entity
required to file Schedule M-3 (Form 1065),
where appropriate.

Schedule M-3, Parts II and III, reconcile
financial statement net income (loss) for
the partnership (per Schedule M-3, Part I,
line 11) to line 1 of the Analysis of Net
Income (Loss) found on Form 1065.

Completing Schedule M-3
(Form 1065)

Where To File

If the partnership is required to file (or
voluntarily files) Schedule M-3 (Form
1065), the partnership must file Form
1065 and all attachments and schedules,
including Schedule M-3 (Form 1065), at
the following address.
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011

Who Must File

Any entity that files Form 1065 must file
Schedule M-3 (Form 1065) if any of the
following is true.

May 06, 2019

Partnerships not required to file
Schedule M-3 may voluntarily file
Schedule M-3.

Form 1065 filers that are required to file
Schedule M-3 (Form 1065) and have at
least $50 million total assets at the end of
the tax year must complete Schedule M-3
(Form 1065) entirely.

Form 1065 filers that (a) are required to
file Schedule M-3 (Form 1065) and have
less than $50 million total assets at the
end of the tax year or (b) aren't required to
file Schedule M-3 (Form 1065) and
voluntarily file Schedule M-3 (Form 1065)
must either (i) complete Schedule M-3
(Form 1065) entirely or (ii) complete
Schedule M-3 (Form 1065) through Part I
and complete Schedule M-1 instead of
completing Parts II and III of Schedule M-3
(Form 1065). If the filer chooses to
complete Schedule M-1 instead of
completing Parts II and III of Schedule M-3
(Form 1065), line 1 of Schedule M-1 must
Cat. No. 38800Y

equal line 11 of Part I of Schedule M-3
(Form 1065).
For any part of Schedule M-3 (Form
1065) that is completed, all columns must
be completed, all applicable questions
must be answered, all numerical data
requested must be provided, any
statement required to support a line item
must be attached and provide the
information required for that line item. Any
partnership required to file Schedule M-3
must check all boxes above Part I that
apply for the reason(s) for which the
Schedule M-3 is required to be filed. A
partnership not required to file
Schedule M-3, but that is doing so
voluntarily, should check box E above Part
I.

Total Assets and Adjusted
Total Assets

The partnership should figure its adjusted
total assets using the Adjusted Total
Assets Worksheet, later.

For purposes of determining for
Schedule M-3 whether the partnership's
adjusted total assets (under these
instructions) equal $10 million or more, the
partnership's total assets at the end of the
tax year must be determined on an overall
accrual method of accounting unless both
of the following apply: (a) the tax return of
the partnership is prepared using an
overall cash method of accounting, and
(b) the partnership doesn't prepare
financial statements using, and isn't
included in financial statements prepared
on, an accrual basis.
See the instructions for Schedule M-3,
Part I, line 1, regarding non-tax-basis
income statements and related
non-tax-basis balance sheets to be used
in the preparation of Schedule M-3 and
the related non-tax-basis balance sheets
to be used in the preparation of
Schedule L.
In the case of a partnership year ending
because of a section 708 termination, the
total assets of the partnership at the end of
the year for determining the requirement
to file Schedule M-3 are determined
immediately before the section 708
termination and any actual or deemed
contribution or distribution of the
partnership assets under the provisions of
section 708.

Example 1.
1. U.S. partnership A, a limited liability
company (LLC), owns 60% of the income
and capital of U.S. partnership B, also an
LLC. For its tax year ending December 31,
2019, A prepares non-tax-basis GAAP
(generally accepted accounting principles)
consolidated financial statements with B
that report total assets at the end of the
year of $12 million. A files Form 1065 and
reports on its non-tax-basis
unconsolidated GAAP Schedule L total
assets at the end of the year of $7 million.
The $7 million total includes $3 million for
its investment in B under the equity
method of accounting. The amount of total
liabilities at the end of the year reported to
A's partners on Schedules K-1 is $5
million. A made distributions of $1 million
during the year reflected on
Schedule M-2, line 6. The amount of A's
adjusted total assets is $8 million for the
tax year. A has total receipts for the tax
year of $15 million. A has no reportable
entity partners (as defined under
Reportable Entity Partner Reporting
Responsibilities, later). A isn't required to
file Schedule M-3 under any of the four
tests discussed earlier. A may voluntarily
file Schedule M-3 for the tax year. If A
doesn't file Schedule M-3, it must
complete Schedule M-1. If A files
Schedule M-3, it must either (i) complete
Schedule M-3 entirely, or (ii) complete
Schedule M-3 through Part I and complete
Schedule M-1 instead of completing Parts
II and III of Schedule M-3.
2. Same facts as in Example 1.1
except that A has total receipts for 2019 of
$40 million. A must file Schedule M-3 for
2019 and either (i) complete
Schedule M-3 entirely, or (ii) complete
Schedule M-3 through Part I and complete
Schedule M-1 instead of completing Parts
II and III of Schedule M-3.
3. R, a U.S. partnership, files Form
1065 for the tax year ending December
31, 2019. R has total assets at the end of
the tax year reported on Schedule L,
line 14, column (d), of $7.5 million. The
aggregate amount of total liabilities at the
end of 2019 reported to R's partners on
Schedules K-1 is $5 million. R made
distributions of $3 million during 2019
reflected on Schedule M-2, line 6. R didn't
report a loss for 2019 on Schedule M-2,
line 3. R didn't report adjustments to
capital on Schedule M-2, line 4 or 7. R has
adjusted total assets for 2019 in the
tentative amount of $10.5 million, the sum
of $7.5 million plus $3 million (the amount
of distributions that must be added back to
determine adjusted total assets for 2019),
an amount that isn't less than the total
liabilities at the end of 2019 reported to R's
partners on Schedules K-1. Because R
has adjusted total assets of $10 million or
more for its tax year ending December 31,
2019, R must file Schedule M-3 for 2019

and either (i) complete Schedule M-3
entirely, or (ii) complete Schedule M-3
through Part I and complete Schedule M-1
instead of completing Parts II and III of
Schedule M-3.
4. Same facts as in Example 1.3
except that the amount of total liabilities at
the end of 2019 reported to R's partners
on Schedules K-1 is $11 million. R made
distributions of $1.5 million during 2019 as
reflected on Schedule M-2, line 6. R has
adjusted total assets for 2019 equal to $11
million, the greater of the tentative amount
of $9 million, the sum of $7.5 million plus
$1.5 million (the amount of distributions
that must be added back to determine
adjusted total assets for 2019), or $11
million (the amount of the total liabilities at
the end of 2019 reported to R's partners
on Schedules K-1). Because R has
adjusted total assets of $10 million or
more for its tax year ending December 31,
2019, R must file Schedule M-3 for 2019
and either (i) complete Schedule M-3
entirely, or (ii) complete Schedule M-3
through Part I and complete Schedule M-1
instead of completing Parts II and III of
Schedule M-3.
5. S, a U.S. partnership, files Form
1065 for the tax year ending December
31, 2019. S has total assets at the end of
2019 reported on Schedule L, line 14,
column (d), of $7.5 million. The amount of
total liabilities at the end of 2019 reported
to S's partners on Schedules K-1 is $5
million. S made no distributions during
2019 reflected on Schedule M-2, line 6. S
reported a loss of ($3 million) for 2019 on
Schedule M-2, line 3. S didn't report
adjustments to capital on Schedule M-2,
line 4 or 7. S has adjusted total assets for
2019 in the tentative amount of $10.5
million, the sum of $7.5 million plus $3
million (the amount of the loss stated as a
positive amount that must be added back
to determine adjusted total assets for
2019). This tentative amount is compared
to the total liabilities at the end of 2019 as
reported to S's partners on Schedules K-1,
and the greater of the two amounts is
considered the adjusted total assets.
Because S has adjusted total assets of
$10 million or more for its tax year ending
December 31, 2019, S must file
Schedule M-3 for 2019 and either (i)
complete Schedule M-3 entirely, or (ii)
complete Schedule M-3 through Part I and
complete Schedule M-1 instead of
completing Parts II and III of
Schedule M-3.
6. T, a U.S. partnership, files Form
1065 for the tax year ending December
31, 2019. T has total assets at the end of
the tax year reported on Schedule L,
line 14, column (d), of $7.5 million. The
amount of total liabilities at the end of
2019 reported to T's partners on
Schedules K-1 is $5 million. T made no
distributions during 2019 reflected on
-2-

Schedule M-2, line 6. T didn't report a loss
for 2019 on Schedule M-2, line 3. T didn't
report adjustments to capital on
Schedule M-2, line 7, but did report a
negative adjustment of ($3 million) on
Schedule M-2, line 4. T has adjusted total
assets for 2019 in the tentative amount of
$10.5 million, the sum of $7.5 million plus
$3 million (the amount of the negative
adjustment stated as a positive amount
that must be added back to determine
adjusted total assets for 2019), an amount
that isn't less than the total liabilities at the
end of 2019 reported to T's partners on
Schedules K-1. Because T has adjusted
total assets of $10 million or more for its
tax year ending December 31, 2019, T
must file Schedule M-3 for 2019 and either
(i) complete Schedule M-3 entirely, or (ii)
complete Schedule M-3 through Part I and
complete Schedule M-1 instead of
completing Parts II and III of
Schedule M-3.
7. Z has $50 million in total assets at
the end of its 2019 tax year ending
December 31, 2019, and files Form 1065.
Z must file Schedule M-3 and complete it
entirely.

Reportable Entity Partner
Reporting Responsibilities

For the purposes of these instructions, a
reportable entity partner with respect to a
partnership filing Form 1065 is an entity
that:
• Owns or is deemed to own, directly or
indirectly, under these instructions a 50%
or greater interest in the income, loss, or
capital of the partnership on any day of the
tax year; and
• Was required to file Schedule M-3 on its
most recently filed U.S. federal 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% 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% or more of
partnership income, loss, or capital on any
day of the partnership tax year is deemed

Adjusted Total Assets Worksheet

Keep for Your Records

1. Enter total assets at the end of the tax year on Schedule L,
line 14, column (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.

2. Enter capital distributions on Schedule M-2, lines 6a and 6b
(shown as a positive amount) . . . . . . . . . . . . . . . . . . . . .

2.

3. Enter any loss reported on Schedule M-2, line 3 (shown as a
positive amount) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.

4. Enter the amount of any positive adjustment on Schedule M-2,
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.

5. Enter the amount of any negative adjustment on Schedule M-2,
line 4 (shown as a positive amount) . . . . . . . . . . . . . . . . .

5.

6. Add lines 1 through 5

............................

6.

7. Enter combined total liabilities (recourse and nonrecourse) on all
Schedules K-1 (Form 1065), Part II, Item K . . . . . . . . . . . . .

7.

8. Adjusted Total Assets. Enter the greater of line 6 or
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.

Note. For line 2 above, if the partnership reflects partner capital account changes resulting from the sale of a
partnership interest on Schedule M-2 as matching contributions and distributions (on lines 2a and 2b and on lines 6a
and 6b, respectively), reduce the amounts shown on lines 6a and 6b by such matching amounts.

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% 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. Employer identification number
(EIN), if applicable.
4. Entity or organization type.
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.
For more information, see Item D.
Reportable Entity Partner, later.
Example 2.
1. 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% owned on September 16,
2019. On September 15, 2019, P filed a
consolidated tax return on Form 1120 and
was required to file Schedule M-3 for the
tax year ending December 31, 2018. On
September 16, 2019, DS1, DS2, DS3,
FS1, and FS2 each acquire a 10%
partnership interest in partnership K,
which files Form 1065 for the tax year
ending December 31, 2019. P is deemed
to own, directly or indirectly, under these
instructions all corporate and partnership
interests of DS1, DS2, and DS3, as the
parent of the tax consolidation group, and
therefore is deemed to own 30% of K on
September 16, 2019. 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% or more of each corporation by vote
and therefore is deemed to own 20% of K
on September 16, 2019. P is therefore
deemed to own 50% of K on September
16, 2019. P owns or is deemed to own,
directly or indirectly, under these
instructions 50% or more of K on
September 16, 2019, and was required to
file Schedule M-3 on its most recently filed
-3-

U.S. income tax return filed before that
date. Therefore, P is a reportable entity
partner of K as of September 16, 2019. On
October 5, 2019, P reports to K, as it is
required to do, that P is a reportable entity
partner as of September 16, 2019,
deemed to own under these instructions a
50% interest in K. K is therefore required
to file Schedule M-3 when it files its Form
1065 for its tax year ending December 31,
2019.
2. Throughout 2019, A, an LLC filing
Form 1065 for calendar year 2019, owns,
as its only asset, 50% of each of B, C, D,
and E, each also an LLC filing Form 1065
for calendar year 2019. A is owned by
individuals and S corporations not
required to file Schedule M-3 for 2018,
2019, or 2020. B, C, D, and E are owned
by A and by individuals and S
corporations not required to file
Schedule M-3 for 2018, 2019, or 2020. For
the partnership tax years ending
December 31, 2019, each of B, C, D, and
E has no year-end liabilities, $3 million in
total assets and $6 million in adjusted total
assets (the difference equal to the
distributions by each in 2019), and 2019
total receipts of $20 million. As of
December 31, 2019, no owner, direct or
indirect, of B, C, D, or E was required to
file Schedule M-3 on its most recently filed
U.S. income tax return or return of income.
None of B, C, D, or E is required to file
Schedule M-3 for 2019. For the
partnership tax year ending December 31,
2019, A has no year-end liabilities, $6
million in total assets and $12 million in
adjusted total assets (the difference equal
to the distributions in 2019), and 2019 total
receipts of $6 million. As of December 31,
2019, no owner, direct or indirect, of A
was required to file Schedule M-3 on its
most recently filed U.S. income tax return.
A must file Schedule M-3 when it files its
Form 1065 for 2019 because A has
adjusted total assets of $10 million or
more.
3. Same ownership facts as in
Example 2.2 continued to calendar year
2020. On March 3, 2020, A files its Form
1065 with Schedule M-3 for the
partnership tax year ending December 31,
2019. As of March 4, 2020, A becomes a
reportable entity partner with respect to
any partnership in which it owns or is
deemed to own, directly or indirectly,
under these instructions a 50% or greater
interest in the income, loss, or capital of
the partnership. A owns 50% of each of B,
C, D, and E and is therefore a reportable
entity partner with respect to each as of
March 4, 2020, the day after it filed its
2019 Form 1065 with a required
Schedule M-3. On March 20, 2020, A
reports to B, C, D, and E, as it is required
to do within 30 days of March 4, that it is a
reportable entity partner owning a 50%
interest. Each of B, C, D, and E is required

to file Schedule M-3 for 2020 because
each has a reportable entity partner. A will
determine if it must file Schedule M-3 for
2020 based on its separate facts for 2020.
4. Same ownership facts as in
Example 2.2 for calendar year 2019,
except that A is owned 50% by
corporation Z that was first required to file
Schedule M-3 for its corporate tax year
ending December 31, 2018, and that filed
its Form 1120 with Schedule M-3 for 2018
on September 15, 2019. As of September
16, 2019, Z was a reportable entity partner
with respect to A and, through A, with
respect to B, C, D, and E. On October 5,
2019, 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% interest.
Therefore, because Z was a reportable
entity partner for 2019, each of A, B, C, D,
and E is required to file Schedule M-3 for
2019, regardless of whether it would
otherwise be required to file Schedule M-3
for that year.

Other Form 1065 Schedules
Affected by Schedule M-3
Requirements
Schedule L
If a non-tax-basis income statement and
related non-tax-basis balance sheet are
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 the
discussion in the instructions for
Schedule M-3, Part I, line 1, 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 at the end of the tax year
shown on Schedule L, line 14, column (d),
must equal the total assets of the
partnership as of the last day of the tax
year, and must be the same total assets
reported by the partnership in the
non-tax-basis financial statements, if any,
used for Schedule M-3. If the partnership
prepares non-tax-basis financial
statements, Schedule L must report the
non-tax-basis financial statement total
assets. If the partnership doesn't prepare
non-tax-basis financial statements,
Schedule L must be based on the
partnership's books and records. The
Schedule L balance sheet can show
tax-basis balance sheet amounts if the
partnership is allowed to use books and
records for Schedule M-3 and the

partnership's books and records reflect
only tax-basis amounts.
Generally, total assets at the beginning
of the year (Schedule L, line 14, column
(b)) must equal total assets at the close of
the prior year (Schedule L, line 14, 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
statement 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 technical terminations
and mergers.
For purposes of measuring total assets
at the end of the year, the partnership's
assets may not be netted or reduced by
partnership 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
another partnership may be shown as
appropriate under the partnership's
non-tax-basis method of accounting,
including, if required by the partnership's
reporting methodology, the equity method
of accounting for investments. If
Schedule L is prepared on a tax-basis
method, an investment by the partnership
in another partnership must be shown as
an asset and measured by the
partnership's adjusted basis in its
partnership interest. Any liabilities
contributing to such adjusted basis must
be shown on Schedule L as partnership
liabilities.
Example 3. A, an LLC, files Form
1065 for calendar year 2019. B, a general
partnership, also files Form 1065 for
calendar year 2019. A is a general partner
in B. A's capital account in B at the close
of 2019 is negative $4 million. This reflects
A's 2019 contribution to B's capital of $2
million reduced by A's share of 2019
losses passing through to it from B, $6
million. A's adjusted basis in B on
December 31, 2019, is $16 million, its $4
million negative tax capital account in B
plus its $20 million share of B's liabilities
under section 752. A prepares only
tax-basis income statements and balance
sheets. On its Schedule L, A reports as an
asset the adjusted basis of its investment
in B, $16 million. A also reports its $20
million share of B's liabilities in the
liabilities section of Schedule L. A doesn't
report its $4 million negative capital
account in B on Schedule L.
Example 4. Same facts as in
Example 3, except that B is an LLC and A
is a member of B. None of B's liabilities
are recourse with respect to A. A isn't
obligated to restore any deficit capital
account in B. A prepares non-tax-basis
-4-

income statements and balance sheets
under an accounting method that requires
the use of the equity method of accounting
to account for its investment in B. On its
non-tax-basis books and records, A
initially reports $2 million as its investment
in B, the amount of A's capital contribution.
A then reduces its $2 million investment in
B by its share of B's allocable losses.
Because A's allocable share of B's losses
is $6 million, A's investment in B under the
equity method is reduced to $0. Because
A isn't liable to repay any of B's liabilities
and isn't obligated to restore any deficit
with respect to its capital account in B, A
doesn't report any of B's liabilities on A's
Schedule L balance sheet.

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, line 7, 8, or
9, 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.

Specific Instructions
Item D. Reportable Entity
Partner

On Schedule M-3, page 1, if the
partnership has any reportable entity
partners for the year, check Item D. A
partnership must report the name, EIN (if
applicable), and maximum percentage of
actual or deemed ownership of each
reportable entity partner if there are one or
two reportable entity partners for the tax
year of the partnership, or, if there are
more than two reportable entity partners
for the tax year of the partnership, of the
two reportable entity partners with the
largest maximum percentage of actual or
deemed ownership for the tax year of the
partnership. The maximum percentage of
actual or deemed ownership for a
reportable entity partner for a tax year of
the partnership is the maximum
percentage interest owned or deemed

owned under these instructions by the
reportable entity partner in the
partnership's capital, profit, or loss on any
day during the tax year of the partnership.
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 received under these
instructions from reportable entity
partners. See Reportable Entity Partner
Reporting Responsibilities, earlier.

Part I. Financial
Information and Net
Income (Loss)
Reconciliation
Line 1. Questions Regarding
the Type of Income Statement
Prepared

For lines 1 through 11, use only the
financial statements of the U.S.
partnership filing Form 1065. If the U.S.
partnership filing Form 1065 is controlled
by another entity, the U.S. partnership
must use for its Schedule M-3, Part I, its
own financial statements and not the
financial statements of the controlling
entity.

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 neither a
non-tax-basis income statement nor a
non-tax-basis balance sheet were
prepared for any purpose and the books
and records of the partnership reflect only
tax-basis amounts. The partnership 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,
members or partners, 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
Securities and Exchange Commission
(SEC) for the period ending with or within
the tax year, the partnership must check
“Yes” for line 1a and use that income
statement for Schedule M-3. If Form 10-K
isn't 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 partnership must check “Yes” for
line 1b and use that income statement for
Schedule M-3. If Form 10-K isn't filed and

no certified non-tax-basis income
statement is prepared but an unaudited
non-tax-basis income statement is
prepared for the period ending with or
within the tax year, the partnership must
check “Yes” for 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 must be used.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Any other International Accounting
Standards (IAS).
4. Any regulatory accrual accounting.
5. Any other accrual accounting
standard.
6. Section 704(b) book accounting.
7. Any other fair market value
reporting 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
above must be used.
If no non-tax-basis financial statements
are prepared for the U.S. partnership filing
Schedule M-3, the U.S. partnership must
check “No” on questions 1a, 1b, and 1c,
skip lines 2 through 3b, and enter the net
income (loss) per the books and records
of the U.S. partnership on line 4a.

Consolidated Financial Statements
If a partnership filing a Schedule M-3
(a) is included in the non-tax-basis
consolidated financial statements of a
group (consolidated financial statement
group) with an entity parent filing a U.S tax
return and Schedule M-3, (b) has its
income (loss) included and removed by
the entity parent on that entity parent's
Schedule M-3, Part I, and (c) doesn't have
a separate non-tax-basis financial
statement (certified or otherwise) of its
own, the partnership must answer
questions 1a, 1b, and 1c as appropriate
for its own tax return and must report on its
own Schedule M-3, as appropriate, the
amount for the partnership's net income
(loss) that is equal to the amount included
and removed in the entity parent's
Schedule M-3, Part I. However, if in the
circumstances described immediately
above, the partnership does have
separate non-tax-basis financial
-5-

statements (certified or otherwise) of its
own, independent of the amount of the
partnership's net income included in the
consolidated financial statements with the
entity parent, the partnership must answer
questions 1a, 1b, and 1c, as appropriate,
for its own tax return, based on its own
separate non-tax-basis income statement,
and must report on line 4a the net income
(loss) amounts shown on its separate
income statement.

Lines 2 and 3. Questions
Regarding Income Statement
Period and Restatements

Enter the beginning and ending dates on
line 2 for the partnership's annual income
statement period ending with or within the
current tax year.
The questions on lines 3a and 3b,
regarding income statement restatements,
refer to the worldwide consolidated
income statement issued by the
partnership filing Form 1065 and used to
prepare Schedule M-3. Answer “Yes” on
lines 3a and/or 3b if the partnership's
annual income statement has been
restated for any reason. Attach a short
statement 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 statement isn't
required to report restatements on an
entity-by-entity basis.

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

In completing Schedule M-3, the
partnership must use financial statement
amounts from the financial statement type
checked “Yes” on line 1, or from its books
and records if line 1c is checked “No.” If
line 1a is checked “Yes,” report on line 4a
the net income amount reported in the
income statement presented to the SEC
on the partnership's Form 10-K.
If a partnership 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 line 2.
If the partnership prepares
non-tax-basis financial statements and the
income statement period differs from the
partnership's tax year, the income
statement period indicated on line 2
applies for purposes of lines 4a through 8.
If the partnership doesn't prepare
non-tax-basis financial statements and

has checked “No” on line 1c, enter the net
income (loss) per the books and records
of the partnership on line 4a.
Check the appropriate box on line 4b to
indicate which of the following accounting
standards was used for line 4a.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Section 704(b).
4. Tax-basis.
5. Other (specify).
Report on lines 5a through 10, as
instructed below, all adjustment amounts
required to adjust worldwide net income
(loss) reported on line 4a (whether from
financial statements or books and records)
to net income (loss) of the partnership that
must be reported on line 11. Report on
line 12a the worldwide consolidated total
assets and total liabilities amounts for the
partnership using the same financial
statements (or books and records) used
for the worldwide consolidated income
(loss) amount reported on line 4a.

Line 5. Net Income (Loss) of
Nonincludible Foreign Entities

Remove the financial statement net
income (line 5a) or loss (line 5b) of each
foreign entity that is included on line 4a
and isn't the partnership (nonincludible
foreign entity). In addition, on line 8, adjust
for consolidation eliminations and correct
for minority interest and intercompany
dividends between any nonincludible
foreign entity and the partnership filing
Form 1065. Don't remove in Part I the
financial statement net income (loss) of
any nonincludible foreign entity accounted
for on line 4a using the equity method.
Attach a supporting statement 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 foreign
entity and include those assets and
liabilities amounts in the total assets and
total liabilities reported on Part I, line 12b.
The amounts of income (loss) detailed on
the supporting statement 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 statement that aren't
reportable on line 8, the net amounts of all
such consolidation and elimination entries
must be reported on a separate line on the
attached statement, 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 statement 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 line 8 should be reported on
the attached supporting statement 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 statement net
income (line 6a) or loss (line 6b) of each
U.S. entity that is included on line 4a and
isn't an includible entity in the partnership
return (nonincludible U.S. entity). In
addition, on line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends
between any nonincludible U.S. entity and
any includible entity. Don't remove in Part I
the financial statement net income (loss)
of any nonincludible U.S. entity accounted
for on line 4a using the equity method.
Attach a supporting statement that
provides the name, EIN (if applicable),
and net income (loss) included on line 4a
that is removed on line 6a or 6b 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 statement 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 statement that aren't
reportable on line 8, the net amounts of all
such consolidation and elimination entries
must be reported on a separate line on the
attached statement, 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 statement should report the
income (loss) of each separate
nonincludible U.S. legal entity from each
-6-

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
line 8 should be reported on the attached
supporting statement as a net amount on
a line separate and apart from lines that
report each nonincludible U.S. entity's
separate net income (loss).

Lines 7a and 7b. Net Income
(Loss) of Other Foreign
Disregarded Entities and Net
Income (Loss) of Other U.S.
Disregarded Entities

Include on line 7a or 7b the financial net
income or (loss) of each disregarded
entity in the U.S. tax return that isn't
included in the consolidated financial
group, and therefore not included in the
income reported on line 4a, but that is
included on line 11. Include on line 7a the
financial income or (loss) of any foreign
disregarded entity that isn't included in the
income reported on line 4a but that is
included on line 11 (other foreign
disregarded entities). Include on line 7b
the financial income or (loss) of any U.S.
disregarded entity that isn't included in the
income reported on line 4a but that is
included on line 11 (other U.S.
disregarded entities). In addition, on line 8,
adjust for consolidation eliminations and
correct for minority interest and
intercompany dividends for any other
disregarded entity.
Attach a supporting statement that
provides the name, EIN, and net income
(loss) per the financial statement or books
and records included on line 7a or 7b for
each separate foreign or U.S. disregarded
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 reported on Part I, line 12d.
The amounts of income (loss) detailed on
the supporting statement should be
reported for each separate other
disregarded 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
separate other disregarded entities whose
income (loss) is reported on the attached
statement that aren't reportable on line 8,
the net amounts of all such consolidation
and elimination entries must be reported
on a separate line on the attached
statement, so that the separate financial
accounting income (loss) of each separate
other disregarded entity remains
separately stated.
For example, if the net income (after
consolidation and elimination entries) of a
sub-consolidated group of other foreign

disregarded entities is being reported on
line 7a, the attached supporting statement
should report the income (loss) of each
separate other foreign disregarded entity
from each disregarded 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 line 8
should be reported on the attached
supporting statement as a net amount on
a line separate and apart from lines that
report each other foreign disregarded
entity's separate net income (loss).

Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities and
Nonincludible Entities

Adjustments on 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 aren't eliminated, in
order to report the correct total amount on
line 11. Also, additional consolidation
entries and elimination entries may be
necessary on line 8 related to transactions
between includible entities that are in the
consolidated financial statement group
and other includible entities that aren't in
the consolidated financial statement group
but that are reported on line 7a or 7b in
order to report the correct total amount on
line 11.
Include on 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 line 4a, required as a result of
removing amounts on 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 line 7a or 7b. This is necessary in order
that the consolidation entries and
intercompany elimination entries included
in the amount reported on 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 line 4a that relate to the net
income of entities removed on 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 eliminate any
intercompany dividends between entities
whose income is included on line 7a or 7b
and other entities included in the U.S.
income tax return.

If an entity owner of an interest in
another entity (a) accounts for the interest
in the other entity in the owner's separate
general ledger on the equity method, and
(b) fully consolidates the other entity in the
owner's consolidated financial statements,
but that entity isn't includible in the owner's
Form 1065, then, as part of reversing all
consolidation and elimination entries for
the nonincludible entity, the owner must
reverse on line 8 the elimination of the
equity income inclusion from the other
entity. If the owner doesn't account for the
other entity on the equity method on its
own general ledger, it won't have
eliminated the equity income for
consolidated financial statement
purposes, and therefore will have no
elimination of equity income to reverse.
The attached supporting statement for
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 isn't necessary, but it is permitted, to
report on line 8 intercompany eliminations
that net to zero, 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 the
partnership to reconcile differences
between the partnership's income
statement period reported on line 2 and
the partnership's tax year. Attach a
statement describing the adjustment.

Line 10. Other Adjustments to
Reconcile to Amount on Line 11

Include on line 10 any other adjustments
to reconcile net income (loss) on line 4a
through line 9, with net income (loss) of
the partnership reported on line 11.

For any adjustment reported on line 10,
attach a supporting statement with an
explanation of each net adjustment
included on line 10.

Line 11. Net Income (Loss) per
Income Statement of the
Partnership

Report on line 11 the net income (loss) per
the income statement (or books and
records, if applicable) of the partnership.
Amounts reported in column (a) of Parts II
and III must be reported on the same
accounting method as is used to report the
amount of net income (loss) per income
statement of the partnership on line 11.
Don't, in any event, report on line 11
the net income of entities other than the
partnership filing Form 1065 for the tax
year. For example, it isn't permissible to
-7-

remove the income of nonincludible
entities on lines 5 and/or 6, above, then to
add back such income on lines 7 through
10, such that the amount reported on
line 11 includes the net income of entities
not includible in the U.S. income tax
return. A principal purpose of
Schedule M-3 is to report on line 11 only
the financial accounting net income of only
the partnership (including any other
includible entities) filing Form 1065.
Whether or not the partnership
prepares financial statements, line 11
must include all items that impact the net
income (loss) of the partnership even if
they aren't recorded in the profit and loss
accounts in the partnership's general
ledger, including, for example, all
post-closing adjusting entries (including
workpaper adjustments) and dividend
income or other income received from
nonincludible entities. If the partnership
prepares unconsolidated financial
statements using the same accounting
method used to determine worldwide
consolidated net income (loss) for Part I,
line 4, and if it uses the equity method for
investments, the amount reported on Part
I, line 11, will equal the amount of the
unconsolidated net income (loss) reported
on the unconsolidated financial
statements. See Examples 5.3, 5.4, and
5.5.
Example 5.
1. U.S. partnership P owns 60% of
corporation DS1 which is fully
consolidated in P's financial statements. P
doesn't 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 line 4a.
P must remove the $100 net income of
DS1 on line 6a. P must reverse on line 8
the elimination of the $40 minority interest
net income of DS1. In addition, P reverses
its elimination of the $30 intercompany
dividend in its financial statements on
line 8. The net result is that P includes the
$30 dividend from DS1 on line 11 and on
Part II, line 6, column (a). P's dividend
income included on the tax return from
DS1 must be reported on Part II, line 6,
column (d).
2. U.S. partnership C owns 60% of the
capital and profits interests in U.S. LLC N.
C doesn't 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 line 4a.
C must remove the $100 net income of
N on line 6a. C must reverse on 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 line 11 or on
Part II, line 7, column (a). C's taxable
income from N must be reported by C on
Part II, line 7, column (d).
3. U.S. partnership 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
line 4a.
P must remove the $100 net income of
DS1 on line 6a. P must reverse on 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 on line 11 and
on Part II, line 5, column (a). P's dividend
income on the tax return from its
investment in DS1 must be reported on
Part II, line 6, column (d).
4. U.S. partnership 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
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 line 4a.
C must remove the $100 net income of
N on line 6a. C must reverse on 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 line 11 and on Part II,
line 7, column (a). C's taxable income from
N must be reported by C on Part II, line 7,
column (d).

5. U.S. partnership 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, consolidates N,
and includes $60 of net income ($100 less
the minority interest of $40) on line 4a.
C must remove the $100 net income of
N on line 6a. C must reverse on 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 line 11 and on Part II,
line 7, column (a). C's taxable income from
N must be reported by C on Part II, line 7,
column (d).
6. U.S. partnership P owns 100% of
the stock of U.S. LLC Q, a disregarded
entity. Q is included in P's federal income
tax return, even though Q isn't included in
P's consolidated financial statements on
either a consolidated basis or on the
equity method. Q 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 Q. Because Q is a
disregarded entity, 100% of the net
income of both P and Q must be reported
on P's Form 1065 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 line 4a and reports
Q's net income of $100 on line 7b as a
U.S. disregarded entity not included on
line 4a, but included on line 11. Then, in
order to reflect the full consolidation of the
financial accounting net income of P and
Q on line 11, the following consolidation
and elimination entry is reported on line 8:
offsetting entries to remove the $40 of
interest income received from Q included
by P on line 4a, and to remove the $40 of
interest expense of Q included in line 7b
for a net change of zero. The result is that
line 11 reports $1,140: $1,040 from
line 4a, and $100 from line 7. Stated
another way, line 11 includes the entire
$1,000 net income of P, measured before
recognition of the intercompany interest
income from Q and the consolidation of Q
operations, plus the entire $140 net
income of Q, measured before interest
expense to P. P isn't required to include on
-8-

the attached supporting statement for
line 8 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
partnerships that file Schedule M-3.
Report on lines 12a, 12b, 12c, and 12d the
total amounts (not just the partnership's
share) of assets and liabilities of entities
included or removed on Part I, lines 4, 5,
6, and 7. All assets and liabilities reported
on Part I, lines 12a through 12d, must be
reported as positive amounts. On line 12a,
enter the worldwide consolidated total
assets and total liabilities of all of the
entities included in completing Part I,
line 4. 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 of
the entities removed in completing Part I,
line 6. On line 12d, enter the total assets
and total liabilities of the entities included
in completing Part I, line 7.

Parts II and III
General Reporting Information

A schedule or statement may be attached
to any line even if none is required.
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included on Part I, line 11,
and report in column (d) the amount
included on line 1 of the Analysis of Net
Income (Loss) found on Form 1065.
Note. Part II, line 26, column (a), must
equal Part I, line 11, and column (d) must
equal line 1 of the Analysis of Net Income
(Loss) found on Form 1065. Thus, column
(d) on Part II and Part III must include
certain of the separately stated items on
Schedule K.
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).
If financial statements are prepared by
the partnership under GAAP, differences
that are treated as temporary under 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, under GAAP, a
temporary difference affects (creates,
increases, or decreases) a deferred tax
asset or liability.

If the partnership doesn't prepare
financial statements, or the financial
statements aren't prepared under GAAP,
report in column (b) any difference that the
partnership 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 partnership believes
won't reverse in a future tax year (and isn't
the reversal of such a difference that arose
in a prior tax year).
If the partnership 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. At the end of Partnership
A’s first tax year, December 31, 2019, it
wasn't required to file Schedule M-3 for
any reason.
A may elect to file Schedule M-3
instead of completing Schedule M-1.
If A elects to file Schedule M-3, it must
either (i) complete Schedule M-3 entirely,
or (ii) complete Schedule M-3 through Part
I and complete Schedule M-1 instead of
completing Parts II and III of
Schedule M-3.
If A elects to complete Schedule M-3
entirely, it must complete all columns of
Parts II and III.
If A completes Schedule M-3 through
Part I and completes Schedule M-1
instead of completing Parts II and III of
Schedule M-3, line 11 of Part I of
Schedule M-3 must equal line 1 of
Schedule M-1.

Reporting Requirements for
Parts II and III
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 10, Items
relating to reportable transactions,
regardless of whether the amount would
otherwise be reported on Schedule M-3,
Part II or Part III. 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 10.
A partnership 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 partnership's current year
financial statement net income (loss) or in
an income or expense account maintained
in the partnership's books and records,
even if there is no difference between that
amount and the amount included in net
income (loss) for tax purposes unless (a)
otherwise instructed 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 10. For
example, with the exception of interest
income reflected on a Schedule K-1
received by the partnership as a result of
the partnership's investment in a
partnership or other pass-through entity,
all interest income included on Part I,
line 11, whether from unconsolidated
affiliated entities, 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 11,
column (a). Likewise, all fines and
penalties included on 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 7, column (a), regardless of
the government authority that imposed the
fines or penalties, regardless of whether
the fines or penalties are civil or criminal,
and regardless of the classification,
nomenclature, or terminology attached to
the fines or penalties by the imposing
authority in its actions or documents.
If a partnership 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
partnership 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 partnership's books and
records, the partnership 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 partnership 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 partnership's financial statements or
exists in the partnership'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
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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 26, 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 7, column (a), regardless of the
terminology or nomenclature attached to
them by the partnership 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 lines 1 through
21.) If an income item is described on
lines 1 through 21, 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
doesn't have a difference, and the item
isn't described on lines 1 through 21,
report and describe the entire amount of
the item on line 22.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
(See lines 1 through 29.) If an expense
item is described on lines 1 through 29,
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
doesn't have a difference and the item
isn't described on lines 1 through 29,
report and describe the entire amount of
the item on line 30.
If there is no difference between the
financial accounting amount and the
amount reported for tax purposes of an
entire item of income, loss, expense, or
deduction and the item isn't described or
included on Part II, lines 1 through 22, or
Part III, lines 1 through 30, report the entire
amount of the item in columns (a) and (d)
of Part II, line 25.
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 7 through 21, or
Part III, lines 1 through 29, and the line
doesn't indicate to “attach schedule” or
“attach details,” and the specific
instructions for the line don't call for an
attachment of a schedule or explanation,
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) is reported in
the applicable columns of the applicable
line. See the instructions for Part II, lines 1
through 9, for specific additional
information required to be provided for
these particular lines.
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 statement
required to be attached, even if the
amounts are below a certain dollar
amount.
Required statements for Part II,
line 22, and Part III, line 30. A separate
statement must be attached to
Schedule M-3 (Form 1065) that includes a
detailed description of each item and
adjustment entered on Part II, line 22, and
Part III, line 30.
The description for each amount
entered in column (a) must be readily
identifiable to the name of the account in
the financial statements or books and
records of the taxpayer, under which the
amount in column (a) was recorded in the
accounting records. Also, the description
for each amount entered in column (a)
must include detailed information
supporting each adjustment reported in
columns (b) and (c), including how the
adjustment is identified in the accounting
records. The entire description is
considered the tax description for the
amount reported in column (d) for each
item reported on Part II, line 22, or Part III,
line 30.
Each description should adequately
describe all four columns of Part II, line 22,
or Part III, line 30. If additional information
is required to provide an acceptable
description, provide a supporting
statement.
Example 7. Partnership B prepares
GAAP financial statements. In prior years,
B acquired intellectual property (IP) and
goodwill. 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. The
goodwill isn't 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. B must
report the amortization attributable to the
IP on Part III, line 21, 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 19, and report
$5,000 in column (a), a permanent
difference of ($5,000) in column (c), and
$0 in column (d).

other two reserves, coupons outstanding,
and warranty costs, on a required,
attached statement that supports the
amounts on Part III, line 30. D must also
provide a description for each reserve that
meets the requirements for Part III, line 30,
discussed earlier under Required
statements for Part II, line 22, and Part III,
line 30. In this example, an acceptable
description for warranty costs would be
“Future Warranty Expense Reserve.”

Example 8. Partnership C is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. C placed in service 10
depreciable fixed assets in a previous tax
year. C's total depreciation expense for its
2019 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 2019 tax year for the other
five assets is $40,000 for income
statement purposes and $30,000 for U.S.
income tax purposes. 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 25, for its 2019 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 10. Partnership E is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. On January 2, 2019, E
establishes an allowance for uncollectible
accounts receivable (bad debt reserve) of
$100,000. During 2019, E increases the
reserve by $250,000 for additional
accounts receivable that may become
uncollectible. Additionally, during 2019, E
decreases the reserve by $75,000 for
accounts receivable that were discharged
in bankruptcy during 2019. The balance in
the reserve account on December 31,
2019, 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 2019 financial
statements but aren't deductible for U.S.
income tax purposes in 2019. However,
the $75,000 decrease to the reserve is
deductible for U.S. income tax purposes in
2019. 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 26, Bad debt expense, for its 2019 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 9. Partnership D is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. On December 31, 2019, 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 2019 financial statements
but aren't deductions for U.S. income tax
purposes in 2019. 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 26, Bad debt expense, and must
separately state and adequately disclose
the amounts attributable to each of the
-10-

Note. There is no need to add the title of
the reserve account to the description if
the account name for the amount in
column (a) is already part of the
adjustment description.

Example 11. Partnership F had $100
of meals expenses, $100 of entertainment
expenses, and therefore deducted $200
on its income statement. For federal
income tax purposes, the $100 of meals
expenses is subject to section 274(n)
(50% allowance) and the $100 of
entertainment expenses is subject to
section 274(a) (0% allowance). F must
report on Part III, line 6: $200 in column
(a), $150 in column (c), and $50 in column
(d). F must report all of its meals and
entertainment expenses only on this line
whether there is a difference or not
because meals and entertainment
expenses are specifically described.

Part II. Reconciliation of
Net Income (Loss) per
Income Statement of
Partnership With Income
(Loss) per Return
Lines 1 Through 9. Additional
Information for Each Entity

For any item reported on lines 1 or 3
through 5, attach a supporting statement
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 lines 2 and 6
through 9 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 on 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
lines 2 through 4, as applicable.

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 on line 1 of
the Analysis of Net Income (Loss) found
on Form 1065, and report on line 2,
column (a), the amount of dividends from
any foreign corporation included on Part I,
line 11. Don't report on line 2 any amounts
that must be reported on line 3 or
dividends that were previously taxed and
must be reported on line 4. (See the
instructions below for lines 3 and 4.)
Report withholding taxes on Part III,
line 30, Other expense/deduction items
with differences, or line 25, Other items
with no differences, as applicable.
For any dividends reported on line 2
that are received on a class of voting stock
of which the partnership 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 statement for line 2:
(a) the name of the dividend payer, (b) the
payer's EIN (if applicable), (c) the class of
voting stock on which the dividend was
paid, (d) the percentage of the class
directly or indirectly owned, and (e) 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 QEFs). See Form 5471, Information
Return of U.S. Persons With Respect to
Certain Foreign Corporations, and Form
8621, Information Return by a
Shareholder of a Passive Foreign
Investment Company or Qualified Electing
Fund, for more information.
Also include on line 3 passive foreign
investment company mark-to-market
gains and losses under section 1296.
Don't report such gains and losses on
line 14.

Line 4. Gross Foreign
Distributions Previously Taxed

Report on line 4, column (a), any
distributions received from foreign
corporations that were included on 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
amounts in column (b) or (c), as
applicable. Report the full amount of the
distribution before any withholding tax.
Report withholding taxes on Part III,
line 30, Other expense/deduction items
with differences, or line 25, Other items
with no differences, as applicable. Since
previously taxed foreign distributions
aren't currently taxable, line 4, column (d),
is shaded. (Also, see the instructions
above for line 2.)

Line 5. Income (Loss) From
Equity Method U.S.
Corporations

Report on line 5, column (a), the financial
income (loss) included on 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 line 6 the amount of dividends
received from any U.S. corporations.

Line 6. U.S. Dividends

Report on line 6, column (a), the amount
of dividends included on Part I, line 11,
that were received from any U.S.
corporation. Report on line 6, column (d),
the amount of any U.S. dividends included
in taxable income on line 1 of the Analysis
of Net Income (Loss) found on Form 1065.
For any dividends reported on line 6
that are received on classes of voting
stock in which the partnership directly or
indirectly owned 10% or more of the
outstanding shares of that class at any
-11-

time during the tax year, report on an
attached supporting statement for line 6:
(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 7. Income (Loss) From
U.S. Partnerships and
Line 8. Income (Loss) From
Foreign Partnerships

For any interest owned by the partnership
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 line 7 or 8, as
described below.
1. In column (a), the sum of the
partnership's distributive share of income
or loss from a U.S. or foreign partnership
that is included on Part I, line 11.
2. In column (b) or (c), as applicable,
the sum of all differences, if any,
attributable to the partnership's distributive
share of income or loss from a U.S. or
foreign partnership.
3. In column (d), the sum of all
amounts of income, gain, loss, or
deduction attributable to the partnership's
distributive share of income or loss from a
U.S. or foreign partnership (that is, the
sum of all amounts reportable on the
partnership'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).
For each partnership reported on line 7
or 8, attach a supporting statement 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
line 7 or 8, as applicable.
Example 12. U.S. partnership H is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. H has an investment in a
U.S. partnership USP. H prepares
financial statements in accordance with
GAAP. For its 2019 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
line 7 $10,000 in column (a), a permanent
difference of ($2,200) in column (c), and
$7,800 in column (d).

Line 9. Income (Loss) From
Other Pass-Through Entities

For any interest in a pass-through entity
(other than an interest in a partnership
reportable on line 7 or 8, as applicable)
owned by the U.S. partnership (other than
an interest in a disregarded entity), report
the following on line 9.
1. In column (a), the sum of the
partnership's distributive share of income
or loss from the pass-through entity that is
included on Part I, line 11.
2. In column (b) or (c), as applicable,
the sum of all differences, if any,
attributable to the pass-through entity.
3. In column (d), the sum of all taxable
amounts of income, gain, loss, or
deduction reportable on the partnership's
Schedule(s) K-1 received from the
pass-through entity (if applicable).
For each pass-through entity reported
on line 9, attach a supporting statement
that provides that entity's name, EIN (if
applicable), the partnership's end of year
profit-sharing percentage (if applicable),
the partnership's end of year loss-sharing
percentage (if applicable), and the
amounts reported by the partnership in
column (a), (b), (c), or (d) of line 9, as
applicable.

Line 10. Items Relating to
Reportable Transactions

Any amounts attributable to any reportable
transactions (as described in Regulations
section 1.6011-4) must be included on
line 10 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 line 10. In
addition, all income and expense amounts
attributable to a reportable transaction
must be reported on line 10, columns (a)
and (d), even if there is no difference
between the financial statement amounts
and the tax return amounts.
Each difference attributable to a
reportable transaction must be separately
stated and adequately disclosed. A
partnership will be considered to have
separately stated and adequately
disclosed a reportable transaction on
line 10 if the partnership sequentially
numbers each Form 8886 and lists by
statement number (shown on line A of
Form 8886) on the supporting statement
for line 10 each sequentially numbered
reportable transaction and the amounts
required for line 10, columns (a) through
(d).
Instead of satisfying the requirements
of the preceding paragraph, a partnership
will be considered to have separately

stated and adequately disclosed a
reportable transaction if the partnership
attaches a supporting statement 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 line 10.
2. The name and reportable
transaction or tax shelter registration
number, if applicable, as reported on lines
1a and 1c, respectively, of Form 8886.
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 published guidance number
shown 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 13. Partnership J is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. J incurred seven different
abandonment losses during its 2019 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
aren't 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 line 10. The $12 million loss and
the $5 million loss will be adequately
disclosed if J attaches a supporting
statement for line 10 that lists each of the
sequentially numbered forms, Form
8886-X1 and Form 8886-X2, and with
respect to each reportable transaction
reports the appropriate amounts required
for line 10, columns (a) through (d).
Alternatively, J's disclosures will be
adequate if the description provided for
each loss on the supporting statement
includes the names and reportable
transaction or 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 line 10, columns (a) through (d). J must
report the losses attributable to the other
five abandonment losses on line 21e,
-12-

regardless of whether a difference exists
for any or all of those abandonment
losses.
Example 14. Partnership K is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 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 2019 tax
year and results in a $7 million capital loss
for both financial accounting purposes and
U.S. income tax purposes. Although the
transaction doesn't result in a difference, K
is required to report on line 10 the
following amounts: ($7 million) in column
(a), $0 in columns (b) and (c), and ($7
million) in column (d). The transaction will
be adequately disclosed if K attaches a
supporting statement for line 10 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 10, columns (a)
through (d). Alternatively, the transaction
will be adequately disclosed if the
supporting statement for line 10 includes a
description of the transaction, the name
and reportable transaction number, if any,
and the type of reportable transaction
disclosed on Form 8886.

Line 11. Interest Income

Attach Form 8916-A, Supplemental
Attachment to Schedule M-3. Complete
Part II and enter the amounts shown on
line 6, columns (a) through (d), on
Schedule M-3, line 11, columns (a)
through (d), as applicable.
An entity that (a) is required to file a
Schedule M-3 and has less than $50
million in total assets at the end of the tax
year or (b) isn't required to file a
Schedule M-3 and voluntarily files a
Schedule M-3, isn't required to file Form
8916-A but may voluntarily do so.
Report on line 11, column (a), the total
amount of interest income included on
Part I, line 11, and report on line 11,
column (d), the total amount of interest
income included on line 1 of the Analysis
of Net Income (Loss) found on Form 1065
that isn't required to be reported
elsewhere on Schedule M-3. In column (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 instructions for
line 16, Sale versus lease, should be
made in columns (b) and (c) of line 11.

Don't report on line 11 amounts
reported in accordance with instructions
for lines 7, 8, 9, 10, and 20.

Line 12. Total Accrual to Cash
Adjustment

This line is completed by a partnership
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
line 10, the partnership must report on
line 12 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 25).
Example 15. Partnership L is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 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, 2019, 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, 2019, L reported financial statement
depreciation expense of $15,000 and
depreciation for U.S. income tax purposes
of $25,000. For L's 2019 tax year using an
overall cash method of accounting, L
doesn't recognize the $35,000 of revenue
attributable to the accounts receivable,
can't deduct the $10,000 allowance for
bad debt, and can't 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 line 12. As a result, L must report on
line 12 $8,000 in column (a) ($35,000 –
$10,000 – $17,000), ($8,000) in column
(b), and $0 in column (d). L must not
report the accrual to cash adjustment

attributable to the legal and accounting
fees on Part III, line 18, Current year
acquisition/reorganization legal and
accounting fees. Because the difference in
depreciation expense doesn't relate to the
use of the cash or accrual method of
accounting, L must report the depreciation
difference on Part III, line 25, Depreciation,
and report $15,000 in column (a), $10,000
in column (b), and $25,000 in column (d).

Line 13. Hedging Transactions

Report on line 13, column (a), the net gain
or loss from hedging transactions 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 13. The hedge of a capital
asset, which isn't 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 13 and not
on line 14.
Report any gain or loss from inventory
hedging transactions on line 13 and not on
line 15.

Line 14. Mark-to-Market Income
(Loss)

Report on line 14 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 commodities
described in section 475(e)(2). Securities
described in section 475(c)(2)(E) do not
include contracts to which section 1256(a)
applies.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 13, Hedging
transactions, and not on line 14.
Traders in securities or commodities.
For a trader in securities or commodities
that made a valid election under section
475(f) to use the mark-to-market method
to account for securities or commodities
held in connection with a trading business
that files Form 4797, Sales of Business
Property, any Schedule M-3 entries
required as a result of mark-to-market
these securities or commodities are
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reported as follows: (a) mark-to-market
gains and losses from Form 4797, line 10,
are included on Schedule M-3, Part II,
line 14; and (b) any other Schedule M-3
entries required based on other results
(non-mark-to-market gains and losses)
included in the total reported on Form
4797, line 17, should be reported on
Schedule M-3, Part II, line 21d, unless the
instructions for Schedule M-3 require the
amounts to be reported on another line.

Line 15. Cost of Goods Sold

Report on line 15 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. However, don't report the
items mentioned in the next paragraph on
line 15. Examples of amounts that must be
included on line 15 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.
Note. The entries in columns (a) and (d)
are negative amounts.

Don't report the following on line 15 or
on Form 8916-A.
• Amounts reportable on line 10.
• Any gain or loss from inventory hedging
transactions reportable on line 13.
• Amounts reportable on line 16.
• Amounts reportable on line 19.
• Mark-to-market income or (loss)
associated with the inventories of dealers
in securities under section 475 reportable
on line 14.
• Section 481(a) adjustments related to
cost of goods sold or inventory valuation
reportable on line 17.
• Fines and penalties reportable on Part
III, line 7.
• Judgments, damages, awards, and
similar costs, reportable on Part III, line 8.
• Amounts included on Part III, line 28,
Purchase versus lease.
Important. Complete and attach Form
8916-A, Part I, for each item listed on
line 15 in columns (a) through (d).
An entity that (a) is required to file a
Schedule M-3 and has less than $50
million in total assets at the end of the tax
year or (b) isn't required to file a
Schedule M-3 and voluntarily files a
Schedule M-3, isn't required to file Form
8916-A but may voluntarily do so.
Example 16. Partnership C is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. C placed in service 10
depreciable fixed assets in a previous tax
year. C's total depreciation expense for its

2019 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 2019 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 meal expenses that C deducts in
computing net income for financial
accounting purposes. All $200 of the meal
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 as
other costs in computing cost of goods
sold. C must include on Form 8916-A and
on line 15, in column (a), the $50,000 of
depreciation and $100 of meals. 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). In addition,
C must report on Part III, line 25, for its
2019 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 6, 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
line 15, detailed in this example, and
reported on Form 8916-A and on line 15 in
the appropriate columns.

Line 16. Sale Versus Lease (for
Sellers and/or Lessors)

or (d), as applicable. Depreciation
expense for such transactions must be
reported on Part III, line 25, in column (a)
or (d), as applicable. Use columns (b) and
(c) of lines 11 and 16, and Part III, line 25,
as applicable, to report the differences
between columns (a) and (d).
Example 17. M is a calendar year
partnership that files and entirely
completes Schedule M-3 for its 2019 tax
year. M sells and leases property to
customers. 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 2019, M reports in its
financial statements $1,000 of sales and
$700 of cost of goods sold with respect to
2019 lease transactions. M receives
periodic payments of $500 in 2019 with
respect to these 2019 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 2019 Schedule M-3, M
must report on line 11 $100 in column (a),
($100) in column (b), and $0 in column (d).
In addition, M must report on line 16 $300
of gross profit in column (a), $200 in
column (b), and $500 of gross rental
income in column (d). Lastly, M must
report on Part III, line 25, $200 in columns
(b) and (d).

Note. Also see the instructions for Part III,
line 28, Purchase Versus Lease (for
Purchasers and/or Lessees), later.
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 reports the periodic
payments as payments of principal and
interest income.

With the exception of a section 481(a)
adjustment that is required to be reported
on Part I, line 10, for reportable
transactions, any difference 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 line 17, regardless of whether
a separate line for that income or expense
item exists in Part II or Part III.

On line 16, 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 tax
purposes. On line 16, 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 line 11 in column (a)

Example 18. Partnership N is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 tax year. N was depreciating certain
fixed assets over an erroneous recovery
period and, effective for its 2019 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

Line 17. Section 481(a)
Adjustments

-14-

accounting results in a positive section
481(a) adjustment of $100,000 that is
required to be spread over 4 tax years,
beginning with the 2019 tax year. In its
financial statements, N treats the section
481(a) adjustment as a temporary
difference. N must report on line 17
$25,000 in columns (b) and (d) for its 2019
tax year and each of the subsequent 3 tax
years (unless N is otherwise required to
recognize the remainder of the section
481(a) adjustment earlier). N must not
report the section 481(a) adjustment on
Part III, line 25.

Line 18. Unearned/Deferred
Revenue

Report on line 18, column (a), amounts of
revenues included on Part I, line 11, that
were deferred from a prior financial
accounting year. Report on line 18,
column (d), amounts of revenues
recognizable for U.S. income tax purposes
in the current tax year that are recognized
for financial accounting purposes in a
different year. Also report on line 18,
column (d), any amount of revenues
reported on line 18, column (a), that are
recognizable for U.S. income tax purposes
in the current tax year. Use columns (b)
and (c) of line 18, as applicable, to report
differences between columns (a) and (d).
Line 18 must not be used to report
income recognized from long-term
contracts. Instead, use line 19.

Line 19. Income Recognition
From Long-Term Contracts

Report on line 19 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 20. Original Issue Discount
and Other Imputed Interest

Report on line 20 any amounts of original
issue discount (OID) and other imputed
interest. The term “original issue discount
and other imputed interest” includes, but
isn't limited to:
1. The excess of a debt instrument's
stated redemption price at maturity over its
issue price, as determined 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 21a. Income Statement
Gain/Loss on Sale, Exchange,
Abandonment, Worthlessness,
or Other Disposition of Assets
Other Than Inventory and
Pass-Through Entities

Report on line 21a, 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 partnership from a
pass-through entity (for example, on
Schedule K-1) that are included in the net
income (loss) of the partnership 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 lines 21b through 21g, as
applicable.

Line 21b. Gross Capital Gains
From Schedule D, Excluding
Amounts From Pass-Through
Entities

Report on line 21b gross capital gains
reported on Schedule D, Capital Gains
and Losses, excluding capital gains from
pass-through entities, which must be
reported on line 7, 8, or 9, as applicable.

Line 21c. Gross Capital Losses
From Schedule D, Excluding
Amounts From Pass-Through
Entities, Abandonment Losses,
and Worthless Stock Losses

Report on line 21c gross capital losses
reported on Schedule D, excluding capital
losses from (a) pass-through entities,
which must be reported on line 7, 8, or 9,
as applicable; (b) abandonment losses,
which must be reported on line 21e; and
(c) worthless stock losses, which must be
reported on line 21f.

Line 21d. Net Gain/Loss
Reported on Form 4797,
Line 17, Excluding Amounts
From Pass-Through Entities,
Abandonment Losses, and
Worthless Stock Losses

Report on line 21d the net gain or loss
reported on line 17 of Form 4797,
excluding amounts from (a) pass-through
entities, which must be reported on line 7,
8, or 9, as applicable; (b) abandonment
losses, which must be reported on
line 21e; and (c) worthless stock losses,
which must be reported on line 21f.
Note. Traders in securities or
commodities that have made a valid
election under section 475(f) to use the
mark-to-market method to account for

securities or commodities, see the
instructions for Part II, line 14, earlier.

available-for-sale
securities—comprehensive income.”

Line 21e. Abandonment Losses

Line 23. Total Income (Loss)
Items

Report on line 21e any abandonment
losses, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss.

Line 21f. Worthless Stock
Losses

Report on line 21f any worthless stock
loss, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss. Attach a statement that
separately states and adequately
discloses each transaction that gives rise
to a worthless stock loss and the amount
of each loss.

Line 21g. Other Gain/Loss on
Disposition of Assets Other
Than Inventory

Report on line 21g any gains or losses
from the sale or exchange of property
other than inventory that aren't reported on
lines 21b through 21f.

Line 22. Other Income (Loss)
Items With Differences

Separately state and adequately disclose
on line 22 all items of income (loss) with
differences that aren't otherwise listed on
lines 1 through 21. Attach a statement that
describes and itemizes the type of income
(loss) and the amount of each item and
provides a description that states the
income (loss) name for book purposes for
the amount recorded in column (a) and
describes the adjustment being recorded
in column (b) or (c). The entire description
completes the tax description for the
amount included in column (d) for each
item separately stated on this line.
The attached statement should have
five columns. The first column has the
description for the next four columns. The
second column is Column (a), Income
(loss) per Income Statement. The third
column is Column (b), Temporary
Difference. The fourth column is Column
(c), Permanent Difference. The fifth
column is Column (d), Income (loss) per
Tax Return. For every item listed on the
attached statement for line 22, columns
(a) + (b) + (c) must equal column (d). Each
item with amounts in columns (a), (b), (c),
and (d) will be totaled and included as one
line on line 22.
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—comprehensive
income” and “Gains and losses on
-15-

Combine lines 1 through 22 and enter the
total on line 23.
Note. Line 15, Cost of goods sold,
columns (a) and (d), are negative amounts
that will affect the totals entered on line 23.

Line 24. Total Expense/
Deduction Items

Report on line 24, columns (a) through (d),
as applicable, the negative of the amounts
reported on Part III, line 31, columns (a)
through (d). For example, if Part III, line 31,
column (a), reflects an amount of $1
million, then report on line 24, column (a),
($1 million). Similarly, if Part III, line 31,
column (b), reflects an amount of
($50,000), then report on line 24, column
(b), $50,000.

Line 25. 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 isn't described or included on
lines 1 through 22, or Part III, lines 1
through 30, report the entire amount of the
item in columns (a) and (d) of line 25. If a
portion of an item of income, loss,
expense, or deduction has a difference
and a portion of the item doesn't have a
difference, don't report any portion of the
item on line 25. 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 lines 1 through 22, or Part III, lines 1
through 30. See Example 11, earlier.

Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Partnership With Income
(Loss) per Return—
Expense/Deduction Items

Note. Expense amounts that reduce
financial 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 positive amounts. Amounts
reported on Part II, line 24, must be the
negative of the amounts reported on Part
III, line 31.

Lines 1 Through 4. Income Tax
Expense

If the partnership doesn't 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 and 3, as
applicable.

Line 5. Equity-Based
Compensation

Report on line 5 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. Examples of
amounts reportable on line 5 include
expense/deduction items attributable to
options to acquire capital interest units,
profits interest units, and other rights to
acquire partnership equity, regardless of
whether such payments are made to
employees or nonemployees, or as
payment for property or compensation for
services.

Line 6. Meals and
Entertainment

Report on line 6, column (a), any amounts
paid or accrued by the partnership 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 partnership's financial
income statement or the income and
expense accounts maintained in the
partnership's books and records. Report
only amounts not otherwise reportable
elsewhere on Schedule M-3, Parts II and
III (for example, Part II, line 15).

Line 7. Fines and Penalties

Report on line 7 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 line 7, 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 partnership's
financial income statement or the income
and expense accounts maintained in the
partnership's books and records. Also
report on line 7, column (a), the reversal of
any overaccrual of any amount described
in this paragraph. See sections 162(f) and
162(g) for additional guidance.

Report on line 7, column (d), any such
amounts 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.
Don't report on line 7 amounts required
to be reported in accordance with the
instructions for line 8.
Don't report on line 7 amounts
recovered from insurers or any other
indemnitors for any fines and penalties
described above.

Line 8. Judgments, Damages,
Awards, and Similar Costs

Report on line 8, 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 8, column
(a), the reversal of any overaccrual of any
amount described in this paragraph.
Report on line 8, column (d), any such
amounts 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.
Don't report on line 8 amounts required
to be reported in accordance with the
instructions for line 7.
Don't report on line 8 amounts
recovered from insurers or any other
indemnitors for any judgments, damages,
awards, or similar costs described above.

Line 9. Guaranteed Payments

Include on line 9, column (a), the amount
of guaranteed payments expense that is
included on Part I, line 11. Report in
column (d) the net amount of guaranteed
payments deduction. The net amount of
the deduction reported in column (d) is the
amount reported as a deduction on Form
1065, page 1, line 10, reduced by the
amount reported as income on Form
1065, Schedule K, line 4. The net amount
of the guaranteed payments reported in
column (d) will be zero if no guaranteed
payments are capitalized and all are
deducted on Form 1065, page 1, line 10,
or a negative amount (reported in
parentheses) if any of the guaranteed
payments are capitalized by the
partnership. Generally, if guaranteed
payments expense is recognized for
financial accounting purposes, the amount
reported in column (c) as a permanent
-16-

difference will be the negative of the
guaranteed payment income reported on
Form 1065, Schedule K, line 4. If no
guaranteed payment expense is
recognized for financial accounting
purposes, the amount reported in column
(c) as a permanent difference generally
will be zero. Any amount of guaranteed
payments capitalized for tax purposes on
Form 1065, page 1, but not capitalized for
financial accounting purposes, generally
will be reported as a negative temporary
difference amount in column (b).
Example 19.
1. AZ is a calendar year partnership
that files and entirely completes
Schedule M-3 for its 2019 tax year. AZ
has total income in 2019 of $5,000 for
both financial accounting and tax
accounting purposes before taking into
account guaranteed payments expense or
deductions. Partner A is paid a deductible
guaranteed payment of $3,000 for
services rendered to the partnership
during the tax year. Partner Z is paid a
$1,000 guaranteed payment, which is
capitalized to land for tax accounting. Both
guaranteed payments, in the total amount
of $4,000, are treated as expenses in
arriving at net financial accounting
income. There are no other expenses or
deductions for financial accounting or tax
accounting purposes. The amount shown
on Part I, line 11, Net income (loss) per
income statement of the partnership, is
$1,000 ($5,000 − $3,000 − $1,000 =
$1,000). The amount shown on line 9,
column (a), is $4,000, the amount of
guaranteed payments expenses for
financial accounting purposes. The
amount shown on line 9, column (d), is
($1,000), the net amount deducted after
taking into consideration the $4,000 of
total guaranteed payments allocated to
the partners as income on Schedule K,
netted against $3,000 deducted on Form
1065, page 1, line 10. The amount
reported on line 9, column (b), is a
temporary difference of ($1,000), the
negative of the amount of guaranteed
payments capitalized for Form 1065,
page 1. The amount reported on line 9,
column (c), is a permanent difference of
($4,000), equal to the guaranteed
payment income shown on Form 1065,
Schedule K, line 4, expressed as a
negative amount. Part II, line 23, reports
$5,000 in column (a), $0 in column (b), $0
in column (c), and $5,000 in column (d).
Part II, line 24, reports ($4,000) in column
(a), $1,000 in column (b), $4,000 in
column (c), and $1,000 in column (d). Part
II, line 26, reports $1,000 in column (a),
$1,000 in column (b), $4,000 in column
(c), and $6,000 in column (d).
2. Same facts as in Example 19.1,
except that no guaranteed payments
expense is recognized for financial
accounting purposes. The amount shown

on Part I, line 11, is $5,000. On line 9, AZ
reports $0 in column (a), ($1,000) in
column (b), $0 in column (c), and ($1,000)
in column (d). Part II, line 23, reports $0 in
column (a), $1,000 in column (b), $0 in
column (c), and $1,000 in column (d). On
Part II, line 25, AZ reports $5,000 in
column (a), $1,000 in column (b), $0 in
column (c), and $6,000 in column (d).

Line 10. Pension and
Profit-Sharing

Report on line 10 any amounts attributable
to the partnership's pension plans,
profit-sharing plans, and any other
retirement plans.

Line 11. Other Post-Retirement
Benefits

Report on line 11 any amounts attributable
to other post-retirement benefits not
otherwise includible on line 10 (for
example, retiree health and life insurance
coverage, dental coverage, etc.).

Line 12. Deferred
Compensation

Report on line 12, column (a), any
compensation expense included in the net
income (loss) amount reported on Part I,
line 11, that isn't deductible for U.S.
income tax purposes in the current tax
year and that wasn't reported elsewhere
on Schedule M-3, column (a). Report on
line 12, column (d), any compensation
deductible in the current tax year that
wasn't included in the net income (loss)
amount reported on Part I, line 11, for the
current tax year and that isn't reportable
elsewhere on Schedule M-3, including any
compensation deductions deferred in a
prior tax year. For example, report
originations and reversals of deferred
compensation subject to section 409A on
line 12.

Line 14. Charitable
Contribution of Intangible
Property

Report on line 14 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 15. Organizational
Expenses as per Regulations
Section 1.709-2(a)

Include on line 15, column (a),
organizational expenses as defined in
Regulations section 1.709-2(a). Include on
line 15, column (d), the amount of
organizational expense deducted per
section 709(b).

Line 16. Syndication Expenses
as per Regulations Section
1.709-2(b)

Include on line 16 syndication expenses
as defined in Regulations section
1.709-2(b).

Line 17. Current Year
Acquisition/Reorganization
Investment Banking Fees

Report on line 17 any investment banking
fees paid or incurred in connection with a
taxable or tax-free acquisition of property
(for example, ownership interests or
assets) or a tax-free reorganization not
otherwise reportable on Schedule M-3 (for
example, line 15 or 16). Report on this line
any investment banking 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 or
reorganization.

Line 18. Current Year
Acquisition/Reorganization
Legal and Accounting Fees

Report on line 18 any legal and
accounting fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (for example,
ownership interests or assets) or a
tax-free reorganization not otherwise
reportable on Schedule M-3 (for example,
line 15 or 16). Report on this line any legal
and accounting 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 or
reorganization.

Line 19. Amortization/
Impairment of Goodwill

Report on line 19 amortization of goodwill
or amounts attributable to the impairment
of goodwill.

Line 20. Amortization of
Acquisition, Reorganization,
and Start-up Costs

Report on line 20 amortization of
acquisition, reorganization, and start-up
-17-

costs. For purposes of columns (b), (c),
and (d), include amounts amortizable
under section 167 or 195.

Line 21. Other Amortization or
Impairment Write-Offs

Report on line 21 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 22. Reserved

When using this line to figure amounts on
other tax forms or worksheets, this line
should be considered to be zero.

Line 23a. Depletion—Oil & Gas
Form 1065 filers report on line 23a,
column (a), any oil and gas depletion
included on Part I, line 11.

Line 23b. Depletion—Other
Than Oil & Gas

Report on line 23b any depletion expense/
deduction other than oil and gas that isn't
required to be reported elsewhere on
Schedule M-3 (for example, on Part II,
line 7, 8, 9, or 15).

Line 24. Intangible Drilling and
Development Costs (IDC)

Intangible drilling and development costs
(IDC) are costs of developing oil, gas, or
geothermal wells. Report on line 24,
column (a), the total amount of intangible
drilling and development costs (or such
equivalent costs as classified in the
partnership's financial statements)
included on Part I, line 11, and report on
line 24, column (d), the total amount of
IDC paid or incurred during the current tax
year under section 263(c) and Regulations
section 1.612-4.

Line 25. Depreciation

Report on line 25 any depreciation
expense/deduction that isn't required to be
reported elsewhere on Schedule M-3 (for
example, on Part II, line 7, 8, 9, or 15).

Line 26. Bad Debt Expense

Report on line 26, 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 27. Interest Expense

Attach Form 8916-A. Complete Part III and
enter the amounts shown on line 5,
columns (a) through (d), on Schedule M-3,
line 27, columns (a) through (d), as
applicable.
An entity that (a) is required to file a
Schedule M-3 and has less than $50
million in total assets at the end of the tax
year or (b) isn't required to file a

Schedule M-3 and voluntarily files a
Schedule M-3, isn't required to file Form
8916-A but may voluntarily do so.
Report on line 27, column (a), the total
amount of interest expense included on
Part I, line 11, and report on line 27,
column (d), the total amount of interest
deduction included on line 1 of the
Analysis of Net Income (Loss) found on
Form 1065 that isn't reported elsewhere
on Schedule M-3. In column (b) or (c), as
applicable, adjust 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
line 28 should be made in columns (b) and
(c), as applicable, of line 27.
Don't report on Form 8916-A and on
line 27 amounts reported in accordance
with the instructions for (a) Part II, lines 7,
8, and 9, Income (loss) from U.S.
partnerships, foreign partnerships, and
other pass-through entities; and (b) Part II,
line 10, Items relating to reportable
transactions.

Line 28. Purchase Versus
Lease (for Purchasers and/or
Lessees)

Note. Also see the instructions for Part II,
line 16, for sellers and/or lessors.
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 or
deduction amounts for such transactions
on line 27, in column (a) or (d), as
applicable. Report depreciation expense
or deductions for such transactions on
line 25, in column (a) or (d), as applicable.
Use columns (b) and (c) of lines 25, 27,
and 28, as applicable, to report the
differences between columns (a) and (d)
for such recharacterized transactions.

Example 20. X is a calendar year
U.S. partnership that files and entirely
completes Schedule M-3 for its 2019 tax
year. X acquired property in a transaction
that, for financial accounting purposes, X
treats as a lease. Because of its terms, the
transaction is treated for U.S. income tax
purposes as a purchase, and X must treat
the periodic payments it makes partially as
a payment of principal and partially as a
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 2019, 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 2019 Schedule M-3,
X must report the following on line 28:
column (a), $1,000, its financial
accounting gross rental expense; column
(b), ($1,000); and column (d), $0. On
line 27, X reports $0 in column (a) and
$300 in columns (b) and (d) for the interest
deduction. On line 25, X reports $0 in
column (a) and $1,200 in columns (b) and
(d) for the depreciation deduction.

Line 29. Research and
Development Costs

Report in column (a) the amount of
expenses included in net income reported
on Part I, line 11, that are related to
research and development expenses.
Report in column (d) the amount of
deductions included on page 1 of the
return and/or separately reported on
Schedule K of the return, that are
recognized and reported as section 174
research and experimental expenditures
consistent with the partnership’s adopted
method of accounting for such
expenditures. In column (c), as applicable,
include any adjustments for any amounts
treated for U.S. income tax purposes as
research or experimental expenditures
that are treated as some other form of
expense for financial accounting
purposes, or vice versa. Report any
difference in timing recognition in column
(b).
Example 21.
1. Partnership X is a calendar year
taxpayer that files and entirely completes
Schedule M-3 for its 2019 tax year. During
2019, X incurred $100,000 of research
and development costs that X recognized
as an expense in its financial statements.
Also, X incurred $20,000 in attorney fees
in obtaining a patent application that X
capitalized and amortized in its financial
statements. X recognized $2,000 of
amortization deduction. In compliance
with its adopted method of accounting
under section 174, X deducts research
-18-

and experimental expenditures for U.S.
income tax purposes. Accordingly, X must
report $100,000 in column (a), $20,000 in
column (b), and $120,000 in column (d). X
must also report $2,000 in column (a),
($2,000) in column (b), and $0 in column
(d) on Part III, line 21.
2. Assume the same facts as
Example 21.1, except X elected to
capitalize and amortize its research and
expenditures over 60 months with respect
to all its research programs for U.S. tax
purposes. X first realized benefits from
such expenditures on August 1.
Accordingly, X must report $100,000 in
column (a), a temporary difference of
($90,000) (that is, $100,000 – $10,000) in
column (b), and $10,000 (that is,
$120,000/60 months, times 5 months) in
column (d).
3. Partnership X is a calendar year
taxpayer that files and entirely completes
Schedule M-3 for its 2019 tax year. X
adopted the current expense method for
research and experimental expenditures
for U.S. income tax purposes. During
2019, X incurred $50,000 of research and
development costs that X recognized as
an expense in its financial statements.
Also, X undertook to develop a new
machine for its business. X expended
$30,000 on the project of which $10,000
represents actual costs of material, labor,
and component cost to construct the
machine, and $20,000 represents
research costs not attributable to the
machine itself. X capitalized all costs of
$30,000 related to the machine and
recognized $6,000 of depreciation
expense in its financial statements. X’s
depreciation expense on the $10,000 of
costs related to the machine itself was
$2,000 for U.S. income tax purposes.
Accordingly, X must report $50,000 in
column (a), $20,000 (research costs that
aren't attributable to the machine itself) in
column (b), and $70,000 in column (d). X
must also report $6,000 in column (a),
($4,000) in column (b), and $2,000 in
column (c) on Part III, line 25.
4. Partnership X is a calendar year
taxpayer that files and entirely completes
Schedule M-3 for its 2019 tax year. During
2019, X incurred $10,000 of research and
development costs related to social
sciences that it recognized as an expense
in its financial statements. X adopted the
current expense method for research and
experimental expenditures for U.S.
income tax purposes. Because such costs
aren't allowable costs under section 174,
X must report $10,000 in column (a),
permanent difference ($10,000) in column
(c), and $0 in column (d). If such costs are
otherwise deductible for U.S. income tax
purposes, X must report this item of
expense on Part III, line 30.

5. Partnership X is a calendar year
taxpayer that files and entirely completes
Schedule M-3 for its 2019 tax year. During
2019, X paid $75,000 to acquire or
in-license intangible assets under a
collaborative arrangement with another
company that X recognized as a research
and development expense in its financial
statements. X adopted the current
expense method for research and
experimental expenditures for U.S.
income tax purposes. Because payments
made to acquire rights to a product or
technology are excluded costs from the
definition of research and experimental
expenditures, X must report $75,000 in
column (a), ($75,000) in column (c), and
$0 in column (d). X must report any
amortization otherwise allowable related
to the payments on Part III, line 21.

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 statement
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 isn't
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.

Line 30. Other Expense/
Deduction Items With
Differences

The attached statement should have
five columns. The first column has the
description for the next four columns; the
second column is Column (a), Expense
per Income Statement; the third column is
Column (b), Temporary Difference; the
fourth column is Column (c), Permanent
Difference; and the fifth column is Column
(d), Deduction per Tax Return. For every
item listed on the attached statement for
line 30, columns (a) + (b) + (c) must equal
column (d). Each item with amounts in
columns (a), (b), (c), and (d) will be totaled
and included as one line on line 30 of the
face of the schedule.

Separately state and adequately disclose
on line 30 all items of expense/deduction
that aren't otherwise listed on lines 1
through 29.
Attach a statement that describes and
itemizes the type of expense/deduction
and the amount of each item, and
provides a description that states the
expense/deduction name for book
purposes for the amount recorded in
column (a) and describes the adjustment
being recorded in column (b) or (c). The
entire description completes the tax
description for the amount included in
column (d) for each item separately stated
on this line.
The statement of details attached to
the return for line 30 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 partnership's net income
amount reported in the income statement

Description

Reserves and contingent liabilities.
Report on line 30 amounts related to the
change in each reserve or contingent
liability that isn't required to be reported
elsewhere on Schedule M-3. Report on
line 30, column (a), expenses included in

Column (a)
Expense per Income
Statement

Prepaid Insurance premium
expenses not capitalized
Legal Expense Reserve
Total Line 30

Line 31. Total Expense/
Deduction Items

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—comprehensive income”
and “Gains and losses on
available-for-sale
securities—comprehensive income.”

Enter on Part II, line 24, columns (a)
through (d), as applicable, positive

net income reported on Part I, line 11, that
are related to reserves and contingent
liabilities. Report on line 30, 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 30 include
warranty reserves, restructuring reserves,
reserves for discontinued operations, and
reserves for acquisitions and dispositions.
Only report on line 30 items that aren't
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 15.
Example 22. Partnership Q is a
calendar year partnership that files and
entirely completes Schedule M-3 for its
2019 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 1, 2019, 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 also has a legal expense reserve
where $300,000 was expensed for
financial accounting purposes and a
($100,000) temporary difference was
calculated to arrive at the income tax
deduction of $200,000. The statement
attached to Q's return for Part III, line 30,
must be separately stated and adequately
disclosed as follows:

Column (b)
Temporary Difference

Column (c)
Permanent Difference

Column (d)
Deduction per Tax Return

$250,000

$250,000

-0-

$500,000

300,000

(100,000)

-0-

200,000

$550,000

$150,000

-0-

$700,000

amounts from line 31 as negative (in
parentheses) and negative amounts as
positive. For example, if line 31, column
(a), reflects an amount of $1 million, then
report on Part II, line 24, column (a),

-19-

($1,000,000). Similarly, if line 31, column
(b), reflects an amount of ($50,000), then
report on Part II, line 24, column (b),
$50,000.