1120-PC Schedule M Instructions for Form 1120-PC Schedule M-3

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

Department of the Treasury
Internal Revenue Service

(Rev. December 2021)

DRAFT AS OF
October 12, 2021

Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance
Companies With Total Assets of $10 Million or More
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 1120-PC), and its instructions, such
as legislation enacted after they were
published, go to IRS.gov/Form1120PC.

General Instructions
Purpose of Schedule

Schedule M-3, Part I, asks certain
questions about the corporation's financial
statements and reconciles financial
statement net income (loss) for the
corporation (or consolidated financial
statement group, if applicable), as
reported on Schedule M-3, Part I, line 4a,
to net income (loss) of the corporation for
U.S. taxable income purposes, as
reported on Schedule M-3, Part I, line 11.
Schedule M-3, Parts II and III, reconcile
financial statement net income (loss) for
the U.S. corporation (or consolidated tax
group, if applicable), as reported on
Schedule M-3, Part I, line 11, to the
subtotal on Form 1120-PC, Schedule A,
line 35 (or Schedule B, line 19, if
applicable). For property and casualty
insurance companies that prepare an
annual statement, financial statement net
income (loss) should be reported on the
statutory basis on Schedule M-3, Part I,
line 11.

Where To File

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

Who Must File

• Any domestic corporation or group of
corporations required to file Form
1120-PC, U.S. Property and Casualty
Oct 08, 2021

Insurance Company Income Tax Return,
that reports on the balance sheet,
Schedule L of Form 1120-PC, total assets
at the end of the corporation's tax year that
equal or exceed $10 million must
complete and file Schedule M-3 instead of
Schedule M-1, Reconciliation of Income
(Loss) per Books With Income (Loss) per
Return.
• A corporation filing a non-consolidated
Form 1120-PC that reports on Schedule L
for Form 1120-PC total assets that equal
or exceed $10 million must complete and
file Schedule M-3 instead of
Schedule M-1. The corporation must
check box (1) Non-consolidated return, at
the top of page 1 of Schedule M-3.
• Any U.S. consolidated tax group
consisting of a U.S. parent corporation
and additional includible corporations
listed on Form 851, Affiliations Schedule,
required to file Form 1120-PC that reports
on Schedule L of Form 1120-PC total
consolidated assets at the end of the tax
year that equal or exceed $10 million must
complete and file Schedule M-3 instead of
Schedule M-1, and must check box (2)
Consolidated return (Form 1120-PC only),
or (3) Mixed 1120/L/PC group, as
applicable, at the top of page 1 of
Schedule M-3.
A U.S. property and casualty insurance
company filing Form 1120-PC that is not
required to file Schedule M-3 may
voluntarily file Schedule M-3 in place of
Schedule M-1. A property and casualty
insurance company filing Schedule M-3
must check Item A, box 3, on Form
1120-PC, page 1, indicating that
Schedule M-3 is attached, whether
required or voluntary. A property and
casualty insurance company filing
Schedule M-3 must not file Schedule M-1.
Example 1.
1. U.S. corporation A owns U.S.
subsidiary B and foreign subsidiary F. For
its current tax year, A prepares
consolidated financial statements with B
and F that report total assets of $12
million. A files a consolidated U.S. income
tax return with B and reports total
consolidated assets on Schedule L of $8
million. A's U.S. consolidated tax group is

Cat. No. 39943A

not required to file Schedule M-3 for the
current tax year.
2. U.S. property and casualty
insurance company C owns U.S. property
and casualty insurance company D. For its
current tax year, C prepares consolidated
financial statements with D but C and D
file separate U.S. income tax returns. The
consolidated accrual basis financial
statements for C and D report total assets
at the end of the tax year of $12 million
after intercompany eliminations. C reports
separate company total year-end assets
on its Schedule L of $7 million. D reports
separate company total year-end assets
on its Schedule L of $6 million. Neither C
nor D is required to file Schedule M-3 for
the current tax year.
3. Foreign corporation A owns 100%
of both U.S. property and casualty
insurance company B and U.S. property
and casualty insurance company C. C
owns 100% of U.S. property and casualty
insurance company D. For its current tax
year, A prepares a consolidated
worldwide financial statement for the
ABCD consolidated group. The ABCD
consolidated financial statement reports
total year-end assets of $25 million. A is
not required to file a U.S. income tax
return. B files a separate U.S. income tax
return and reports separate company total
year-end assets on its Schedule L of $12
million. C files a consolidated U.S. income
tax return with D and, after eliminating
intercompany transactions between C and
D, reports consolidated total year-end
assets on Schedule L of $8 million. B is
required to file Schedule M-3 because its
total year-end assets reported on
Schedule L equal at least $10 million. The
CD U.S. consolidated tax group is not
required to file Schedule M-3 because its
total year-end assets reported on
Schedule L do not equal at least $10
million.

Special Filing Requirements for
Mixed Groups

If the parent company of a U.S.
consolidated tax group files Form
1120-PC and files Schedule M-3, all
members of the group must file
Schedule M-3. However, if the parent
corporation of a U.S. consolidated tax

group files Form 1120-PC and any
member of the group files a Form 1120 or
Form 1120-L, U.S. Life Insurance
Company Income Tax Return, that
member must file a Form 1120
Schedule M-3 or a Form 1120-L
Schedule M-3, respectively, and the group
must comply with the mixed group
consolidated Schedule M-3 reporting
described under Schedule M-3
Consolidation for Mixed Groups (1120/L/
PC), later. A mixed group must also file
Form 8916, Reconciliation of
Schedule M-3 Taxable Income with Tax
Return Taxable Income for Mixed Groups,
and, if applicable, Form 8916-A,
Supplemental Attachment to
Schedule M-3.

may voluntarily file Schedule M-3 for the
current tax year. If for a subsequent tax
year the property and casualty insurance
company is required to file Schedule M-3,
the property and casualty insurance
company must complete Schedule M-3 in
its entirety for that subsequent tax year.
In the case of a U.S. consolidated tax
group, total assets at the end of the tax
year must be determined based on the
total year-end assets of all includible
corporations listed on Form 851, net of
eliminations for intercompany transactions
and balances between the includible
corporations. In addition, for purposes of
determining for Schedule M-3 whether the
corporation (or U.S. consolidated tax
group) has total assets at the end of the
current tax year of $10 million or more, the
corporation's total consolidated assets
must be determined on an overall accrual
method of accounting unless both of the
following apply: (a) the tax returns of all
includible corporations in the U.S.
consolidated tax group are prepared using
an overall cash method of accounting, and
(b) no includible corporation in the U.S.
consolidated tax group prepares or is
included in financial statements prepared
on an accrual basis.

U.S. consolidated tax group, the total
assets of all members of the group listed
on Form 851) as of the last day of the tax
year. The same amount of total assets
must be reported by the property and
casualty insurance company (or by each
member of the U.S. consolidated tax
group) in the non-tax-basis financial
statements, if any, used for Schedule M-3.
If the property and casualty insurance
company prepares non-tax-basis financial
statements, Schedule L must equal the
sum of the non-tax-basis financial
statement total assets for each
corporation listed on Form 851 and
included in the consolidated U.S. income
tax return (includible corporation) net of
eliminations for intercompany transactions
between includible corporations. If the
property and casualty insurance company
does not prepare non-tax-basis financial
statements, Schedule L must be based on
the property and casualty company's
books and records. The Schedule L
balance sheet may show tax-basis
balance sheet amounts if the property and
casualty insurance company is allowed to
use books and records for Schedule M-3
and the property and casualty insurance
company's books and records reflect only
tax-basis amounts.

DRAFT AS OF
October 12, 2021

If the parent company of a U.S.
consolidated tax group files Form
1120-PC, and any member of the group
files Form 1120 or Form 1120-L, and the
consolidated Schedule L reported in the
return includes the assets of all of the
companies (insurance companies as well
as the non-insurance companies), in order
to determine if the group meets the $10
million threshold test for the requirement
to file Schedule M-3, use the amount of
total assets reported on Schedule L of the
consolidated return. If the parent company
of a U.S. consolidated tax group files Form
1120-PC and any member of the group
files Form 1120 or Form 1120-L and the
consolidated Schedule L reported in the
return does not include the assets of one
or more of the insurance companies in the
U.S. consolidated tax group, in order to
determine if the group meets the $10
million threshold test for the requirement
to file Schedule M-3, use the sum of the
amount of total assets reported on the
consolidated Schedule L plus the amounts
of all assets reported on Forms 1120 and
1120-L that are included in the
consolidated return but not included on
the consolidated Schedule L.
For insurance companies included in
the consolidated U.S. income tax return,
see instructions for Part I, lines 10a, 10b,
10c, and 11, and Part II, line 7, for
guidance on Schedule M-3 reporting of
intercompany dividends and statutory
accounting adjustments.

Other Issues Affecting
Schedule M-3 Filing
Requirements

If a property and casualty insurance
company was required to file
Schedule M-3 for the preceding tax year
but reports on Schedule L of Form
1120-PC total consolidated assets at the
end of the current tax year of less than $10
million, the property and casualty
insurance company is not required to file
Schedule M-3 for the current tax year. The
property and casualty insurance company

Note. See the instructions for Part I,
line 1, for a discussion of non-tax-basis
income statements and related
non-tax-basis balance sheets to be used
in the preparation of Schedule M-3 and
Form 1120-PC, Schedule L.

Other Form 1120-PC
Schedules Affected by
Schedule M-3
Requirements

Report on Schedules L and Form
1120-PC, Schedule A (or Schedule B, if
applicable), amounts for the U.S.
corporation or, if applicable, the U.S.
consolidated tax group.

Schedule L, Balance Sheet

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
instructions for Schedule M-3, Part I,
line 1, for the discussion of non-tax-basis
income statements and related
non-tax-basis balance sheets prepared for
any purpose and the impact on the
selection of the income statement used for
Schedule M-3 and the related
non-tax-basis balance sheet amounts that
must be used for Schedule L.
Total assets shown on Schedule L,
line 15, column (d), must equal the total
assets of the property and casualty
insurance company (or, in the case of a
-2-

Generally, total assets at the beginning
of the year (Schedule L, line 15, column
(b)) must equal total assets at the close of
the prior year (Schedule L, line 15, column
(d)). For each Schedule L balance sheet
item reported for which there is a
difference between the current year
opening balance sheet amount and the
prior year 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.
Reasons for these differences include
mergers and acquisitions.
For purposes of measuring total assets
at the end of the year, the corporation's
assets may not be netted or reduced by
the corporation's liabilities. In addition,
total assets may not be reported as a
negative amount. If Schedule L is
prepared on a non-tax-basis method, an
investment in a partnership may be shown
as appropriate under the corporation's
non-tax-basis method of accounting,
including, if required by the corporation's
reporting methodology, the equity method
of accounting for investments. If
Schedule L is prepared on a tax basis, an
investment by the corporation in a
partnership must be shown as an asset
and measured by the corporation's
adjusted basis in its partnership interest.
Any liabilities contributing to such adjusted
basis must be shown on Schedule L as
corporate liabilities.

Instructions for Schedule M-3 (Form 1120-PC) (2020)

Schedule M-2

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

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. 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’s tax year is deemed to own
all corporate and partnership interests
owned or deemed to be owned under
these instructions by the corporation
during its 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
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.

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.

DRAFT AS OF
October 12, 2021

Consolidated Return (Form
1120-PC)

Report on Form 1120-PC each item of
income, gain, loss, expense, or deduction
net of elimination entries for intercompany
transactions between includible
corporations. The corporation must not
report as dividends on Form 1120-PC,
Schedule A, any amounts received from
an includible corporation unless the
corporation receiving the intercompany
dividends is an insurance company and
only to the extent that the insurance
company is required to include
intercompany dividends in taxable
income. (See the instructions for Part I,
lines 10a, 10b, 10c, and 11, for a
discussion of intercompany dividends and
insurance company statutory accounting.)
In general, dividends received from an
includible corporation must be eliminated
in consolidation rather than offset by the
dividends-received deduction.

Entity Considerations for
Schedule M-3

For purposes of Schedule M-3, references
to the classification of an entity (for
example, as a corporation, a partnership,
or a trust) are references to the treatment
of the entity for U.S. income tax purposes.
An entity that is generally 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 9, 10,
or 11 as a separate partnership or other
pass-through entity. The financial
statement income or loss of a disregarded
entity is included on Part I, line 7a or 7b,
only if its financial statement income or
loss is included on Part I, line 11, but not
on Part I, line 4a.

Reportable Entity Partner
Reporting Responsibilities

A reportable entity partner with respect to
a partnership filing Form 1065, U.S.
Return of Partnership Income, 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

A reportable entity partner with respect
to a partnership (as defined above) must
report the following to the partnership
within 30 days of first becoming a
reportable entity partner and, after first
reporting to the partnership under these
instructions, thereafter within 30 days of
the date of any change in the interest it
owns or is deemed to own, directly or
indirectly, under these instructions, in the
partnership.
1. Name.
2. Mailing address.
3. Taxpayer identification number
(TIN or EIN), if applicable.
4. Entity or organization type.
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.

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-3-

Example 2.
1. Z, a U.S. property and casualty
insurance company, owns 50% of A, an
LLC filing Form 1065 for 2021. A owns
50% of B, C, D, and E, which are also
LLCs filing a Form 1065 for calendar year
2021. Z was first required to file
Schedule M-3 (Form 1120-PC) for its
corporate tax year ended December 31,
2020, and filed its Schedule M-3 with
Form 1120-PC for 2020 on October 15,
2021. As of October 16, 2021, Z was a
reportable entity partner with respect to A
and, through A, with respect to B, C, D,
and E. On November 5, 2021, Z reports to
A, B, C, D, and E, as it is required to do
within 30 days of October 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 2021, each of
A, B, C, D, and E is required to file
Schedule M-3 (Form 1065), for 2021,
regardless of whether they would
otherwise be required to file Schedule M-3
for that year.
2. P, a U.S. property and casualty
insurance company, 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 October 16,
2021. On October 15, 2021, P filed a
consolidated tax return on Form 1120-PC
and was required to file Schedule M-3 for
the tax year ending December 31, 2020.
On October 16, 2021, 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, 2021. 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
October 16, 2021. 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 October 16, 2021. P is therefore

deemed to own 50% of K on October 16,
2021. Since P owns or is deemed to own,
directly or indirectly (under these
instructions), 50% or more of K on
October 16, 2021, and was required to file
Schedule M-3 with its most recently filed
U.S. income tax return filed prior to that
date, P is a reportable entity partner of K
as of October 16, 2021. On November 5,
2021, P reports to K that P is a reportable
entity partner as of October 16, 2021,
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, 2021.

example, charitable contribution
carryovers and capital loss carryovers).
See Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers, later.
Note. Complete only one Schedule M-3,
Part I, for each consolidated group. A
subsidiary of a consolidated group does
not complete Schedule M-3, Part I. Enter
on Part I the name and EIN of the common
parent of the consolidated group.
Indicate on each Schedule M-3, Parts II
and III, on the line after the common
parent's name and EIN, whether the
Schedule M-3, Parts II and III, is for the:
1. Consolidated group,
2. Parent corporation,
3. Consolidation eliminations, or
4. Subsidiary corporation,

for each subgroup's sub-consolidation
eliminations amounts.
At the mixed group consolidated level,
there must be a consolidated
Schedule M-3, Part II, and, if applicable, a
Part II, for consolidation eliminations not
includible in the subgroup eliminations. At
the consolidated level there must also be
a consolidated Schedule M-3, Part I, and a
consolidated Form 8916. For a mixed
group, there is no Schedule M-3, Part III,
at the consolidated level. At the
consolidated level, use the Schedule M-3
(Form 1120, 1120-PC, or 1120-L), Parts I
and II, that match the form on which the
parent corporation reports and the entire
consolidated group files.

DRAFT AS OF
October 12, 2021

Consolidated
Schedule M-3 Versus
Consolidating Schedules
M-3 for Form 1120-PC
Groups

A consolidated tax return group with a
parent corporation that files a Form
1120-PC is a mixed group if any member
is a life insurance company (files Form
1120-L, U.S. Life Insurance Company
Income Tax Return) or is not an insurance
company. See Schedule M-3
Consolidation for Mixed Groups (1120/L/
PC), later.

A U.S. consolidated tax group must file
a consolidated Schedule M-3. Parts I, II,
and III of the consolidated Schedule M-3
must reflect the activity of the entire U.S.
consolidated tax group. The parent
corporation must also complete Parts II
and III of a separate Schedule M-3 to
reflect the parent's own activity. In
addition, Parts II and III of a separate
Schedule M-3 must be completed by each
includible corporation to reflect the activity
of that includible corporation. Lastly, it
generally will be necessary to complete
Parts II and III of a separate Schedule M-3
for consolidation eliminations.
If a U.S. consolidated tax group that is
not a mixed group consists of four
includible corporations (the parent and
three subsidiaries) all filing Form 1120-PC,
the U.S. consolidated tax group must
complete six Schedules M-3 as follows.
• One consolidated Schedule M-3 with
Parts I, II, and III completed to reflect the
activity of the entire U.S. consolidated tax
group.
• Parts II and III of a separate
Schedule M-3 for each of the four
includible corporations to reflect the
activity of each includible corporation.
• Parts II and III of a separate
Schedule M-3 to eliminate intercompany
transactions between includible
corporations and to include limitations on
deductions (for example, charitable
contribution limitations and capital loss
limitations) and carryover amounts (for

by checking the appropriate box. If Parts II
and III are for a subsidiary in a
consolidated return, also enter the name
and EIN of the subsidiary.

Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC)

Special Schedule M-3 consolidation rules
apply to a mixed group, that is, a
consolidated tax group that:
1. Includes both a corporation that is
an insurance company and a corporation
that is not an insurance company, or
2. Includes both a life insurance
company and a property and casualty
insurance company, or
3. Includes a life insurance company,
a property and casualty insurance
company, and a corporation that is not an
insurance company.

Mixed group consolidation for
Schedule M-3, Parts II and III, requires:
1. Subgroup sub-consolidation of the
1120 subgroup, the 1120-PC subgroup,
and the 1120-L subgroup, each with its
own sub-consolidated Schedule M-3,
Parts II and III, and
2. Consolidation of the subgroup
sub-consolidation totals on a consolidated
Schedule M-3, Part II, that ties to a
consolidated Schedule M-3, Part I, and a
consolidated Form 8916, Reconciliation of
Schedule M-3 Taxable Income with Tax
Return Taxable Income for Mixed Groups.
In addition to one Schedule M-3, Part II,
and one Schedule M-3, Part III, for each
corporation in the three subgroup
sub-consolidations, there will generally be
a total of six additional Schedule M-3,
Parts II, and six additional Schedule M-3,
Parts III, for the subgroup
sub-consolidations. Specifically, there
must be one Part II, and one Part III, for
each subgroup's sub-consolidated
amounts and one Part II, and one Part III,
-4-

The corporation must check the
applicable mixed group checkboxes on all
Schedules M-3, Parts I, II, and III, as
discussed below.

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

Instructions for Schedule M-3 (Form 1120-PC) (2020)

used. See Life/Non-Life Loss Limitation
and Carryforward Used Calculations, later.
The reconciliation totals for book,
temporary difference, permanent
difference, and taxable income for each
subgroup are reported on Form 1120,
1120-PC, or 1120-L, as applicable,
Schedule M-3, Part II, line 29a, columns
(a), (b), (c), and (d), and equal the sum of
the line amounts on Part II, lines 26
through 28. For a mixed group,
Schedule M-3, Part II, lines 29b, 29c, and
30 are blank on the Form 1120, 1120-PC,
or 1120-L, as applicable, for the separate
corporations (parent and subsidiary) and
for the three subgroup sub-consolidations.

Completion of Mixed Group
Checkboxes for Schedule M-3,
Part II and Part III
Note. The following discussion of
checkboxes will assume that the 1120-PC
subgroup includes the corporate parent of
the mixed group.

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

Life/Non-Life Loss Limitation and
Carryforward Used Calculations

DRAFT AS OF
October 12, 2021

Note. A sub-consolidation is required for
every subgroup, even if the subgroup
consists of only one corporation. In
addition, Form 8916-A, if applicable, is
required at the sub-consolidated level and
the sub-consolidated elimination level.

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

Forms 1120, 1120-PC, and 1120-L,
Schedule M-3, Parts II and III, each have a
checkbox (5) at the top indicating a mixed
group. Checkbox (5) and one or more
other applicable checkboxes must be
checked for a mixed group.

For example, an 1120-PC parent
corporation included in the 1120-PC
subgroup must check Form 1120-PC,
Schedule M-3, Parts II and III, box (2)
Parent corporation, and box (5) Mixed
1120/L/PC group. An 1120-PC subsidiary
corporation within the 1120-PC subgroup
must check Form 1120-PC,
Schedule M-3, Parts II and III, box (4)
Subsidiary corporation, and box (5) Mixed
1120/L/PC group. An 1120 subsidiary
corporation within the 1120 subgroup
must check Form 1120, Schedule M-3,
Parts II and III, box (4) Subsidiary
corporation, and box (5) Mixed 1120/L/PC
group. An 1120-L subsidiary corporation
within the 1120-L subgroup must check
Form 1120-L, Schedule M-3, Parts II and
III, box (4) Subsidiary corporation, and box
(5) Mixed 1120/L/PC group.
The 1120 subgroup sub-consolidation
Form 1120, Schedule M-3, Parts II and III,
must be indicated by checking box (5)
Mixed 1120/L/PC group, and box (6) 1120
group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC group,
and box (7) 1120 eliminations for the
eliminations. The 1120-PC subgroup
sub-consolidation Form 1120-PC,
Schedule M-3, Parts II and III, must be
indicated by checking box (5) Mixed
1120/L/PC group, and box (6) 1120-PC
group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC group,
and box (7) 1120-PC eliminations for the
eliminations. The 1120-L subgroup
sub-consolidation Form 1120-L,
Schedule M-3, Parts II and III, must be
indicated by checking box (5) Mixed
1120/L/PC group, and box (6) 1120-L
group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC group,
and box (7) 1120-L eliminations for the
eliminations.

A mixed group with a Form 1120-PC
parent corporation completes a
consolidated level Form 1120-PC,
Schedule M-3, Parts I and II, and a
consolidated Form 8916. The mixed group
consolidated Schedule M-3, Part II, must
be indicated by checking box (1)
Consolidated group, and box (5) Mixed

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-5-

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

Completion of
Schedule M-3 and Certain
Allocations, Limitations,
and Carryovers

Generally, a corporation (or any member
of a U.S. consolidated tax group) required
to file Schedule M-3 must complete the
form in its entirety. In particular, a
corporation filing a nonconsolidated return
that meets the filing requirements for
Schedule M-3 must complete Parts I, II,
and III. Such a corporation does not check
any of the checkboxes at the top of Parts II
and III. In the case of a U.S. consolidated
tax group, Part I must be completed once,
on the consolidated Schedule M-3, by the
parent corporation. Parts II and III must be
completed by the parent corporation, each
includible corporation, and a consolidating
eliminations entity.

Except as otherwise provided in these
instructions, when a Schedule M-3 (Form
1120-PC) is filed, all applicable Part I
questions must be answered; all
applicable columns in Parts II and III must
be completed; all numerical data required
in Parts I, II, and III must be provided; and
any statement required to support a line
item in Parts I, II, or III must be attached
and must provide the information for that
line item.
All detailed statements for Part II and
Part III of Schedule M-3 must be attached
for each separate entity included in the
consolidated Part II and Part III, including
those for the parent company and the
eliminations entity, if applicable. It is not
required that the same supporting detailed
information be presented for Part II and
Part III of the consolidated Schedule M-3.
If an item attributable to an includible
corporation is not shared by or allocated to
the appropriate member of the group but
is retained in the parent corporation's

financial statements (or books and
records, if applicable), then the item must
be reported by the parent corporation in its
separate Schedule M-3. For example, if
the parent of a U.S. consolidated tax
group prepares financial statements that
include all members of the U.S.
consolidated tax group and the parent
does not allocate the group's income tax
expense as reflected in the financial
statements among the members of the
group but retains it in the parent
corporation, the parent corporation must
report on its separate Schedule M-3 the
U.S. consolidated tax group's income tax
expense as reflected in the financial
statements.

Line 1. Questions Regarding
the Type of Income Statement
Prepared

For Schedule M-3, Part I, lines 1 through
12, use only the financial statements of the
U.S. property and casualty insurance
company filing the U.S. income tax return
(or the consolidated financial statements
for the U.S. parent corporation of a U.S.
consolidated tax group). If the U.S.
property and casualty insurance company
filing a U.S. income tax return (or the U.S.
parent corporation of a U.S. consolidated
tax group) prepares its own financial
statements but is controlled by another
corporation (U.S. or foreign) that prepares
financial statements that include the U.S.
corporation, the U.S. corporation (or the
U.S. parent corporation of a U.S.
consolidated tax group) must use for its
Schedule M-3, Part I, its own financial
statements and not the financial
statements of the controlling corporation.

statement is prepared that is a certified
non-tax-basis income statement for the
period ending with or within the tax year,
the corporation must check “Yes,” for Part
I, line 1b, and use that income statement
for Schedule M-3. If Form 10-K is not filed
and no certified non-tax-basis income
statement is prepared for the period
ending with or within the tax year, the
corporation must check “Yes,” for Part I,
line 1c, and use that income statement for
Schedule M-3.

DRAFT AS OF
October 12, 2021

Any adjustments made at the
consolidated group level that are not
attributable to any specific member of the
U.S. consolidated tax group (for example,
disallowance of net capital losses,
contribution deduction carryovers, and
limitation of contribution deductions) must
not be reported on the separate
consolidating parent or subsidiary
Schedules M-3 but rather on the
consolidated Schedule M-3 and on the
consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group).

If an includible corporation has (1) no
activity for the tax year (for example,
because the corporation is a dormant or
inactive corporation), (2) no amount for the
corporation was included in Part I, line 11,
and (3) the corporation has no amounts to
report on Part II and Part III of
Schedule M-3 for the tax year, the parent
corporation of the U.S. consolidated tax
group may attach to the consolidated
Schedule M-3 a statement that provides
the name and employer identification
number (EIN) of the includible corporation
instead of filing a blank Part II and Part III
of Schedule M-3 for the entity. On Part I
check box (4) Dormant subsidiaries
schedule attached.

Specific Instructions
Part I. Financial
Information and Net
Income (Loss)
Reconciliation
When To Complete Part I

Part I must be completed for any tax year
for which the property and casualty
insurance company files Schedule M-3.
Check either box (1) Non-consolidated
return, (2) Consolidated return (Form
1120-PC only), or (3) Mixed 1120/L/PC
group, as applicable. In addition, check
box (4) Dormant subsidiaries schedule
attached, if applicable.

If a non-publicly traded U.S. parent
property and casualty insurance company
of a U.S. consolidated tax group prepares
financial statements and that group
includes a publicly traded subsidiary that
files financial statements with the
Securities and Exchange Commission
(SEC), the consolidated financial
statements of the parent property and
casualty insurance company are the
appropriate financial statements for
purposes of completing Part I. Do not use
any separate company financial
statements that might be prepared for
publicly traded subsidiaries.

Non-Tax-Basis Financial
Statements and Tax-Basis
Financial Statements
A tax-basis income statement for
Schedule M-3 and a tax-basis balance
sheet for Schedule L are allowed only if no
non-tax-basis income statement and no
non-tax-basis balance sheet were
prepared for any purpose and the books
and records of the corporation reflect only
tax-basis amounts. The corporation is
deemed to have non-tax-basis income
statements and the related non-tax-basis
balance sheets for the current tax year for
purposes of Schedule M-3 and
Schedule L if such non-tax-basis financial
statements were prepared for and
presented to management, creditors,
shareholders, government regulators, and
any other third parties for a period ending
with or within the tax year.
If a Form 10-K is filed with the SEC for
the period ending with or within the tax
year, the corporation must check “Yes,” for
Part I, line 1a, and use that income
statement for Schedule M-3. If Form 10-K
is not filed and a non-tax-basis income
-6-

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. Statutory accounting for insurance
companies.
5. Other regulatory accrual
accounting.
6. Any other accrual accounting
standard.
7. Any fair market value standard.
8. Any cash basis standard.
If no non-tax-basis income statement is
certified and two or more non-tax-basis
income statements are prepared, the
income statement prepared according to
the accounting standards first listed in the
order of priority above must be used.
If no non-tax-basis financial statements
are prepared for a U.S. property and
casualty insurance company (or, in the
case of a U.S. consolidated tax group, for
the U.S. parent corporation's consolidated
group) filing Schedule M-3, the U.S.
property and casualty insurance company
(or the U.S. parent corporation of a U.S.
consolidated tax group) must check “No”
on questions 1a, 1b, and 1c; skip Part I,
lines 2a through 3c; and enter the net
income (loss) per the books and records
of the U.S. property and casualty
insurance company (or U.S. consolidated
tax group) on Part I, line 4a.
If no non-tax-basis financial statements
are prepared for a U.S. property and
casualty insurance company (or, in the
case of a U.S. consolidated tax group, for
the U.S. parent corporation's consolidated
group) filing Schedule M-3, and the U.S.
property and casualty insurance company
is owned by a foreign corporation that
prepares financial statements that include
the U.S. corporation (or the U.S. parent

Instructions for Schedule M-3 (Form 1120-PC) (2020)

corporation's consolidated group), the
U.S. corporation (or the U.S. parent
corporation of the U.S. consolidated tax
group) must check “No” on questions 1a,
1b, and 1c; skip Part I, lines 2a through 3c;
and enter the net income (loss) per the
books and records of the U.S. corporation
(or U.S. consolidated tax group) on Part I,
line 4a.

from the financial statement type checked
“Yes” on Part I, line 1, or from its books
and records if Part I, line 1c, is checked
“No.” If Part I, line 1a, is checked “Yes,”
report on Part I, line 4a, the net income
amount reported in the income statement
presented to the SEC on the corporation's
Form 10-K (the Form 10-K for the security
identified on Part I, line 3b, if applicable).

Line 2. Questions Regarding
Income Statement Period and
Restatements

If a property and casualty insurance
company prepares non-tax-basis financial
statements, the amount on Part I, line 4a,
must equal the financial statement net
income (loss) for the income statement
period ending with or within the tax year as
indicated on Part I, line 2a.

equal or exceed $10 million at the end of
the corporation's tax year, the property
and casualty insurance company must
answer questions 1a, 1b, and 1c of Part I
as appropriate for its own Form 1120-PC
and must report on Part I, line 4a, the
amount for the corporation's net income
(loss) that is removed on Part I, line 6a or
6b, of the other corporation's
Schedule M-3. However, if in the
circumstances described immediately
above, the property and casualty
insurance company does have separate
non-tax-basis financial statements
(certified or otherwise) of its own,
independent of the amount of the
corporation's net income included in Part I,
line 4a, of the other U.S. corporation, the
corporation must answer questions 1a, 1b,
and 1c of Part I, as appropriate, for its own
Form 1120-PC, based on its own separate
income statement, and must report on
Part I, line 4a, the net income amounts
shown on its separate income statement.

DRAFT AS OF
October 12, 2021

Enter the beginning and ending dates on
line 2a for the property and casualty
insurance company's income statement
period ending with or within this tax year.

The questions on Part I, lines 2b and
2c, regarding income statement
restatements, refer to the worldwide
consolidated income statement issued by
the corporation filing the U.S. income tax
return (the consolidated financial
statements for the U.S. parent corporation
of a U.S. consolidated tax group) and
used to prepare Schedule M-3. Answer
“Yes” on lines 2b and/or 2c if the property
and casualty insurance company's income
statement has been restated for any
reason. Attach a short explanation of the
reasons for the restatement in net income
for each annual income statement period
that is restated, including the original
amount and restated amount of each
annual statement period's net income. The
attached statement is not required to
report restatements on an entity-by-entity
basis.

Line 3. Questions Regarding
Publicly Traded Voting
Common Stock

The primary U.S. publicly traded voting
common stock class is the most widely
held or most heavily traded within the
United States as determined by the
property and casualty insurance company.
If the property and casualty insurance
company has more than one class of
publicly traded voting common stock,
attach a list of the classes of publicly
traded voting common stock and the
trading symbol and the nine-digit CUSIP
number of each class.

Line 4. Worldwide Consolidated
Net Income (Loss) per Income
Statement

Report on Part I, line 4a, the worldwide
consolidated net income (loss) per the
income statement (or books and records,
if applicable). A corporation filing a
non-consolidated Form 1120-PC for itself
must report its worldwide income on Part I,
line 4a.

In completing Schedule M-3, the
property and casualty insurance company
must use financial statement amounts

If the property and casualty insurance
company prepares non-tax-basis financial
statements and the income statement
period differs from the corporation's tax
year, the income statement period
indicated on Part I, line 2a, applies for
purposes of Part I, lines 4a through 8.
If the property and casualty insurance
company does not prepare non-tax-basis
financial statements, and has checked
“No” on Part I, line 1c, enter the net
income (loss) per the books and records
of the U.S. corporation or the U.S.
consolidated tax group on Part I, line 4a.

Indicate on Part I, line 4b, which of the
following accounting standards were used
for line 4a.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Statutory.
4. Other (specify).
Report on Part I, lines 5a through 10,
as instructed below, all adjustment
amounts required to adjust worldwide net
income (loss) reported on this Part I,
line 4a (whether from financial statements
or books and records), to net income
(loss) of includible corporations that must
be reported on Part I, line 11.
Report on line 12a the worldwide
consolidated total assets and total
liabilities amounts for the corporation
using the same financial statements (or
books and records) used for the
worldwide consolidated income (loss)
amount reported on Part I, line 4a.
If a U.S. property and casualty
insurance company (a) has net income
(loss) included on Part I, line 4a, and
removed on Part I, line 6a or 6b, on
another U.S. corporation's Schedule M-3,
(b) files its own Form 1120-PC (separate
or consolidated), (c) does not have a
separate non-tax-basis financial statement
(certified or otherwise) of its own, and (d)
reports on Schedule L of its own Form
1120-PC total consolidated assets that

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-7-

Note. See the instructions for Part I,
line 10, for adjustments that may be
necessary to reconcile financial statement
income to statutory income for the
property and casualty insurance company.

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

Remove the financial net income (line 5a)
or loss (line 5b) of each foreign entity that
is included on Part I, line 4a, and is not an
includible corporation in the U.S.
consolidated tax group (nonincludible
foreign entity). In addition, on Part I, line 8,
adjust for consolidation eliminations and
correct for minority interest and
intercompany dividends between any
nonincludible foreign entity and any
includible corporation. Do not remove in
Part I the financial net income (loss) of any
nonincludible foreign entity accounted for
on Part I, line 4a, using the equity method.
Attach a supporting statement that
provides the name, EIN (if applicable),
and net income (loss) included on Part I,
line 4a, that is removed on 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 are not
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on a

separate line on the attached 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 Part I, 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).

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
such entity's own financial accounting net
income statement or books and records,
and any consolidation or elimination
entries (for intercompany dividends,
minority interests, etc.) not reportable on
Part I, line 8, should be reported on the
attached supporting 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).

be reported on a separate line on the
attached statement, so that the separate
financial accounting income (loss) of each
other disregarded entity or other includible
entity remains separately stated.
For example, if the net income (after
consolidation and elimination entries) of a
sub-consolidated group of other
disregarded entities is being reported on
line 7a or 7b, the attached supporting
statement should report the income (loss)
of each separate other disregarded entity
from each entity's own financial
accounting net income statement or books
and records, and any consolidation or
elimination entries (for intercompany
dividends, minority interests, etc.) not
reportable on Part I, line 8, should be
reported on the attached supporting
statement as a net amount on a line
separate and apart from lines that report
each other disregarded entity's separate
net income (loss).

DRAFT AS OF
October 12, 2021

Line 6. Net Income (Loss) of
Nonincludible U.S. Entities

Remove the financial net income (line 6a)
or loss (line 6b) included on Part I, line 4a,
for each U.S. entity that is not an includible
corporation in the U.S. consolidated tax
group (nonincludible U.S. entity). In
addition, on Part I, line 8, adjust for
consolidation eliminations and correct for
minority interest and intercompany
dividends between any nonincludible U.S.
entity and any includible corporation. Do
not remove in Part I the financial net
income (loss) of any nonincludible U.S.
entity accounted for on Part I, line 4a,
using the equity method.
Attach a supporting statement that
provides the name, EIN, and net income
(loss) included on Part I, line 4a, that is
removed on line 6 for each separate
nonincludible U.S. entity. Also state the
total assets and total liabilities for each
such separate nonincludible U.S. entity
and include those assets and liabilities
amounts in the total assets and total
liabilities reported on Part I, line 12c. The
amounts of income (loss) detailed on the
supporting 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 are not
reportable on Part I, line 8, the net
amounts of all such consolidation and
elimination entries must be reported on a
separate line on the attached 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

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

Include on Part I, line 7a, 7b, or 7c, the
financial net income or (loss) of each
foreign or U.S. disregarded entity or other
includible corporation that is not included
in the consolidated financial group and
therefore not included in the income
reported on Part I, line 4a. Include on
line 7a or 7b the financial net income or
(loss) of any disregarded entity that is not
included in the income reported on Part I,
line 4a, but is included on Part I, line 11
(other disregarded entities). Include on
line 7c the financial net income or (loss) of
any entity not a disregarded entity that is
not included in the income reported on
Part I, line 4a, but is included on line 11
(other includible corporations). In addition,
on Part I, line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends for
any other disregarded entity or other
includible entities.
Attach a supporting statement that
provides the name, EIN, and net income
(loss) per the financial statement or books
and records for each separate other
disregarded entity or other includible entity
reported on line 7. 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 or other includible
entity without regard to the effect of
consolidation or elimination entries solely
between or among the entities listed. If
there are consolidation or elimination
entries relating to such other disregarded
entity or other includible entities whose
income (loss) is reported on the attached
statement that are not reportable on Part I,
line 8, the net amounts of all such
consolidation and elimination entries must
-8-

Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities and
Nonincludible Entities
Adjustments on Part I, line 8, to reverse
certain financial accounting consolidation
or elimination entries are necessary to
ensure that transactions between
includible entities and nonincludible U.S.
or foreign entities are not eliminated, in
order to report the correct total amount on
Part I, line 11. Also, additional
consolidation entries and elimination
entries may be necessary on Part I, line 8,
related to transactions between includible
entities that are in the consolidated
financial statement group and other
disregarded entities and other includible
entities that are not in the consolidated
financial statement group but that are
reported on Part I, line 7a, 7b, or 7c, in
order to report the correct total amount on
Part I, line 11.
Include on Part I, line 8, the total of the
following: (a) amounts of any adjustments
to consolidation entries and elimination
entries that are contained in the amount
reported on Part I, line 4a, required as a
result of removing amounts on Part I,
line 5 or 6, and (b) amounts of any
additional consolidation entries and
elimination entries that are required as a
result of including amounts on Part I,
line 7a, 7b, or 7c. This is necessary in
order that the consolidation entries and
intercompany eliminations entries
included in the amount reported on Part I,
line 11, are only those applicable to the
financial net income (loss) of includible
entities for the financial statement period.
For example, adjustments must be
reported on line 8 to remove minority
interest and to reverse the elimination of
intercompany dividends included on Part I,

Instructions for Schedule M-3 (Form 1120-PC) (2020)

line 4a, that relate to the net income of
entities removed on Part I, line 5 or 6,
because the income to which the
consolidation or elimination entries relate
has been removed. Also, for example,
consolidation or elimination entries must
be reported on line 8 to reflect any minority
interest ownership in the net income of
other disregarded entities or other
includible entities reported on Part I,
line 7a, 7b, or 7c. Consolidation and
elimination entries must also be reported
on line 8 to eliminate any intercompany
dividends between corporations or entities
whose income is included on Part I,
line 7a, 7b, or 7c, and other entities
included in the consolidated U.S. income
tax return. See line 11, examples 3, 4, and
5.

Part I, line 11, that differs from the period
reported on Part I, line 4a, or line 7. Report
on Part I, line 10b, adjustments to income
because of the differences in accounting
period.

Line 10a. Intercompany
Dividend Adjustments To
Reconcile to Line 11,
Line 10b. Other Statutory
Accounting Adjustments To
Reconcile to Line 11, and
Line 10c. Other Adjustments To
Reconcile to Amount on Line 11

the net adjustment that is attributable to
intercompany dividend adjustments
required to be reported by statutory
accounting and included on Part I,
line 10a; the amount of the net adjustment
attributable to other statutory accounting
requirements and included on Part I,
line 10b; and the amount of the remainder
of the net adjustment not required
because of statutory accounting and
included on Part I, line 10c. If any net
adjustment is included for the corporation
on Part I, line 10b or 10c, attach a
supplemental supporting statement
identifying the line (10b or 10c), and the
type and amount of each adjustment
included in the net adjustment.

DRAFT AS OF
October 12, 2021

If a corporate owner of an interest in
another entity (a) accounts for the interest
in the entity in the owner corporation's
separate general ledger on the equity
method, and (b) fully consolidates the
entity in the owner corporation's
consolidated financial statements, but the
entity is not includible in the owner
corporation's consolidated U.S. income
tax return, then, as part of reversing all
consolidation and elimination entries for
the nonincludible entity, the corporate
owner must reverse on Schedule M-3,
Part I, line 8, the elimination of the equity
income inclusion from the entity. If the
owner corporation does not account for
the entity on the equity method on its own
general ledger, it will not have eliminated
the equity income for consolidated
financial statement purposes, and
therefore will have no elimination of equity
income to reverse.
The attached supporting statement for
Part I, line 8, must identify the type (for
example, minority interest, intercompany
dividends, etc.) and amount of
consolidation or elimination entries
reported, as well as the names of the
entities to which they pertain. It is not
necessary, but it is permitted, to report
intercompany eliminations that net to zero
on Part I, line 8, such as intercompany
interest income and expense.

Line 9. Adjustment To
Reconcile Income Statement
Period to Tax Year

Include on line 9 any adjustments
necessary to the income (loss) of
includible corporations to reconcile
differences between the corporation's
income statement period reported on
line 2a and the corporation's tax year.
Attach a statement describing the
adjustment.

Statutory accounting for an insurance
company subsidiary acquired or merged
may require the use of a financial
statement period for income reported on

Include on lines 10a, 10b, and 10c any
other adjustments to reconcile net income
(loss) on Part I, line 4a, through Part I,
line 9, with net income (loss) on Part I,
line 11. Include on line 10a the amount of
any intercompany dividend adjustment
required by statutory accounting. Include
on line 10b the amount of any other
required statutory accounting adjustment.
Include on line 10c the amount of any
other adjustment not required by statutory
accounting.

Normally, all intercompany dividends
will have been eliminated or excluded
from the financial accounting consolidated
net income (loss) reported on Part I,
line 4a. However, an insurance company
may be required to include certain
intercompany dividends on Part I, line 11,
so that the amount reported on Part I,
line 11, agrees with statutory accounting
net income (Annual Statement). If the net
income (loss) of a corporation that files
Form 1120-PC or Form 1120-L is included
on Part I, line 4a, or line 7, and is
computed on a basis other than statutory
accounting, include on line 10a the
adjustments necessary such that Part I,
line 11, includes intercompany dividends
in the net income (loss) for the corporation
to the extent required by statutory
accounting principles. (For insurance
companies included in the consolidated
U.S. income tax return, see instructions for
Part I, line 11, and Part II, line 7.)
Statutory accounting for an insurance
company subsidiary acquired or merged
may require the use of a financial
statement period for income reported on
Part I, line 11, that differs from the period
reported on Part I, line 4a, or line 7. Report
on Part I, line 10b, adjustments to income
because of such differences in accounting
period.
For any adjustments reported on Part I,
lines 10a, 10b, and 10c, attach a
supporting statement that provides, for
each corporation to which an adjustment
relates, the name and EIN of the
corporation; the amount of net income
included in Part I before any adjustments
on line 10; the amount of net income
included on Part I, line 11; the amount of

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-9-

Line 11. Net Income (Loss) per
Income Statement of Includible
Corporations

Report on line 11 the net income (loss) per
the income statement (or books and
records, if applicable) of the property and
casualty insurance company. In the case
of a U.S. consolidated tax group, report
the consolidated income statement net
income (loss) of all corporations listed on
Form 851 and included in the consolidated
U.S. income tax return for the tax year.
Amounts reported in column (a) of Parts II
and III (see instructions, later) must be
reported on the same accounting method
used to report the amount of net income
(loss) per income statement of includible
corporations on Part I, line 11, which for
insurance companies is usually statutory
accounting. (For insurance companies
included in the consolidated U.S. income
tax return, see instructions for Part I,
line 10, and Part II, line 7.)
Do not, in any event, report on line 11
the net income of entities not listed on
Form 851 other than disregarded entities
and not included in the consolidated U.S.
income tax return for the tax year. For
example, it is not permissible to remove
the income of nonincludible entities on
lines 5 and/or 6, discussed earlier, then to
add back such income on lines 7 through
10, such that the amount reported on
line 11 includes the net income of entities
not includible in the consolidated U.S.
income tax return. A principal purpose of
Schedule M-3 is to report on this Part I,
line 11, only the financial accounting net
income of only the corporations included
in the consolidated U.S. income tax return.
Whether or not the corporation
prepares financial statements, Part I,
line 11, must include all items that impact
the net income (loss) of the corporation
even if they are not recorded in the profit
and loss accounts in the corporation's
general ledger, including, for example, all
post-closing adjusting entries (including
workpaper adjustments) and dividend
income or other income received from
non-includible corporations.

Example 3.
1. U.S. property and casualty
insurance company P is publicly traded
and files Form 10-K with the SEC. P owns
80% or more of the stock of 75 U.S.
corporations, DS1 through DS75; between
51% and 79% of the stock of 25 U.S.
corporations, DS76 through DS100; and
100% of the stock of 50 foreign
subsidiaries, FS1 through FS50. P
eliminates all dividend income from DS1
through DS100 and FS1 through FS50 in
financial statement consolidation entries.
Furthermore, P eliminates the minority
interest ownership, if any, of DS1 through
DS100 in financial statement
consolidation entries. P's SEC Form 10-K
includes P, DS1 through DS100, and FS1
through FS50 on a fully consolidated
basis. P files a consolidated U.S. income
tax return with DS1 through DS75.
P must check “Yes” on Part I, line 1a.
On Part I, line 4a, P must report the
consolidated net income from the SEC
Form 10-K for the consolidated financial
statement group of P, DS1 through
DS100, and FS1 through FS50. P must
remove the net income (loss) of FS1
through FS50 on Part I, line 5a or 5b, as
applicable. P must remove the net income
(loss) before minority interests of DS76
through DS100 on Part I, line 6a or 6b, as
applicable. P must reverse on Part I,
line 8:
a. The elimination of dividends
received by P and DS1 through DS75
from DS76 through DS100 and FS1
through FS50; and
b. The recognition of minority
interests' share of the net income (loss) of
DS76 through DS100. (Note. The minority
interests' share, if any, of the income of
DS1 through DS75 must be reported on
Part II, line 8.)
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the includible
corporations. Intercompany transactions
between the includible corporations that
had been eliminated in the net income
amount on Part I, line 4a, remain
eliminated in the net income amount on
line 11. Transactions between the
includible corporations and the
nonincludible entities that are eliminated in
the net income amount on Part I, line 4a,
are included in the net income amount on
line 11 since the elimination of those
transactions was reversed on line 8.
2. Foreign corporation F owns 100%
of the stock of U.S. property and casualty
insurance company P. P owns 100% of
the stock of DS1, 60% of the stock of DS2,
and 100% of the stock of FS1. F prepares
certified audited financial statements. P
does not prepare any financial statements.
P files a consolidated U.S. income tax
return with DS1.

P must not complete Schedule M-3,
Part I, with reference to the financial
statements of its foreign parent F. P must
check “No” on Part I, lines 1a, 1b, and 1c,
skip lines 2a through 3c of Part I, and
enter worldwide net income (loss) per the
books and records of the includible
corporations (P and DS1) on Part I,
line 4a. If the amount on Part I, line 4a,
includes the income (loss) of DS2 and
FS1 or is not on the statutory basis, P
must enter any necessary adjustments on
lines 5a through 10 in order for Part I,
line 11, to report the net income (loss) of
includible corporations P and DS1, net of
eliminations for transactions between P
and DS1.

corporation DS1, which is fully
consolidated in P's financial statements. P
accounts for DS1 in P's separate general
ledger on the equity method. DS1 has net
income of $100 (before minority interests)
and pays dividends of $50, of which P
receives $30. The dividend reduces P's
investment in DS1 for equity method
reporting on P's separate general ledger
where P includes its 60% equity share of
DS1 income, which is $60. In its financial
statements, P eliminates the DS1 equity
method income of $60 and consolidates
DS1, including $60 of net income ($100
less the minority interest of $40) on Part I,
line 4a.
P must remove the $100 net income of
DS1 on Part I, line 6a. P must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of DS1 and
the elimination of the $60 of DS1 equity
income. The net result is that P includes
the $60 of equity method income from
DS1 at Part I, line 11, and on Part II, line 6,
column (a). P's dividend income included
on the tax return from its investment in
DS1 must be reported on Part II, line 7,
column (d).
4. U.S. property and casualty
insurance company 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 Part I, line 4a.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on Part
I, line 8, the elimination of the $40 minority
interest net income of N and the
elimination of the $60 of N equity method
income. The result is that C includes the
$60 of equity method income for N on Part
I, line 11, and on Part II, line 9, column (a).
C's taxable income from N must be
reported by C on Part II, line 9, column (d).
5. U.S. property and casualty
insurance company 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

DRAFT AS OF
October 12, 2021
Example 4.
1. U.S. property and casualty
insurance company P owns 60% of
corporation DS1 which is fully
consolidated in P's financial statements. P
does not account for DS1 in P's separate
general ledger on the equity method. DS1
has net income of $100 (before minority
interests) and pays dividends of $50, of
which P receives $30. The dividend is
eliminated in the consolidated financial
statements. In its financial statements, P
consolidates DS1 and includes $60 of net
income ($100 less the minority interest of
$40) on Part I, line 4a.
P must remove the $100 net income of
DS1 on Part I, line 6a. P must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of DS1. In
addition, P reverses its elimination of the
$30 intercompany dividend in its financial
statements on Part I, line 8. The net result
is that P includes the $30 dividend from
DS1 at Part I, line 11, and on Part II, line 7,
column (a). P's dividend income included
on the tax return from DS1 must be
reported on Part II, line 7, column (d).
2. U.S. property and casualty
insurance company C owns 60% of the
capital and profits interests in U.S. LLC N.
C does not account for N in C's separate
general ledger on the equity method. N
has net income of $100 (before minority
interests) and makes no distributions
during the tax year. C treats N as a
corporation for financial statement
purposes and as a partnership for U.S.
income tax purposes. In its financial
statements, C consolidates N and
includes $60 of net income ($100 less the
minority interest of $40) on Part I, line 4a.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on Part
I, line 8, the elimination of the $40 minority
interest net income of N. The result is that
C includes no income for N either on Part
I, line 11, or on Part II, line 9, column (a).
C's taxable income from N must be
reported by C on Part II, line 9, column (d).
3. U.S. property and casualty
insurance company P owns 60% of
-10-

Instructions for Schedule M-3 (Form 1120-PC) (2020)

for U.S. income tax purposes. For equity
method reporting on C's separate general
ledger, C includes its 60% equity share of
N income, which is $60. In its financial
statements, C eliminates the $60 of N
equity method income and consolidates N
and includes $60 of net income ($100 less
the minority interest of $40) on Part I,
line 4a.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on Part
I, line 8, the elimination of the $40 minority
interest net income of N and the
elimination of the $60 of N equity method
income. The result is that C includes the
$60 of equity method income for N on Part
I, line 11, and on Part II, line 9, column (a).
C's taxable income from N must be
reported by C on Part II, line 9, column (d).

consolidated U.S. income tax group is
required to include on the attached
supporting statement for Part I, line 8, the
details of the adjustment to the minority
interest in the net income of DS1, but is
not required to report the offsetting
adjustment to the intercompany
elimination of interest income and interest
expense (though it is permitted to do so).

and report in column (d) the amount
included in the subtotal on Form 1120-PC,
Schedule A, line 35 (or Schedule B,
line 19, if applicable).
Note. A statement or explanation may be
attached to any line even if none is
required.

DRAFT AS OF
October 12, 2021

Example 5. U.S. property and
casualty insurance company P owns 80%
of the stock of corporation DS1. DS1 is
included in P's consolidated U.S. income
tax return, even though DS1 is not
included in P's consolidated financial
statements on either a consolidated basis
or on the equity method. DS1 has current
year net income of $100 after taking into
account its $40 interest payment to P. P
has net income of $1,040 after recognition
of the interest income from DS1. Because
DS1 is an includible corporation, 100% of
the net income of both P and DS1 must be
reported on Form 1120-PC, Schedule A,
of the PDS consolidated U.S. income tax
return, and the intercompany interest
income and expense must be removed by
consolidation elimination entries.

P must report its financial statement net
income of $1,040 on Part I, line 4a, and
reports DS1's net income of $100 on Part
I, line 7c. Then, in order to reflect the full
consolidation of the financial accounting
net income of P and DS1 at Part I, line 11,
Net income (loss) per income statement of
includible corporations, the following
consolidation and elimination entries are
reported on Part I, line 8: (a) offsetting
entries to remove the $40 of interest
income received from DS1 included by P
on Part I, line 4a, and to remove the $40 of
interest expense of DS1 included in line 7c
for a net change of zero; and (b) an entry
to reflect the $20 minority interest in the
net income of DS1 (DS1 net income of
$100 times 20% minority interest). The
result is that Part I, line 11, reports $1,120:
$1,040 from Part I, line 4a, $100 from
line 7, and ($20) from line 8. Stated
another way, Part I, line 11, includes the
entire $1,000 net income of P, measured
before recognition of the intercompany
interest income from DS1 and the
consolidation of DS1 operations, plus the
entire $140 net income of DS1, measured
before interest expense to P, less the
minority interest ownership of $20 in DS1's
separate net income ($100). The

Line 12. Total Assets and
Liabilities of Entities Included
or Removed on Part I, Lines 4,
5, 6, and 7

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

Specific Instructions for
Parts II and III

For U.S. consolidated tax returns, file
supporting statements for each includible
corporation. See Consolidated Return in
the Instructions for Form 1120-PC.

General Format for Parts II
and III

Check the applicable box(es) at the top of
pages 2 and 3 of Schedule M-3 to indicate
whether the Schedule M-3 is for the:
1. Consolidated group,
2. Parent corporation,
3. Consolidated eliminations,
4. Subsidiary corporation, or
5. Mixed 1120/L/PC group.
Also check the applicable box to
indicate whether the Schedule M-3 is for a
sub-consolidated (6) 1120-PC group; or
(7) 1120-PC eliminations. See
Consolidated Schedule M-3 Versus
Consolidating Schedules M-3 for Form
1120-PC Groups, and Schedule M-3
Consolidation for Mixed Groups (1120/L/
PC), earlier.
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included in Part I, line 11,

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-11-

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 property and casualty insurance
company in accordance with statutory
accounting principles (SAP), differences
that are treated as temporary for SAP
must be reported in column (b) and
differences that are permanent (that is, not
temporary for SAP) must be reported in
column (c). Generally, pursuant to SAP, a
temporary difference affects (creates,
increases, or decreases) a deferred tax
asset or liability.
If the property and casualty insurance
company does not prepare financial
statements, or the financial statements are
not prepared in accordance with SAP,
report in column (b) any difference that the
property and casualty insurance company
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 property and casualty insurance
company believes will not reverse in a
future tax year (and is not the reversal of
such a difference that arose in a prior tax
year).
If the property and casualty insurance
company 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. In its first year of
operation, property and casualty
insurance company A is not required to file
a Schedule M-3. If A voluntarily files
Schedule M-3, all applicable Part I
questions must be answered and all
applicable columns in Parts II and III must
be completed.
Example 7. Property and casualty
insurance company B is a U.S. publicly
traded corporation that files a U.S.
consolidated tax return and prepares
consolidated SAP/GAAP financial

statements. In prior years, B acquired
intellectual property (IP) and goodwill
through several corporate acquisitions.
The IP is amortizable for both U.S. income
tax and financial statement purposes. In
the current year, B's annual amortization
expense for IP is $9,000 for U.S. income
tax purposes and $6,000 for financial
statement purposes. In its financial
statements, B treats the difference in IP
amortization as a temporary difference.
The goodwill is not amortizable for U.S.
income tax purposes and is subject to
impairment for financial statement
purposes. In the current year, B records
an impairment charge on the goodwill of
$5,000. In its financial statements, B treats
the goodwill impairment as a permanent
difference. B must report the amortization
attributable to the IP on Part III, line 28,
and report $6,000 in column (a), a
temporary difference of $3,000 in column
(b), and $9,000 in column (d). B must
report the goodwill impairment on Part III,
line 27, and report $5,000 in column (a), a
permanent difference of ($5,000) in
column (c), and $0 in column (d).

described in Regulations section
1.6011-4(b) and is therefore reported on
Part II, line 12. For example, with the
exception of interest income reflected on a
Schedule K-1 received by a property and
casualty insurance company as a result of
the property and casualty insurance
company's investment in a partnership or
other pass-through entity, all interest
income, whether from unconsolidated
affiliated companies, third parties, banks,
or other entities; whether imputed interest
or not; whether from foreign or domestic
sources; whether taxable or exempt from
tax; and regardless of how or where the
income is classified in the property and
casualty insurance company's annual
statement, must be included on Part II,
line 13, column (a). Likewise, all fines and
penalties 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 11,
column (a), regardless of the government
authority that imposed the fines or
penalties; regardless of whether the fines
or penalties are civil or criminal;
regardless of the classification,
nomenclature, or terminology attached to
the fines or penalties by the imposing
authority in its actions or documents; and
regardless of how or where the fines or
penalties are classified in the property and
casualty insurance company's summary of
operations or the income and expense
accounts maintained in the property and
casualty insurance company's books and
records.

specific line items included in
Schedule M-3 and consistent reporting of
all transactions of like substantive nature
that occurred during the tax year. For
example, all expense amounts that are
included in the annual statement or exist in
the books and records that represent
some form of “Bad debt expense,” except
write-offs of premium receivables, must be
reported on Part III, line 32, in column (a),
regardless of whether the amounts are
recorded or stated under different
nomenclature in the annual statement or
the books and records, such as “Provision
for doubtful accounts” or “Expense for
uncollectible notes receivable.” Likewise,
as stated in the preceding paragraph, all
fines and penalties must be included on
Part III, line 11, column (a), regardless of
the terminology or nomenclature attached
to them by the property and casualty
insurance company in its books and
records or annual statement.

DRAFT AS OF
October 12, 2021

Reporting Requirements
for Parts II and III

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

General Reporting
Requirements

If an amount is attributable to a reportable
transaction described in Regulations
section 1.6011-4(b), the amount must be
reported in columns (a), (b), (c), and (d),
as applicable, of Part II, line 12, regardless
of whether the amount would otherwise be
reported on Part II or Part III of
Schedule M-3. Thus, if a taxpayer files
Form 8886, Reportable Transaction
Disclosure Statement, the amounts
attributable to that reportable transaction
must be reported on Part II, line 12.
A property and casualty insurance
company 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
property and casualty insurance
company's current year annual statement
net income (loss) or in an income or
expense account maintained in the
property and casualty insurance
company's books and records. The
amount should be reported even if there is
no difference between that amount and
the amount included in taxable income
unless (a) otherwise provided in these
instructions or (b) the amount is
attributable to a reportable transaction

If a property and casualty insurance
company would be required to report in
Parts II and III, column (a), the amount of
any item specifically listed on
Schedule M-3 in accordance with the
preceding paragraph, except that the
property and casualty insurance company
has capitalized the item of income or
expense and reports the amount in its
annual statement or in asset and liability
accounts maintained in the property and
casualty insurance company's books and
records, the property and casualty
insurance company 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 property and
casualty insurance company is required to
report in Parts II and III, column (a), the
amount of any item specifically listed on
Schedule M-3 that is included in the
property and casualty insurance
company's annual statement or exists in
the property and casualty insurance
company's books and records, regardless
of the nomenclature associated with that
item in the annual statement or books and
records. Accurate completion of
Schedule M-3 requires reporting amounts
according to the substantive nature of the
-12-

With limited exceptions, Part II includes
lines for specific items of income, gain, or
loss (income items). See Part II, lines 1
through 24. If an income item is described
in Part II, lines 1 through 24, report the
amount of the item on the applicable line,
regardless of whether there is a difference
for the item. If there is a difference for the
income item, or only a portion of the
income item has a difference and a portion
of the item does not have a difference,
and the item is not described in Part II,
lines 1 through 24, report and describe the
entire amount of the item on Part II,
line 25.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
See Part III, lines 1 through 38. If an
expense item is described on Part III, lines
1 through 38, report the amount of the
item on the applicable line, regardless of
whether there is a difference for the item. If
there is a difference for the expense item,
or only a portion of the expense item has a
difference and a portion of the item does
not have a difference and the item is not
described in Part III, lines 1 through 38,
report and describe the entire amount of
the item on Part III, line 39.
If there is no difference between the
annual statement amount and the taxable
amount of an entire item of income, loss,
expense, or deduction and the item is not
described or included in Part II, lines 1
through 25, or Part III, lines 1 through 39,
report the entire amount of the item in
columns (a) and (d) of Part II, line 28.
Special instructions for Part II, lines 25
and 28, and Part III, line 39. Whether an
income (loss) item is reported on Part II,
line 25, or on Part II, line 28, or an
expense/deduction item on Part III, line 39,
or on Part II, line 28, is determined
separately by each member of the U.S.

Instructions for Schedule M-3 (Form 1120-PC) (2020)

consolidated tax group and not at the U.S.
consolidated tax group level. For example,
U.S. corporation P has two subsidiaries, A
and B, that are included in P's
consolidated financial statements and in
P's consolidated U.S. income tax return.
For financial statement purposes, P, A,
and B recognize real estate tax expense
when accrued. For U.S. income tax
purposes, P and A recognize such
expense consistent with the method used
for financial statement purposes, whereas
B recognizes such deduction based on a
method different from that used for
financial statement purposes. P and A
must report this expense/deduction in
columns (a) and (d) on Part II, line 28. B
must report the following on Part III,
line 39, in column (a), B's expense
recognized in the financial statements
when accrued; in column (d), B's real
estate tax expense recognized for U.S.
income tax purposes; and in column (b) or
(c), as applicable, the difference between
B's real estate tax expense in its financial
statements and its real estate tax
deduction recognized for U.S. taxable
income purposes.

required to be attached, even if the
amounts are below a certain dollar
amount.
Required statements for Part II,
line 25, and Part III, line 39. A separate
statement must be attached to
Schedule M-3 (Form 1120-PC) that
includes a detailed description of each
item and adjustment entered on Part II,
line 25, and Part III, line 39.
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 25, or Part III,
line 39.
Each description should adequately
describe all four columns of Part II, line 25,
or Part III, line 39. If additional information
is required to provide an acceptable
description, attach a supporting
statement.

agency balances that are estimated to be
uncollectible. The second reserve is an
estimate of future office closure expenses.
In its annual statement, D treats the two
reserve accounts as giving rise to
temporary differences that will reverse in
future years. The two reserves are
expenses in D's current annual statement
but are not deductions for U.S. income tax
purposes in the current year. D must not
combine the Schedule M-3 differences for
the two reserve accounts. D must report
the amounts attributable to the allowance
for bad debts on Part III, line 32, and must
separately state and adequately disclose
the amount attributable to the other
reserve, future office closure expenses, on
a required, attached statement that
supports the amounts on Part III, line 39.
D must also provide a description for
each reserve that meets the requirements
for Part III, line 39, discussed earlier under
Required statements for Part II, line 25,
and Part III, line 39. In this example, an
acceptable description would be “Future
Office Closure Expense Reserve.”

DRAFT AS OF
October 12, 2021

Separately stated and adequately disclosed. Each difference reported in Parts
II and III must be separately stated and
adequately disclosed. In general, a
difference is adequately disclosed if the
difference is labeled in a manner that
clearly identifies the item or transaction
from which the difference arises. For
further guidance about adequate
disclosure, see Regulations section
1.6662-4(f). If a specific item of income,
gain, loss, expense, or deduction is
described on Part II, lines 9 through 24, or
Part III, lines 1 through 38, and the line
does not indicate to “attach statement”
and the specific instructions for the line do
not call for an attachment of a statement,
then the item is considered separately
stated and adequately disclosed if the
item is reported on the applicable line and
the amount(s) of the item(s) are reported
in the applicable columns of the applicable
line. See the instructions for Part II, lines 1
through 8, later, for specific additional
information required to be provided for
these particular lines.
Note. A statement or explanation may be
attached to any line even if none is
required.
Except as otherwise provided,
differences for the same item must be
combined or netted together and reported
as one amount on the applicable line of
Schedule M-3. However, differences for
separate items must not be combined or
netted together. Each item (and
corresponding amount attributable to that
item) must be separately stated and
adequately disclosed on the applicable
line of Schedule M-3, or any statement

Example 8. Property and casualty
insurance company C is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. C
placed in service 10 depreciable assets in
prior years. C's total depreciation expense
for its current 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 current tax year for the
other five assets is $40,000 for income
statement purposes and $30,000 for U.S.
income tax purposes. In its annual
statement, C treats the differences
between annual statement and U.S.
income tax depreciation expense as
giving rise to temporary differences that
will reverse in future years. C must
combine all of its depreciation
adjustments. Accordingly, C must report
on Part III, line 31, for its current tax year
income statement depreciation expense of
$90,000 in column (a), a temporary
difference of $10,000 in column (b), and
U.S. income tax depreciation expense of
$100,000 in column (d).
Example 9. Property and casualty
insurance company D is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. On
December 31, of the current year, D
establishes two reserve accounts in the
amount of $100,000 for each account.
One reserve account is an allowance for

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-13-

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 10. Insurance company F
had $100 of meal expenses, $100 of
entertainment expenses, and therefore
deducted $200 on its income statement.
For federal income tax purposes, the
entire $100 of meal expenses are subject
to the 50% limitation under section 274(n).
The $100 of entertainment expenses are
nondeductable under section 274(a). F
must report on Part III, line 10, $200 in
column (a), $150 in column (c), and $50 in
column (d). F must report all 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
Includible Corporations
With Taxable Income per
Return
Lines 1 Through 8. Additional
Information for Each Property
and Casualty Insurance
Company

For any item reported on Part II, lines 1, 3
through 6, or 8, attach a supporting
statement that provides the name of the
entity for which the item is reported, the
type of entity (corporation, partnership,

etc.), the entity's EIN (if applicable), and
the item amounts for columns (a) through
(d). See the instructions for Part II, lines 2
and 7, for the specific information required
for those particular lines.

Line 1. Income (Loss) From
Equity Method Foreign
Corporations

any amount included in taxable income
pursuant to section 1293 (relating to
qualified electing funds). The amount
included under section 951 corresponds
to the total of the amounts reported by the
property and casualty insurance company
on line 6, Schedule I, of all Forms 5471,
Information Return of U.S. Persons With
Respect To Certain Foreign Corporations.
The amount of qualified electing fund
(QEF) income corresponds to the total of
the amounts reported by the property and
casualty insurance company on all Forms
8621, Information Return by a
Shareholder of a Passive Foreign
Investment Company or Qualified Electing
Fund.

U.S. corporation accounted for on the
equity method.

Line 7. U.S. Dividends Not
Eliminated in Tax Consolidation
Report on line 7, column (a), the amount
of dividends included in Part I, line 11 that
were received from any U.S. corporation.
Report on line 7, column (d), the amount
of any U.S. dividends included in the
subtotal on Form 1120-PC, Schedule A,
line 35 (or Schedule B, line 19, if
applicable).

DRAFT AS OF
October 12, 2021

Report on line 1, column (a), the financial
income (loss) included in Part I, line 11, for
any foreign corporation accounted for on
the equity method and remove such
amount in column (b) or (c), as applicable.
Report the amount of dividends received
and other taxable amounts received or
includible from or includible with respect to
foreign corporations on Part II, lines 2
through 5, 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 in the
subtotal on Form 1120-PC, Schedule A,
line 35 (or Schedule B, line 19, if
applicable), and report on line 2, column
(a), the amount of dividends from any
foreign corporation included in Part I,
line 11. Do not report on Part II, line 2, any
amounts that must be reported on Part II,
line 3 or 4, or dividends that were
previously taxed and must be reported on
Part II, line 5. See the instructions for Part
II, lines 3, 4, and 5, later. Report amounts
in columns (b) and (c), as applicable.

Also include on line 3 passive foreign
investment company mark-to-market
gains and losses under section 1296. Do
not report such gains and losses on
Schedule M-3, Part II, line 15.

Line 4. Gross-Up for Foreign
Taxes Deemed Paid

Report on line 4, column (d), the amount
of any gross-up for foreign taxes deemed
paid not included on Part II, column (d) of
lines 9, 10, and 11, Income (loss) from
U.S. partnerships, foreign partnerships,
and other pass-through entities. The
gross-up amount on line 4 must
correspond to the total gross-up amounts
for foreign taxes deemed paid reported by
the property and casualty insurance
company on all Forms 1118, Foreign Tax
Credit—Corporations, excluding the
amounts reported on Schedule M-3, Part
II, column (d), of lines 9, 10, and 11.

For any dividends reported on Part II,
line 2, that are received on a class of
voting stock of which the property and
casualty insurance company 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 Part II,
line 2:
1. The name of the dividend payer,
2. The payer's EIN (if applicable),
3. The class of voting stock on which
the dividend was paid,
4. The percentage of the class directly
or indirectly owned, and
5. The item amounts for columns (a)
through (d).

Line 5. Gross Foreign
Distributions Previously Taxed

Line 3. Subpart F, QEF, and
Similar Income Inclusions

Line 6. Income (Loss) From
Equity Method U.S.
Corporations

Report on line 3, column (d), the amount
included in taxable income under section
951, relating to Subpart F; the amount
included in income under section 951A,
relating to global intangible low-taxed
income (GILTI); gains or other income
inclusions resulting from elections under
sections 1291(d)(2) and 1298(b)(1); and

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

Report on line 6, column (a), the financial
income (loss) included in Part I, line 11, for
any U.S. corporation accounted for on the
equity method and remove such amount in
column (b) or (c), as applicable. Report on
Part II, line 7, dividends received from any
-14-

Usually, the amounts included on
line 7, columns (a) and (d), include only
dividends received from U.S. corporations
that are not included in the U.S.
consolidated tax group because
intercompany dividends (dividends
received from includible corporations
listed on Form 851) are eliminated or
excluded for financial accounting
purposes and eliminated for the
calculation of U.S. taxable income. In the
case of an insurance company included in
the consolidated U.S. income tax return
required to report intercompany dividends
as part of statutory accounting net income,
include such intercompany dividends on
Part II, line 7, column (a), and the taxable
amount of those dividends on Part II,
line 7, column (d). For insurance
companies included in the consolidated
U.S. income tax return, see the
instructions for Part I, lines 10a, 10b, 10c,
and 11.
For any intercompany dividends
(dividends received from includible
corporations listed on Form 851) included
on Part II, line 7, report on an attached
supporting statement for Part II, line 7:
1. The name of the dividend payer,
2. The payer's EIN,
3. The class of stock or security on
which the dividends were paid,
4. The amount of any net adjustment
included on Part I, line 10a, for such
dividends, and
5. The amounts for columns (a)
through (d).
For any dividends included on Part II,
line 7, that are not intercompany dividends
(dividends received from includible
corporations listed on Form 851) that are
received on classes of voting stock in
which the corporation directly or indirectly
owned 10% or more of the outstanding
shares of that class at any time during the
tax year, report on an attached supporting
statement for Part II, line 7:
1. The name of the dividend payer,
2. The payer's EIN (if applicable),
3. The class of voting stock on which
the dividend was paid,
4. The percentage of the class directly
or indirectly owned, and

Instructions for Schedule M-3 (Form 1120-PC) (2020)

5. The amounts for columns (a)
through (d).

Line 8. Minority Interest for
Includible Corporations

Report on line 8, column (a), the minority
interest included in the income statement
income (loss) on Part I, line 11, for any
member of the U.S. consolidated tax
group that is less than 100% owned.

Line 9. Income (Loss) From
U.S. Partnerships and Line 10.
Income (Loss) From Foreign
Partnerships

For any interest owned by the corporation
or a member of the U.S. consolidated tax
group that is treated as an investment in a
partnership for U.S. income tax purposes
(other than an interest in a disregarded
entity), report amounts on Part II, line 9 or
10, as described below.
1. In column (a) the sum of the
corporation's distributive share of income
or loss from a U.S. or foreign partnership
that is included in Part I, line 11;
2. In column (b) or (c), as applicable,
the sum of all differences, if any,
attributable to the corporation's distributive
share of income or loss from a U.S. or
foreign partnership; and
3. In column (d), the sum of all
amounts of income, gain, loss, or
deduction attributable to the corporation's
distributive share of income or loss from a
U.S. or foreign partnership (that is, the
sum of all amounts reportable on the
corporation's Schedule(s) K-1 received
from the partnership (if applicable)),
without regard to any limitations computed
at the partner level (for example,
limitations on utilization of charitable
contributions, capital losses, and interest
expense).

interest in USP and is limited to $90
pursuant to section 170(b)(2) due to other
investment losses incurred by H. In its
financial statements, H treated this
limitation as a temporary difference. H
must not report the charitable contribution
limitation of $3,910 ($4,000 - $90) on Part
II, line 9. H must report the limitation on
Part III, line 20, and report the disallowed
charitable contributions of ($3,910) in
columns (b) and (d).

DRAFT AS OF
October 12, 2021

Example 11. Property and casualty
insurance company G is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. G
owns 90% of the stock of U.S. corporation
DS1. G files a consolidated U.S. income
tax return with DS1 as the GDS1 U.S.
consolidated group. G prepares certified
SAP/GAAP financial statements for the
consolidated financial statement group
consisting of G and DS1. G has no net
income of its own, and G does not report
its equity interest in the income of DS1 on
its separate financial statements. DS1 has
financial statement net income (before
minority interests) and taxable income of
$1,000 ($2,500 of revenue less $1,500
cost of goods sold).
On the consolidated Schedule M-3,
Part I, line 4a, Worldwide consolidated net
income (loss) per income statement, and
on line 11, Net income (loss) per income
statement of includible corporations, the
U.S. consolidated tax group GDS1 must
report $900 of financial statement net
income ($1,000 net income less $100
minority interest).
The GDS1 group must prepare one
consolidated Schedule M-3, Parts II and
III, and three additional Schedules M-3,
Parts II and III: one for G, one for DS1, and
one for consolidation eliminations.
On the Schedule M-3, Parts II and III,
for DS1, $1,000 is reported on Part II,
line 28 and line 30, in both columns (a)
and (d). On G's Schedule M-3, Parts II and
III, zero is reported on Part II, line 30, in
both columns (a) and (d). On the
consolidation eliminations Schedule M-3,
Parts II and III, on Part II, line 8 and line 30,
the minority interest elimination for the
U.S. consolidated tax group is reported as
($100) in column (a), $100 in column (c),
and $0 in column (d).
On the Schedule M-3, Parts II and III for
the U.S. consolidated tax group, on Part II,
line 8, Minority interest for includible
corporations, ($100) is reported in column
(a), $100 in column (c), and $0 in column
(d). On Part II, line 28, the U.S.
consolidated tax group reports $1,000 in
both columns (a) and (d). As a result,
financial statement net income on Part II,
line 30, column (a), will total $900; net
permanent differences on Part II, line 30,
column (c), will total $100; and taxable
income on line 30, column (d), will total
$1,000.

For each partnership reported on line 9
or 10, 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 9 or 10, as applicable.
Example 12. U.S. property and
casualty insurance company H is a
calendar year taxpayer that is required to
file Schedule M-3. H has an investment in
a U.S. partnership, USP. H prepares
annual statements in accordance with
SAP. In its annual statement, H treats the
difference between annual statement net
income and taxable income from its
investment in USP as a permanent
difference. For its current tax year, H's
annual statement net income includes
$10,000 of income attributable to its share
of USP's net income. H's Schedule K-1
from USP reports $5,000 of ordinary
income, $7,000 of long-term capital gains,
$4,000 of charitable contributions, and
$200 of section 179 expense. H must
report on Part II, line 9, $10,000 in column
(a), a permanent difference of ($2,200) in
column (c), and $7,800 in column (d).
Example 13. Assume the same facts
as Example 12, except that corporation
H's charitable contribution deduction is
wholly attributable to its partnership

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-15-

Line 11. Income (Loss) From
Other Pass-Through Entities

For any interest in a pass-through entity
(other than an interest in a partnership
reportable on Part II, line 9 or 10, as
applicable) owned by a member of the
U.S. consolidated tax group (other than an
interest in a disregarded entity), report the
following on line 11.
1. In column (a) the sum of the
corporation's distributive share of income
or loss from the pass-through entity that is
included in Part I, line 11;
2. In column (b) or (c), as applicable,
except for amounts described in item 4
below, the sum of all differences, if any,
attributable to the pass-through entity; and
3. In column (d), except for amounts
described in item 4 below, the sum of all
taxable amounts of income, gain, loss, or
deduction reportable on the corporation's
Schedules K-1 received from the
pass-through entity (if applicable).
For each pass-through entity reported
on line 11, attach a supporting statement
that provides that entity's name, EIN (if
applicable), the property and casualty
insurance company's end of year
profit-sharing percentage (if applicable),
the property and casualty insurance
company's end of year loss-sharing
percentage (if applicable), and the
amounts reported by the property and
casualty insurance company in column
(a), (b), (c), or (d) of line 11, as applicable.

Line 12. Items Relating to
Reportable Transactions

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

Each difference attributable to a
reportable transaction must be separately
stated and adequately disclosed. A
property and casualty insurance company
will be considered to have separately
stated and adequately disclosed a
reportable transaction on line 12 if the
property and casualty insurance company
sequentially numbers each Form 8886
and lists by identifying number on the
supporting statement for Part II, line 12,
each sequentially numbered reportable
transaction and the amounts required for
Part II, line 12, columns (a) through (d).

loss and the $5 million loss will be
adequately disclosed if J attaches a
supporting statement for line 12 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 Part II, line 12, columns (a) through (d).
Alternatively, J's disclosures will be
adequate if the description provided for
each loss on the supporting 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 Part II, line 12, columns (a) through (d).
J must report the losses attributable to the
other five abandonment losses on Part II,
line 23e, regardless of whether a
difference exists for any or all of those
abandonment losses.

purposes, or vice versa. For example,
adjustments to interest income resulting
from adjustments made in accordance
with instructions for Part II, line 17, should
be made in columns (b) and (c) of this
line 13.
Complete Part II of Form 8916-A. Enter
the amounts from Form 8916-A, Part II,
line 6, columns (a) through (d), on
Schedule M-3, Part II, line 13, columns (a)
through (d), as applicable. Attach Form
8916-A.

DRAFT AS OF
October 12, 2021

Instead of the requirements of the
preceding paragraph, a property and
casualty insurance company will be
considered to have separately stated and
adequately disclosed a reportable
transaction if the property and casualty
insurance company 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 Part II,
line 12;
2. The name and reportable
transaction or tax shelter registration
number, if applicable, as reported on Form
8886; and
3. The type of reportable transaction
(for example, listed transaction,
confidential transaction, transaction with
contractual protection, etc.) as reported on
Form 8886.
If a transaction is a listed transaction
described in Regulations section
1.6011-4(b)(2), the description must also
include the description provided on 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 Form 8886.
Example 14. Property and casualty
insurance company J is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. J
incurred seven different abandonment
losses during its current tax year. One loss
of $12 million results from a reportable
transaction described in Regulations
section 1.6011-4(b)(5), another loss of $5
million results from a reportable
transaction described in Regulations
section 1.6011-4(b)(4), and the remaining
five abandonment losses are not
reportable transactions. J discloses the
reportable transactions giving rise to the
$12 million and $5 million losses on
separate Forms 8886 and sequentially
numbers them X1 and X2, respectively. J
must separately state and adequately
disclose the $12 million and $5 million
losses on Part II, line 12. The $12 million

Example 15. Property and casualty
insurance company K is a calendar year
taxpayer that is required to file
Schedule M-3 for its current 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
current tax year and results in a $7 million
capital loss for both statutory accounting
purposes and U.S. income tax purposes.
Although the transaction does not result in
a difference, K is required to report on Part
II, line 12, the following amounts: ($7
million) in column (a), zero in columns (b)
and (c), and ($7 million) in column (d). The
transaction will be adequately disclosed if
K attaches a supporting statement for
line 12 that (a) sequentially numbers the
Form 8886 and refers to the sequentially
numbered Form 8886-X1 and (b) reports
the applicable amounts required for
line 12, columns (a) through (d).
Alternatively, the transaction will be
adequately disclosed if the supporting
statement for line 12 includes a
description of the transaction, the name
and tax shelter registration number, if any,
and the type of reportable transaction
disclosed on Form 8886.

Line 13. Interest Income

Report on Part II, line 13, column (a), the
total amount of interest income included
on Part I, line 11. Report on Part II, line 13,
column (d), the total amount of interest
income included on Form 1120-PC,
Schedule A, line 35 (or Schedule B,
line 19, if applicable), that is not 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 statutory accounting
-16-

Do not report on line 13 or include on
Form 8916-A amounts reported in
accordance with the instructions for Part II,
lines 9, 10, 11, 12, and 21.

Line 14. Hedging Transactions

Report on line 14, column (a), the net gain
or loss from hedging transactions included
on Part I, line 11. Report in column (d) the
amount of taxable income from hedging
transactions as defined in section 1221(b)
(2). Use columns (b) and (c) to report all
differences caused by treating hedging
transactions differently for statutory
accounting purposes and for U.S. income
tax purposes. For example, if a portion of
a hedge is considered ineffective under
SAP but still is a valid hedge under section
1221(b)(2), the difference must be
reported on line 14. The hedge of a capital
asset, which is not a valid hedge for U.S.
income tax purposes but may be
considered a hedge for SAP purposes,
must also be reported here.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 14 and not
on Part II, line 15.

Line 15. Mark-to-Market Income
(Loss)

Report on line 15 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” do not include any items
specifically excluded from sections 475(c)
(2) and 475(e)(2), such as certain
contracts to which section 1256(a)
applies.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line 14,
and not on line 15.
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

Instructions for Schedule M-3 (Form 1120-PC) (2020)

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 marking to market
these securities or commodities are
reported as follows: (a) mark-to-market
gains and losses from Form 4797, line 10,
are included on Part II, line 15, of
Schedule M-3 (Form 1120-PC), 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 Part
II, line 23d, of Schedule M-3 (Form
1120-PC), unless the instructions for
Schedule M-3 require the amounts to be
reported on another line.

for such transactions must be reported on
Part III, line 31, in column (a) or (d), as
applicable. Use columns (b) and (c) of
Part II, lines 13 and 17, and Part III,
line 31, as applicable, to report the
differences between columns (a) and (d).
Example 16. Property and casualty
insurance company M sells and leases
property to customers. M is a calendar
year taxpayer that is required to file
Schedule M-3 for its current tax year. For
statutory 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 annual statement, M treats the
difference in the statutory accounting and
the U.S. income tax treatment of these
transactions as temporary. During its
current year, M reports in its annual
statement $1,000 of sales and $700 of
cost of goods sold with respect to current
year lease transactions. M receives
periodic payments of $500 in its current
year with respect to these current year
transactions and similar transactions from
prior years and treats $400 as principal
and $100 as interest income. For statutory
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 Schedule M-3, M must report
on Part II, line 13, $100 in column (a),
($100) in column (b), and zero in column
(d). In addition, M must report on Part II,
line 17, $300 of gross profit in column (a),
$200 in column (b), and $500 of gross
rental income in column (d). Lastly, M
must report on Part III, line 31, $200 in
columns (b) and (d).

recovery period. The change in method of
accounting results in a positive section
481(a) adjustment of $100,000 that is
required to be spread over 4 tax years,
beginning with the current tax year. In its
annual statement, N treats the section
481(a) adjustment as a temporary
difference. N must report on Part II,
line 18, $25,000 in columns (b) and (d) for
its current 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 31.

DRAFT AS OF
October 12, 2021

Line 16. Premium Income

Report on line 16, column (a), the amount
of earned premiums included in Part I,
line 11. Include on line 16, column (d), the
amount of earned premiums included on
Form 1120-PC, Schedule A, line 35 (or
Schedule B, line 19, if applicable).
Complete columns (b) and (c), as
appropriate. Attach a detailed statement
separately stating amounts included on
line 16 attributable to the change in:
1. Advanced premiums,
2. Earned but unbilled premiums,
3. Retrospective premium accruals,
4. Unearned premiums, and
5. Other premium accounts.

Line 17. Sale Versus Lease (for
Sellers and/or Lessors)

Note. Also see the instructions in Part III,
line 35, Purchase Versus Lease (for
Purchasers and/or Lessees), later.
Asset transfer transactions with periodic
payments characterized for statutory
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.
On Part II, line 17, in column (a), report
the gross profit or gross rental income for
statutory accounting purposes for all sale
or lease transactions that must be given
the opposite characterization for U.S.
income tax purposes. In column (d), report
the gross profit or gross rental income for
U.S. income tax purposes. Interest income
amounts for such transactions must be
reported on Part II, line 13, in column (a) or
(d), as applicable. Depreciation expense

Line 18. Section 481(a)
Adjustments

With the exception of a section 481(a)
adjustment that is required to be reported
on Part II, line 12, for reportable
transactions, any difference between an
income or expense item attributable to an
authorized (or unauthorized) change in
method of accounting made for U.S.
income tax purposes that results in a
section 481(a) adjustment must be
reported on Part II, line 18, regardless of
whether a separate line for that income or
expense item exists in Part II or Part III.
Example 17. Property and casualty
insurance company N is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. N
was depreciating certain fixed assets over
an erroneous recovery period and,
effective for its current tax year, N receives
IRS consent to change its method of
accounting for the depreciable fixed
assets and begins using the proper

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-17-

Line 19. Reserved for Future
Use

This line is reserved for future use. Do not
include any amounts on this line.

Line 20. Income Recognition
From Long-Term Contracts

Report on line 20 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 21. Original Issue Discount
and Other Imputed Interest

Report on line 21 any amounts of original
issue discount (OID) and other imputed
interest. The term “original issue discount
and other imputed interest” includes, but is
not limited to:
1. The 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 22. Reserved for Future
Use

This line is reserved for future use. Do not
include any amounts on this line.

Line 23a. Income Statement
Gain/Loss on Sale, Exchange,
Abandonment, Worthlessness,
or Other Disposition of Assets
Other Than Pass-Through
Entities

Report on line 23a, column (a), all gains
and losses on the disposition of assets. An
exception to this reporting is for gains and

losses allocated to the corporation from a
pass-through entity (for example, on
Schedule K-1) that are included in the net
income (loss) per income statement of
includible corporations reported on Part I,
line 11. Reverse the amount reported in
column (a) in column (b) or (c), as
applicable. The corresponding gains and
losses for U.S. income tax purposes are
reported on Part II, lines 23b through 23g,
as applicable.

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

Line 23f. Worthless Stock
Losses

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.

DRAFT AS OF
October 12, 2021

Line 23b. Gross Capital Gains
From Schedule D, Excluding
Amounts From Pass-Through
Entities

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

Report on line 23b gross capital gains
reported on Schedule D, Capital Gains
and Losses, excluding capital gains from
pass-through entities, which must be
reported on Part II, line 9, 10, or 11, as
applicable.

Line 23g. Other Gain/Loss on
Disposition of Assets

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

Line 24. Capital Loss Limitation
and Carryforward Used

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

Line 23d. Net Gain/Loss
Reported on Form 4797,
Line 17, Excluding Amounts
From Pass-Through Entities,
Abandonment Losses, and
Worthless Stock Losses

Report on line 23d the net gain or loss
reported on line 17 of Form 4797,
excluding amounts from (a) pass-through
entities, which must be reported on Part II,
line 9, 10, or 11, as applicable; (b)
abandonment losses, which must be
reported on Part II, line 23e; and (c)
worthless stock losses, which must be
reported on Part II, line 23f.
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 15, earlier.

Report on line 23g any gains or losses
from the sale or exchange of property that
are not reported on lines 23b through 23f.

Report as a positive amount on line 24,
column (b) or (c), as applicable, and
column (d) the excess of the net capital
losses over the net capital gains reported
on Schedule D, by the corporation. For a
U.S. consolidated tax group, the
Schedule M-3 adjustment for the amount
of the consolidated net capital loss that is
disallowed should not be made on the
separate consolidating Schedules M-3 of
the includible corporations, but on the
separate Schedule M-3 for consolidated
eliminations (or on Form 8916 in the case
of a mixed group) as described under
Completion of Schedule M-3 and Certain
Allocations, Limitations, and Carryovers,
earlier.

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

Line 25. Other Income (Loss)
Items With Differences

Separately state and adequately disclose
on Part II, line 25, all items of income
(loss) with differences that are not
otherwise listed on Part II, lines 1 through
24. Attach a statement that describes and
itemizes the type of income (loss) and the
-18-

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;— and the fifth
column is column (d), income (loss) per
tax return. Every item listed on the
attached statement for line 25 always
must have columns (a) + (b) + (c) = (d).
Each item with amounts in columns (a),
(b), (c), and (d) will be totaled and
included as one line on Part II, line 25.
For insurance companies included in
the consolidated U.S. income tax return,
see instructions for Part I, lines 10a, 10b,
10c, and 11, and Part II, line 7, for
guidance on the treatment of
intercompany dividends and statutory
accounting.
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
available-for-sale securities —
comprehensive income.”
Whether an item of income (loss) is
reported on line 25, or is reported on Part
II, line 28, is determined separately by
each member of the U.S. consolidated tax
group and not at the U.S. consolidated tax
group level.
Example 18. U.S. corporation P has
two subsidiaries, corporations A and B,
that are included in P's consolidated
financial statements and in P's
consolidated U.S. income tax return. For
financial statement purposes, P, A, and B
recognize revenue from the sale of
inventory upon delivery to the customer.
For U.S. income tax purposes, P and A
recognize such revenue consistent with
the method used for financial statement
purposes, whereas B recognizes such
revenue based upon customer
acceptance. P and A must report this
revenue in columns (a) and (d) on Part II,
line 28. B must report the following on Part
II, line 25: in column (a), B's revenue
recognized in the financial statements
based upon delivery to the customer; in
column (d), B's revenue recognized for

Instructions for Schedule M-3 (Form 1120-PC) (2020)

U.S. income tax purposes based upon
customer acceptance; and in column (b)
or (c), as applicable, the difference
between B's revenue recognized in its
financial statements and in its U.S. taxable
income.

Line 29c. Life Insurance
Subgroup Reconciliation Totals

Note. In this example, the first column of
the attached statement for Part II, line 25,
discussed earlier, must include an
adequate description, such as, “Inventory
Sales Revenue recognized upon
acceptance, not delivery.”

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

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

correct for any difference between foreign
withholding tax included in statutory
accounting net income and the amount of
foreign withholding taxes being deducted
in the return. If the property and casualty
insurance company is crediting foreign
withholding taxes against the U.S. income
tax liability, use column (b) or (c), as
applicable, to negate the amount reported
in column (a).

DRAFT AS OF
October 12, 2021

Line 27. Total Expense/
Deduction Items

Report on Part II, line 27, columns (a)
through (d), as applicable, the negative of
the amounts reported on Part III, line 40,
columns (a) through (d). For example, if
Part III, line 40, column (a), reflects an
amount of $1 million, then report on Part II,
line 27, column (a), ($1 million). Similarly,
if Part III, line 40, column (b), reflects an
amount of ($50,000), then report on Part II,
line 27, column (b), $50,000.

Line 28. Other Items With No
Differences

If there is no difference between the
statutory accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or deduction
and the item is not described or included
in Part II, lines 1 through 25, or Part III,
lines 1 through 39, report the entire
amount of the item in columns (a) and (d)
of line 28. If a portion of an item of income,
loss, expense, or deduction has a
difference and a portion of the item does
not have a difference, do not report any
portion of the item on line 28. Instead,
report the entire amount of the item (for
example, both the portion with a difference
and the portion without a difference) on
the applicable line of Part II, lines 1
through 25, or Part III, lines 1 through 39.
See Example 10, earlier.

Line 29a. PC Insurance
Subgroup Reconciliation Totals

For filers other than a mixed group,
combine lines 26 through 28 and skip lines
29b and 29c. On the sub-consolidated
Schedule M-3 for a mixed group, combine
lines 26 through 28 and skip lines 29b and
29c. For the consolidated Schedule M-3 of
a mixed group, complete only lines 29a
through 29c and line 30 of Part II. Part III is
not required for the consolidated
Schedule M-3 of a mixed group.

Line 29b. 1120 Subgroup
Reconciliation Totals

Line 29b is used only by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.

Note. Expense amounts that reduce
financial accounting income must be
reported on Part III, column (a), as positive
amounts. Deduction amounts that reduce
taxable income must be reported on Part
III, column (d), as positive amounts.
Amounts reported on Part II, line 27, must
be the negative of the amounts reported
on Part III, line 40.

Lines 1 Through 6. Income Tax
Expense

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

Line 7. Foreign Withholding
Taxes

Report on line 7, column (a), the amount
of foreign withholding taxes included in
financial accounting income on Part I,
line 11. If the property and casualty
insurance company is deducting foreign
tax, use column (b) or (c), as applicable, to

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-19-

Line 8. Stock Option Expense

Report on line 8, column (a), amounts
expensed on Part I, line 11, that are
attributable to all stock options. Report on
line 8, column (d), deduction amounts
attributable to all stock options.

Line 9. Other Equity-Based
Compensation

Report on line 9 any amounts for
equity-based compensation or
consideration that are reflected as
expenses for statutory accounting
purposes (column (a)) or deducted in the
U.S. income tax return (column (d)) other
than amounts reportable elsewhere on
Schedule M-3, Parts II and III (for
example, on Part III, line 8, for stock
options expense). Examples of amounts
reportable on line 9 include payments
attributable to employee stock purchase
plans (ESPPs), phantom stock options,
phantom stock units, stock warrants, stock
appreciation rights, and restricted stock,
regardless of whether such payments are
made to employees or non-employees, or
as payment for property or compensation
for services.

Line 10. Meals and
Entertainment

Report on line 10, column (a), any
amounts paid or accrued by the property
and casualty insurance company during
the tax year for meals, beverages, and
entertainment that are accounted for in the
company's statutory income statement or
the income and expense accounts
maintained in the property and casualty
insurance company's books and records.
Report only amounts not otherwise
reportable elsewhere on Schedule M-3,
Parts II and III.

Line 11. Fines and Penalties

Report on line 11 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 statutory
accounting income (paid or accrued) must
be included on line 11, 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 property and
casualty insurance company's statutory
income statement or the income and
expense accounts maintained in the
property and casualty insurance
company's books and records. Also report
on line 11, column (a), the reversal of any
overaccrual of any amount described in
this paragraph. See section 162(f) for
additional guidance.

(b) or (c), as applicable, the amount of
nondeductible parachute payments
pursuant to section 280G, and report in
column (d) the deductible amount of
compensation after any excess parachute
payment limitations under section 280G. If
a payment is subject to limitation under
both sections 162(m) and 280G, report the
total payment on line 13.

Line 19. Charitable
Contribution of Intangible
Property

Report on line 19 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, and 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.

DRAFT AS OF
October 12, 2021

Report on line 11, column (d), any such
amounts as described in the preceding
paragraph that are includible in taxable
income, regardless of the financial
accounting period in which such amounts
were or are included in financial
accounting net income. Complete
columns (b) and (c) as appropriate.
Do not report on Part III, line 11,
amounts required to be reported in
accordance with instructions for Part III,
line 12.
Do not report on Part III, line 11,
amounts recovered from insurers or any
other indemnitors for any fines and
penalties described above.

Line 12. Judgments, Damages,
Awards, and Similar Costs

Report on line 12, 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 12, column
(a), the reversal of any overaccrual of any
amount described in this paragraph.
Report on line 12, column (d), any such
amounts as are described in the
preceding paragraph that are includible in
taxable income, regardless of the statutory
accounting period in which such amounts
were or are included in statutory
accounting net income. Complete
columns (b) and (c), as appropriate.
Do not report on Part III, line 12,
amounts required to be reported in
accordance with instructions for Part III,
line 11.
Do not report on Part III, line 12,
amounts recovered from insurers or any
other indemnitors for any judgments,
damages, awards, or similar costs
described above.

Line 13. Parachute Payments

Line 14. Compensation With
Section 162(m) Limitation

Report on line 14, column (a), the total
amount of non-performance-based current
compensation expense for the corporate
officers to whom section 162 (m) applies.
Report in column (b) or (c), as applicable,
the nondeductible amount of current
compensation in excess of $1 million
($500,000 if the corporation receives or
has received financial assistance under
the Treasury Asset Relief Program
(TARP)). Report the deductible
compensation in column (d). If a payment
is subject to limitation under both sections
162(m) and 280G, report the total
payment on Part III, line 13, Parachute
payments. See Regulations section
1.162-27(g) for the interaction between
sections 162(m) and 280G.

Line 15. Pension and
Profit-Sharing

Report on line 15 any amounts attributable
to the property and casualty insurance
company's pension plans, profit-sharing
plans, and any other retirement plans.

Line 16. Other Post-Retirement
Benefits

Report on line 16 any amounts attributable
to other post-retirement benefits not
otherwise includible on Part III, line 15 (for
example, retiree health and life insurance
coverage, dental coverage, etc.).

Line 17. Deferred
Compensation

Report on line 17, column (a), any
compensation expense included in the net
income (loss) amount reported in Part I,
line 11, that is not deductible for U.S.
income tax purposes in the current tax
year and that was not reported elsewhere
on Schedule M-3. Report on line 17,
column (d), any compensation deductible
in the current tax year that was not
included in the net income (loss) amount
reported in Part I, line 11, for the current
tax year and that is not reportable
elsewhere on Schedule M-3. For example,
report originations and reversals of
deferred compensation subject to section
409A on line 17.

Report on line 13, column (a), the total
expense included in statutory accounting
net income on Part I, line 11, that is
subject to section 280G. Report in column

Line 20. Charitable
Contribution Limitation/
Carryforward

Report as a negative amount on line 20,
columns (b), (c), and (d), as applicable,
the excess of charitable contributions
made during the tax year over the amount
of the charitable contribution limitation
amount.
If the corporation utilizes a contribution
carryforward in the current tax year, report
the carryforward utilized as a positive
amount in columns (b), (c), and (d), as
applicable.
When a consolidated income tax return
is being filed, Schedule M-3 adjustments
for the amount of charitable contributions
in excess of the limitation, or for charitable
contribution carryforward utilized, should
not be made on the separate
consolidating Schedules M-3 of the
includible corporations, but on the
separate consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group). See
Completion of Schedule M-3 and Certain
Allocations, Limitations, and Carryovers,
earlier.

Line 21. Write-Off of Premium
Receivables

Report on line 21 the amount of premium
receivables written off rather than on
line 32.

Line 22. Guarantee Fund
Assessments

Report on line 22 all special purpose and
guaranty fund assessments accrued or
deducted for the tax year.

Line 23. Current Year
Acquisition or Reorganization
Investment Banking Fees

Report on line 23 any investment banking
fees paid or incurred in connection with a
taxable or tax-free acquisition of property
(for example, stock or assets) or a tax-free

-20-

Instructions for Schedule M-3 (Form 1120-PC) (2020)

reorganization. Report on this line any
investment banking fees incurred at any
stage of the acquisition or reorganization
process including, for example, fees paid
or incurred to evaluate whether to
investigate an acquisition, fees to conduct
an actual investigation, and fees to
consummate the acquisition. Also include
on line 23 investment banking fees
incurred in connection with the liquidation
of a subsidiary, a spin-off of a subsidiary,
or an initial public stock offering.

Line 27. Amortization/
Impairment of Goodwill,
Insurance in Force, and Ceding
Commissions

Line 24. Current Year
Acquisition or Reorganization
Legal and Accounting Fees

Line 28. Other Amortization or
Impairment Write-Offs

Report on line 27 amortization of goodwill,
insurance in force, and ceding
commissions or amounts attributable to
the impairment of goodwill, insurance in
force, and ceding commissions. Attach a
statement separately stating the amounts
for each item.

for federal income tax purposes in
accordance with section 166.

Line 33. Reserved for Future
Use
No entry is made on line 33.

Line 34. Corporate Owned Life
Insurance Premiums

DRAFT AS OF
October 12, 2021

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

Line 25. Current Year
Acquisition/Reorganization
Other Costs

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

Line 26. Amortization of
Acquisition, Reorganization,
and Start-Up Costs

Report on line 26 amortization of
acquisition, reorganization, and start-up
costs. For purposes of columns (b), (c),
and (d), include amounts amortizable
under section 167, 195, or 248.

Report on line 28 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 29. Discounting of Unpaid
Losses (Section 846)

Report on line 29, column (a), the change
in liability for unpaid losses and loss
adjustment expense net of reinsurance as
included in Part I, line 11. Report in
column (d) the amount of change in the
same liability valued for tax purposes
included in the subtotal on Form 1120-PC,
Schedule A, line 35 (or Schedule B,
line 19, if applicable). Do not include paid
losses on line 29. Indicate amounts in
columns (b) and (c), as appropriate.
Attach a statement supporting columns (b)
and (c) that identifies the beginning and
end of the taxable year amounts of
discounting as required by section 846.
Include any other differences between
columns (a) and (d) by separate title as
well as beginning and end of tax year
amounts.

Line 30. Reduction of Loss
Deduction (Section 832(b)(5)
(B))

Report the proration adjustment required
by section 832(b)(5)(B) as a negative
amount on line 30, column (d). Report
amounts in columns (b) and (c), as
appropriate. Do not enter an amount on
line 30, column (a).

Line 31. Depreciation

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

Line 32. Bad Debt Expense and
Agency Balances Written Off

Report on line 32, column (a), any
amounts attributable to an allowance for
uncollectible accounts receivable or actual
write-offs of accounts receivable included
in Part I, line 11. Also report on this line
agency balances written off per the annual
statement. Report in column (d) the
amount of bad debt expense deductible

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-21-

Report on line 34 all amounts of insurance
premiums attributable to any life insurance
policy if the insurance company is directly
or indirectly a beneficiary under the policy
or if the policy has a cash value. Report in
column (d) the amount of the premiums
that are deductible for federal income tax
purposes.

Line 35. Purchase Versus
Lease (for Purchasers and/or
Lessees)

Note. Also see the instructions for sellers
and/or lessors in the instructions for Part II,
line 17.
Asset transfer transactions with periodic
payments characterized for statutory
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 statutory 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 statutory accounting
purposes. Report interest expense for
such transactions on Part III, line 36, in
column (a) or (d), as applicable. Report
depreciation expense or deductions for
such transactions on Part III, line 31, in
column (a) or (d), as applicable. Use
columns (b) and (c) of Part III, lines 31, 35,
and 36, as applicable, to report the
differences between columns (a) and (d)
for such recharacterized transactions.
Example 19. U.S. property and
casualty insurance company X acquired
property in a transaction that, for statutory
accounting purposes, X treats as a lease.
X is a calendar year taxpayer that is
required to file Schedule M-3 for its current
tax year. 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
payment of principal and partially as

payment of interest. In its annual
statement, X treats the difference between
the statutory accounting and U.S. income
tax treatment of this transaction as a
temporary difference. During its current
tax year, X reports in its annual statement
$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
Schedule M-3, X must report the following
on Part III, line 35: column (a), $1,000, its
statutory accounting gross rental expense;
column (b), ($1,000); and column (d),
zero. On Part III, line 36, X reports zero in
column (a) and $300 in columns (b) and
(d) for the interest deduction. On Part III,
line 31, X reports zero in column (a) and
$1,200 in columns (b) and (d) for the
depreciation deduction.

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). For example, if the taxpayer's financial
accounting method does not specify
otherwise, column (b) adjustments include
adjustments for timing differences
between financial and tax accounting for:
1. Deferral and amortization of
research expenditures,
2. Section 59(e) election,
3. Reduction of section 174
expenditures under section 280C or
section 482,
4. Costs attributable to obtaining a
patent,
5. Research in social sciences, and
6. Cost elements for property of a
character subject to depreciation.

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 a $2,000 amortization
deduction. In compliance with its adopted
method of accounting under section 174,
X deducts research 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 28, Other amortization
or impairment write-offs.

DRAFT AS OF
October 12, 2021

Line 36. Interest Expense

Report on Part III, line 36, column (a), the
total amount of interest expense included
on Part I, line 11, and report on Part III,
line 36, column (d), the total amount of
interest expense included on Form
1120-PC, Schedule A, line 35 (or
Schedule B, line 19, if applicable), that is
not 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 expense that are
treated as some other form of expense for
statutory accounting purposes, or vice
versa. For example, adjustments to
interest expense resulting from
adjustments made in accordance with
instructions for Part III, line 35, Purchase
versus lease (for purchasers and/or
lessees), should be made in columns (b)
and (c), as applicable, on line 36.
Complete Part III of Form 8916-A. Enter
the amounts from Form 8916-A, Part III,
line 5, columns (a) through (d), on
Schedule M-3, Part III, line 36, columns (a)
through (d), as applicable. Attach Form
8916-A.
Do not report on Form 8916-A and
line 36 amounts reported in accordance
with the instructions for Part II, lines 9, 10,
11, and 12.

Line 37. 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 expense.
Report in column (d) the amount of
deductions included in Form 1120-PC,
page 2, Schedule A, line 32, that are
recognized and reported as section 174
research and experimental expenditures
consistent with the corporation’s adopted
method of accounting for such
expenditures. In column (c), as applicable,

Section 174 provides two methods for
the treatment of research and
experimental expenditures paid or
incurred by a taxpayer in connection with
the taxpayer’s trade or business. These
expenditures may be treated as expenses
not chargeable to a capital account and
deducted in the year in which they are
paid or incurred, or they may be deferred
and amortized. Since the method for
treatment of research and experimental
expenditures is adopted at the subsidiary
level, the expense/deduction item is
determined separately by each member of
a U.S. consolidated tax group and not at
the U.S. consolidated tax group level. For
example, U.S. Corporation P has two
subsidiaries, A and B, which are included
in P’s consolidated financial statements
and in P’s consolidated U.S. income tax
return. For financial purposes, P, A, and B
recognize research and development
costs as an expense when accrued. For
U.S. income tax purposes, P and A
recognize such costs consistent with the
method used for financial purposes,
whereas B capitalizes and amortizes such
costs. P and A must report this expense in
columns (a) and (d). B must report its
expense recognized in the financial
statements when accrued in column (a); in
column (d), B’s research and development
expenditures recognized for U.S. income
tax purposes; and in columns (b) and (c),
as applicable, the difference between B’s
research and development costs in its
financial statements and its research and
experimental expenditures for U.S.
taxable income purposes.
Example 20. Corporation X is a
calendar year taxpayer that is required to
file Schedule M-3 for its current tax year.
During its current tax year, X incurred
$100,000 of research and development
-22-

Example 21. Assume the same facts
as Example 20 except Corporation X
makes an annual election under section
59(e) to deduct $80,000 of its $120,000 of
research and experimental expenditures
over a 10-year period. Accordingly, X
must report $100,000 in column (a), a
temporary difference of ($52,000)
($20,000 less ($80,000/10 years x 9
years)) in column (b), and $48,000 in
column (d). X must report $2,000 in
column (a), ($2,000) in column (b), and $0
in column (d) on Part III, line 28, Other
amortization or impairment write-offs.
Example 22. Assume the same facts
as Example 21 except Corporation 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) ($20,000 less
($120,000/60 months x 55 months)) in
column (b), and $10,000 in column (d).

Example 23. Corporation X is a
calendar year taxpayer that is required to
file Schedule M-3 for its current tax year. X
adopted the current expense method for
research and experimental expenditures
for U.S. income tax purposes. During its
current tax year, 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
$30,000 of costs 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 which

Instructions for Schedule M-3 (Form 1120-PC) (2020)

are not 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 (d) on Part III, line 31,
Depreciation.
Example 24. Corporation X is a
calendar year taxpayer that is required to
file Schedule M-3 for its current tax year.
During its current tax year, 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
are not 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 39, Other
expense/deduction items with differences.

headquarters, distribution center(s),
factory(ies), etc. (“inducements”).
On the accompanying statement also
identify any inducements that include
refundable or transferable tax credits,
including transferable credits that were
sold.
The statement must separately state,
adequately disclose, and identify all of the
dollar amounts summarized by this line.
An accompanying statement is required
even if there are no dollar amounts
reported on line 38.

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. Every item
listed on the attached statement for line 39
always must have columns (a) + (b) + (c) =
(d). Each item with amounts in columns
(a), (b), (c), and (d) will be totaled and
included as one line on Part III, line 39.

DRAFT AS OF
October 12, 2021

Example 25. Corporation X is a
calendar year taxpayer that is required to
file Schedule M-3 for its current tax year.
During its current tax year, 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 28, Other
amortization or impairment write-offs.

Line 38. Section 118 Exclusion

Report on line 38 any inducements
received in the current year that are
treated as contributions to the capital of a
corporation by a non-shareholder. Report
in column (a) any income amount as a
negative number and any expense
amount as a positive number.
Corporations must identify on an
accompanying statement referencing
line 38 the fair market value of land or
other property (including cash) provided to
the corporation by any non-shareholder,
including a governmental unit, or civic
group, as an inducement, or for any other
purpose. Include inducements for the
corporation to locate its business in a
particular state, municipality, community,
or locality for the purpose of enabling the
corporation to expand its existing
operating facilities including corporate

Line 39. Other Expense/
Deduction Items With
Differences

Separately state and adequately disclose
on Part III, line 39, all items of expense/
deduction that are not otherwise listed on
Part III, lines 1 through 38.

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 Schedule M-3 for line 39 must
separately state and adequately disclose
the nature and amount of the expense
related to each reserve and/or contingent
liability. The appropriate level of disclosure
depends upon each taxpayer’s
operational activity and the nature of its
accounting records. For example, if a
corporation’s net income amount reported
in the income statement includes
anticipated expenses for a discontinued
operation as a single amount, and its
general ledger or other books, records,
and workpapers provide details for the
anticipated expenses under more
explanatory and defined categories such
as employee termination costs, lease
cancellation costs, loss on sale of
equipment, etc., a supporting 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 is not
required that an anticipated termination
cost amount be listed for each employee,
or that each asset (or category of asset)
be listed along with the anticipated loss on
disposition.
The attached statement should have
five columns. The first column has the
description for the next four columns. The

Instructions for Schedule M-3 (Form 1120-PC) (2020)

-23-

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.”
Reserves and contingent liabilities.
Report on line 39 amounts related to the
change in each reserve or contingent
liability that is not required to be reported
elsewhere on Schedule M-3. For example,
(1) amounts relating to changes in
reserves for litigation must be reported on
Part III, line 12, Judgments, damages,
awards, and similar costs; and (2)
amounts relating to changes in reserves
for uncollectible accounts receivable must
be reported on Part III, line 32, Bad debt
expense and/or agency balances written
off. (See Example 9 and Example 26.)
Report on Part III, line 39, the
amortization of various items of prepaid
expense, such as prepaid subscriptions
and license fees, prepaid insurance, etc.
Report on line 39, column (a),
expenses included in net income reported
on Part I, line 11, that are related to
reserves and contingent liabilities. Report
on line 39, 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 39 include restructuring reserves,
reserves for discontinued operations, and
reserves for acquisitions and dispositions.
Only report on line 39 items that are not
required to be reported elsewhere on
Schedule M-3, Parts II and III.
Example 26. Property and casualty
insurance company Q is a calendar year
taxpayer that is required to file
Schedule M-3 for its current tax year. On
July 1 of each year, Q has a fixed liability
for its annual insurance premiums on its
home office building 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,
Q prepays its insurance premium of
$500,000 and advertising expenses of
$800,000. For statutory 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 annual statement,
Q treats the differences attributable to the
financial accounting treatment and U.S.

income tax treatment of the prepaid
insurance and advertising as temporary
differences.
Q also has a legal reserve where
$300,000 was expensed for financial
accounting purposes and a ($100,000)

Column (a) Expense per Income
Statement

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 39, must be
separately stated and adequately
disclosed as follows:

Column (b) Temporary Difference

Column (c) Permanent Difference

Column (d) Deduction per
Tax Return

DRAFT AS OF
October 12, 2021

Description

Prepaid insurance premium expensed not
capitalized

$250,000

$250,000

-0-

$500,000

Legal expense reserve

$300,000

($100,000)

-0-

$200,000

Total Line 39

$550,000

$150,000

-0-

$700,000

Line 40. Total Expense/
Deduction Items

Report on Part II, line 27, columns (a)
through (d), as applicable, the negative of
the amounts reported on Part III, line 40,

columns (a) through (d), as applicable.
Report positive amounts as negative and
negative amounts as positive. For
example, if Part III, line 40, column (a),
reflects an amount of $1 million, then

-24-

report on Part II, line 27, column (a), ($1
million). Similarly, if Part III, line 40,
column (b), reflects an amount of
($50,000), then report on Part II, line 27,
column (b), $50,000.

Instructions for Schedule M-3 (Form 1120-PC) (2020)