General Instructions

Future Developments

For the latest information about developments related to Schedule M-3 (Form 1120S) and its instructions, such as legislation enacted after they were published, go to  
www.irs.gov/form1120s.

Purpose of Schedule

Schedule M-3, Part I, asks certain questions about the corporation's financial statements and reconciles financial statement worldwide net income (loss) for the corporation (or consolidated financial statement group, if applicable), as reported on Part I, line 4a, to income (loss) per the income statement of the corporation for U.S. income tax purposes, as reported on Part I, line 11.

Schedule M-3, Parts II and III, reconcile financial statement net income (loss) for the U.S. tax return (per Schedule M-3, Part I, line 11) to total income (loss) on Form 1120S, Schedule K, line 18.

Where To File

If the corporation is required to file (or voluntarily files) Schedule M-3 (Form 1120S), the corporation must file Form 1120S and all attachments, schedules, including Schedule M-3 (Form 1120S), and statements at the following address.

Department of the Treasury 
Internal Revenue Service Center 
Ogden, UT 84201-0013

Who Must File

Any corporation required to file Form 1120S, U.S. Income Tax Return for an S Corporation, that reports on Schedule L of Form 1120S 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 U.S. corporation filing Form 1120S that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1. A corporation filing Schedule M-3 must check the box on Form 1120S, item C, indicating that Schedule M-3 is attached (whether required or voluntary). A corporation filing Schedule M-3 must not file Schedule M-1.

Example 1.

  1. U.S. corporation A owns U.S. subsidiary B and foreign subsidiary F. For its 2013 tax year, A prepares consolidated financial statements with B and F that report total assets of $12 million. A files a U.S. income tax return with B (a corporation that has made a qualified subchapter S subsidiary election) and reports total assets on Schedule L of $8 million. A's U.S. tax group is not required to file Schedule M-3 for the 2013 tax year.

  2. U.S. corporation C owns U.S. subsidiary D. For its 2013 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 2013 tax year.

Other Issues Affecting Schedule M-3 Filing Requirements

If a corporation was required to file Schedule M-3 for the preceding tax year, but reports on Form 1120S, Schedule L, total assets at the end of the current tax year of less than $10 million, the corporation is not required to file Schedule M-3 for the current tax year. The corporation may either (a) file Schedule M-3, or (b) file Schedule M-1, for the current tax year. However, if the corporation chooses to file Schedule M-1 for the current tax year, and for a subsequent tax year the corporation is required to file Schedule M-3, the corporation must complete Schedule M-3 in its entirety (Part I and all columns in Parts II and III) for that subsequent tax year.

For purposes of determining whether the corporation has total assets at the end of the current tax year of $10 million or more, the corporation's total assets must be determined on an overall accrual method of accounting unless both of the following apply: (a) the tax return of the corporation is prepared using an overall cash method of accounting, and (b) no includible entity in the U.S. tax return prepares or is included in financial statements prepared on an accrual basis.

Note.

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

Schedule L

If a non-tax-basis income statement and related non-tax-basis balance sheet is prepared for any purpose for a period ending with or within the tax year, Schedule L must be prepared showing non-tax-basis amounts. See the instructions for Part I, line 1, for a 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 corporation as of the last day of the tax year, and must be the same total assets reported by the corporation in the non-tax-basis financial statements, if any, used for Schedule M-3. If the corporation does not prepare non-tax-basis financial statements, Schedule L must be based on the corporation's books and records. The Schedule L balance sheet can show tax-basis balance sheet amounts if the corporation is allowed to use books and records for Schedule M-3 and the corporation's books and records reflect only tax-basis amounts.

Generally, total assets at the beginning of the year (Schedule L, line 15, column (b)) must equal total assets at the close of the prior year (Schedule L, line 15, column (d)). For each Schedule L balance sheet item reported for which there is a difference between the current opening balance sheet amount and the prior closing balance sheet amount, attach a statement that reports the balance sheet item, the prior closing amount, the current opening amount, and a short explanation of the difference. In particular, indicate if the differences occurred because of acquisitions or mergers.

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 method, 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. In any event, any investments or other assets reported on Schedule L can never be reported as negative amounts.

Entity Considerations for Schedule M-3

For purposes of Schedule M-3, references to the classification of an entity (for example, as a corporation, a partnership, or a trust) are references to the treatment of the entity for U.S. income tax purposes. An entity that generally is disregarded as separate from its owner for U.S. income tax purposes (disregarded entity) must not be separately reported on Schedule M-3 except, if required, on Part I, line 7a, 7b, or 7c. On Schedule M-3, Parts II and III, any item of income, gain, loss, deduction, or credit of a disregarded entity must be reported as an item of its owner. In particular, the income or loss of a disregarded entity must not be reported on Part II, lines 7, 8, or 9 as from a separate partnership or other pass-through. The financial statement income or loss of a disregarded entity other than a qualified subchapter S subsidiary (QSub) is included on Part I, line 7b, if and only if its financial statement income or loss is included on Part I, line 11, but not on Part I, line 4a. The financial statement income or loss of a QSub is included on Part I, line 7c, if and only if its financial statement income or loss is included on Part I, line 11, but not on Part I, line 4a.

Qualified Subchapter S Subsidiaries (QSubs).   Because a QSub is a disregarded entity, for purposes of Schedule M-3, Schedule L, and the tax return in general, the subsidiary is deemed to have liquidated into the parent S corporation. As such, all QSubs are treated as divisions of the S corporation parent and they must not be separately reported on Schedule M-3 except, if required, on Part I, line 7c.

Reportable Entity Partner Reporting Responsibilities

A reportable entity partner to a partnership filing Form 1065, U.S. Return of Partnership Income, is an entity that (1) owns or is deemed under these instructions to own, directly or indirectly, a 50% or greater interest in the income, loss, or capital of the partnership on any day of the tax year and (2) was required to complete Schedule M-3 on its most recently filed U.S. income tax return or return of income filed prior to that day.

For the purposes of these instructions:

  1. The parent corporation of a consolidated tax group is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by any member of the tax consolidated group;

  2. The owner of a disregarded entity is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the disregarded entity;

  3. The owner of 50% or more of a corporation by vote on any day of the corporation tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the corporation during the corporation tax year;

  4. The owner of 50% or more of partnership income, loss, or capital on any day of the partnership tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the partnership during the partnership tax year; and

  5. The beneficial owner of 50% or more of the beneficial interest of a trust or nominee arrangement on any day of the trust or nominee arrangement tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the trust or nominee arrangement.

A reportable entity partner 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, after that 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 for which it is reporting a change in its ownership interest in the partnership, if applicable.

  8. The interest in the partnership it owns or is deemed to own in the partnership, directly or indirectly (as defined under these instructions) as of the date for which it is reporting.

  9. Any change in that interest as of the date for which it is reporting.

The reportable entity partner must retain copies of required reports it makes to partnerships under these instructions. Each partnership must retain copies of the required reports it receives under these instructions from reportable entity partners.

Example 2.

A, a limited liability company (LLC) filing a Form 1065 for 2013, is owned 50% by U.S. corporation Z which files Form 1120S. A owns 50% of each of B, C, D, and E, each also an LLC filing a Form 1065 for calendar year 2013. Z was first required to complete Schedule M-3 (Form 1120S) for its corporate tax year ended December 31, 2012, and filed its Form 1120S with Schedule M-3 for 2012 on September 15, 2013. As of September 16, 2013, Z was a reportable entity partner regarding A and, through A, regarding B, C, D, and E. On October 5, 2013, Z reports to A, B, C, D, and E, as it is required to do within 30 days of September 16, that Z is a reportable entity partner directly owning (regarding A) or deemed to own indirectly (regarding B, C, D, and E) a 50% interest. So, because Z was a reportable entity partner for 2013, each of A, B, C, D, and E is required to complete Schedule M-3 (Form 1065) for 2013, regardless of whether they would otherwise be required to complete Schedule M-3 for that year.

Completion of Schedule M-3

A corporation required to file Schedule M-3 must complete the form in its entirety. At the time the Form 1120S is filed, all applicable questions must be answered on Part I, all columns must be completed on Parts II and III, and all numerical data required by Schedule M-3 must be provided. Any statement required to support a line item on Schedule M-3 must be attached at the time Schedule M-3 is filed and must provide the information required for that line item.


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