U. S. Business Income Tax Return

Instructions for
Schedule M-3 (Form 1120)
(Rev. June 2025)

(For use with the December 2019 revision of Schedule M-3 (Form 1120))
Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million
or More
Section references are to the Internal Revenue Code unless
otherwise noted.

Future Developments
For the latest information about developments related to
Schedule M-3 (Form 1120) and its instructions, such as
legislation enacted after they were published, go to IRS.gov/
Form1120.

General Instructions
Purpose of Schedule

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

Where To File

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

Who Must File

Generally, the following apply.
• A domestic corporation or group of corporations required
to file Form 1120, U.S. Corporation Income Tax Return, that
reports on Form 1120, Schedule L, Balance Sheets per
Books, total assets at the end of the corporation's tax year
that equal or exceed $10 million must file Schedule M-3
instead of Schedule M-1, Reconciliation of Income (Loss) per
Books With Income per Return.
• A corporation filing a non-consolidated Form 1120 that
reports on Schedule L total assets that equal or exceed $10
million must complete and file Schedule M-3 and must check
box (1) Non-consolidated return, at the top of page 1 of
Schedule M-3.
Jun 26, 2025

• Any U.S. consolidated tax group consisting of a U.S.
parent corporation and additional includible corporations
listed on Form 851, Affiliations Schedule, required to file
Form 1120, that reports on Schedule L total consolidated
assets at the end of the tax year that equal or exceed $10
million must file Schedule M-3 and must check box (2)
Consolidated return (Form 1120 only), or box (3) Mixed
1120/L/PC group, as applicable, at the top of page 1 of
Schedule M-3.
• Cooperatives filing Form 1120-C, U.S. Income Tax Return
for Cooperative Associations, that report total assets at tax
year end that equal or exceed $10 million must file
Schedule M-3 (Form 1120).
• A corporation filing Form 1120 (or Form 1120-C) that is not
required to file Schedule M-3 may voluntarily file
Schedule M-3.
• If a corporation was required to file Schedule M-3 for the
preceding tax year, but reports on Form 1120, page 1, item D,
and on Form 1120, Schedule L, total consolidated assets at
the end of the current tax year of less than $10 million, the
corporation is not required to file Schedule M-3 for the current
tax year.
See Completing Schedule M-3, later.
In the case of a U.S. consolidated tax group, total assets
at the end of the tax year must be determined based on the
total year-end assets of all includible corporations listed on
Form 851, net of eliminations for intercompany transactions
and balances between the includible corporations. In
addition, for purposes of determining whether the corporation
(or U.S. consolidated tax group) has total assets at the end of
the current tax year of $10 million or more, the corporation's
total consolidated assets must be determined on an overall
accrual method of accounting unless both of the following
apply: (a) the tax returns of all includible corporations in the
U.S. consolidated tax group are prepared using an overall
cash method of accounting, and (b) no includible corporation
in the U.S. consolidated tax group prepares or is included in
financial statements prepared on an accrual basis.

Special Filing Requirements for Certain Groups
Mixed groups. If the parent corporation of a U.S.
consolidated tax group files Form 1120 and files and
completes Schedule M-3, Parts II and III, then Schedule M-3,
Parts II and III, must be completed for each member of the
group. However, if the parent corporation of a U.S.
consolidated tax group files Form 1120 and any member of
the group files Form 1120-PC, U.S. Property and Casualty
Insurance Company Income Tax Return, or Form 1120-L,
U.S. Life Insurance Company Income Tax Return, that
member must complete Parts II and III of Schedule M-3
(Form 1120-PC) or Schedule M-3 (Form 1120-L),

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025) Catalog Number 38103Y
Department of the Treasury Internal Revenue Service www.irs.gov

respectively, and the group must comply with the mixed
group consolidated Schedule M-3 instructions under
Schedule M-3 Consolidation for Mixed Groups (1120/L/PC),
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.
If the parent company of a U.S. consolidated tax group
files Form 1120 and any member of the group files Form
1120-PC or Form 1120-L and the consolidated Schedule L
reported in the return includes the assets of all of the
companies (the insurance companies as well as the
non-insurance companies), in order to determine if the group
meets the $10 million threshold test for the requirement to file
Schedule M-3, use the amount of total assets reported on
Schedule L of the consolidated return. If the parent company
of a U.S. consolidated tax group files Form 1120 and any
member of the group files Form 1120-PC or Form 1120-L and
the consolidated Schedule L reported in the return does not
include the assets of one or more of the insurance
companies in the U.S. consolidated tax group, in order to
determine if the group meets the $10 million threshold test,
use the sum of the amount of total assets reported on the
consolidated Schedule L plus the amounts of all assets
reported on Forms 1120-PC and 1120-L that are included in
the consolidated return but not included on the consolidated
Schedule L.
Other entities. There are unique separate Schedules M-3
for taxpayers required to file Form 1065, U.S. Return of
Partnership Income; Form 1120-S, U.S. Income Tax Return
for an S Corporation; Form 1120-F, U.S. Income Tax Return
of a Foreign Corporation; and for Forms 1120-PC or 1120-L.
For more information, see the instructions for the applicable
Schedule M-3.
For insurance companies included in the consolidated
U.S. income tax return, see the instructions for Part I, lines 10
and 11, and Part II, line 7, for guidance on Schedule M-3
reporting of intercompany dividends and statutory accounting
adjustments.
No Schedule M-3 is required for taxpayers filing Form
1120-REIT, U.S. Income Tax Return for Real Estate
Investment Trusts; Form 1120-RIC, U.S. Income Tax Return
for Regulated Investment Companies; Form 1120-H, U.S.
Income Tax Return for Homeowners Associations; and Form
1120-SF, U.S. Income Tax Return for Settlement Funds
(Under Section 468B).

Completing Schedule M-3

A corporation (or any member of a U.S. consolidated tax
group) that is required to file Schedule M-3 and has at least
$50 million total assets at the end of the tax year must
complete the schedule in its entirety. In particular, a
corporation filing a non-consolidated return that has at least
$50 million total assets at the end of the tax year 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.
Form 1120 and Form 1120-C filers that (a) are required to
file Schedule M-3 (Form 1120) and have less than $50 million
total assets at the end of the tax year, or (b) are not required
to file Schedule M-3 (Form 1120) and voluntarily file
2

Schedule M-3 (Form 1120), must either (i) complete
Schedule M-3 (Form 1120) entirely, or (ii) complete
Schedule M-3 (Form 1120) through Part I, and complete
Schedule M-1 of Form 1120 (or Form 1120-C, if applicable)
instead of completing Parts II and III of Schedule M-3 (Form
1120). If the filer chooses to complete Schedule M-1 instead
of completing Parts II and III of Schedule M-3, line 1 of the
applicable Schedule M-1 must equal line 11 of Part I of
Schedule M-3.
Note. In the case of an 1120 mixed group, Parts II and III of
Schedule M-3 (Form 1120) must be completed for all
members of the mixed group whether Schedule M-3 (Form
1120) is required or voluntarily filed.
For any part of Schedule M-3 (Form 1120) that is
completed, 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.
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.
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 not required to file
Schedule M-3 for the current tax year.
2. U.S. corporation C owns U.S. subsidiary 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 F owns 100% of both U.S.
corporation B and U.S. corporation C. C owns 100% of U.S.
corporation D. For its current tax year, F prepares a
consolidated worldwide financial statement for the FBCD
consolidated group. The FBCD consolidated financial
statement reports total year-end assets of $65 million. F 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 $52 million. C files a
consolidated U.S. income tax return with D and, after
eliminating intercompany transactions between C and D,
reports consolidated total year-end assets on Schedule L of
$8 million. B is required to file Schedule M-3 because its total
year-end assets reported on Schedule L exceed $50 million.
The CD U.S. consolidated tax group is not required to file
Schedule M-3 because its total year-end assets do not
exceed $10 million.
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Example 2. At the end of Corporation A's current tax
year, A's total assets were less than $10 million. A is not
required to file Schedule M-3 for any reason. A may elect to
file Schedule M-3 instead of completing Schedule M-1 of
Form 1120. If A elects to file Schedule M-3, A must either (i)
complete Schedule M-3 entirely, or (ii) complete
Schedule M-3 through Part I and complete Schedule M-1
instead of completing Parts II and III of Schedule M-3. If A
elects to complete Schedule M-3 entirely, A must complete
all columns of Parts II and III.

Certain Allocations, Limitations, and Carryovers

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

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

Generally, a corporation or group of corporations that files a
Form 1120 and is required to file Schedule M-3, must also file
Schedule B (Form 1120), Additional Information for
Schedule M-3 Filers. In the case of a consolidated group, a
parent corporation files one Schedule B (Form 1120) for the
entire consolidated group.
Certain corporations or groups of corporations filing Form
1120 that (a) are required to file Schedule M-3 and have less
than $50 million in total assets at the end of the tax year, or
(b) are not required to file Schedule M-3 and voluntarily file
Schedule M-3, are not required to file Schedule B (Form
1120). See the instructions for Schedule B (Form 1120).
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Schedule L

If a non-tax-basis income statement and related
non-tax-basis balance sheet are prepared for any purpose for
a period ending with or within the tax year, the Schedule L
balance sheet must be prepared showing non-tax-basis
amounts. See the instructions for Part I, line 1, for the
discussion of non-tax-basis income statements and related
non-tax-basis balance sheets prepared for any purpose and
the impact on the selection of the income statement used for
Schedule M-3 and the related non-tax-basis balance sheet
amounts that must be used for Schedule L.
Total assets shown on Schedule L, line 15, column (d) (or,
for some consolidated mixed groups with a Form 1120 parent
and an insurance subsidiary, the assets reported on Form
1120, page 1, item D), must equal the total assets of the
corporation (or, for a U.S. consolidated tax group, the total
assets of all members of the group listed on Form 851) as of
the last day of the tax year, and must be the same total
assets reported by the corporation (or by each member of the
U.S. consolidated tax group) in the non-tax-basis financial
statements, if any, used for Schedule M-3. If the corporation
prepares non-tax-basis financial statements, Schedule L
must equal the sum of the financial statement total assets for
each corporation listed on Form 851 and included in the
consolidated U.S. income tax return (includible corporation)
net of eliminations for intercompany transactions between
includible corporations. If the corporation does not prepare
non-tax-basis financial statements, Schedule L must be
based on the corporation's books and records. The
Schedule L balance sheet can show tax-basis balance sheet
amounts if the corporation is allowed to use books and
records for Schedule M-3 and the corporation's books and
records reflect only tax-basis amounts.
Generally, total assets at the beginning of the year
(Schedule L, line 15, column (b)) must equal total assets at
the close of the prior year (Schedule L, line 15, column (d)).
For each Schedule L balance sheet item reported for which
there is a difference between the current opening balance
sheet amount and the prior closing balance sheet amount,
attach a 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.

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.
3

Consolidated Return (Form 1120, Page 1)

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

Entity Considerations for
Schedule M-3

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

Reportable Entity Partner Reporting
Responsibilities

A reportable entity partner with respect to a partnership filing
Form 1065 is an entity that:
• Owns or is deemed to own, directly or indirectly, under
these instructions a 50% or greater interest in the income,
loss, or capital of the partnership on any day of the tax year;
and
• Was required to file Schedule M-3 with 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 the
corporation’s 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
4

owned under these instructions by the trust or nominee
arrangement.
A reportable entity partner with respect to a partnership
(as defined above) must report the following to the
partnership within 30 days of first becoming a reportable
entity partner and, after first reporting to the partnership
under these instructions, thereafter within 30 days of the date
of any change in the interest it owns or is deemed to own,
directly or indirectly, under these instructions, in the
partnership.
1. Name.
2. Mailing address.
3. Taxpayer identification number (TIN) or EIN, if
applicable.
4. Entity or organization type.
5. State or country in which it is organized.
6. Date on which it first became a reportable entity
partner.
7. Date with respect to which it is reporting a change in its
ownership interest in the partnership, if applicable.
8. The interest in the partnership it owns or is deemed to
own in the partnership, directly or indirectly (as defined under
these instructions), as of the date with respect to which it is
reporting.
9. Any change in that interest as of the date with respect
to which it is reporting.
The reportable entity partner must retain copies of
required reports it makes to partnerships under these
instructions. Each partnership must retain copies of the
required reports it receives under these instructions from
reportable entity partners.
Example 3.
1. A, limited liability company (LLC) filing a Form 1065 for
2025, is owned 50% by U.S. corporation Z. A owns 50% of B,
C, D, and E, which are also LLCs filing a Form 1065 for
calendar year 2025. Z was first required to file Schedule M-3
(Form 1120) for its corporate tax year ending December 31,
2024, and filed its Form 1120 with Schedule M-3 for 2024 on
October 15, 2025. As of October 16, 2025, Z was a
reportable entity partner with respect to A and, through A,
with respect to B, C, D, and E. On November 5, 2025, 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
2025, each of A, B, C, D, and E is required to file
Schedule M-3 (Form 1065) for 2025, regardless of whether
they would otherwise be required to file Schedule M-3 for that
year.
2. P, a U.S. corporation, is the parent of a financial
consolidation group with 50 domestic subsidiaries, DS1
through DS50, and 50 foreign subsidiaries, FS1 through
FS50, all 100% owned on October 16, 2025. On October 15,
2025, P filed a consolidated tax return on Form 1120 and was
required to file Schedule M-3 for the tax year ending
December 31, 2024. On October 16, 2025, 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, 2025. 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
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

the tax consolidation group and is therefore deemed to own
30% of K on October 16, 2025. 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 is therefore deemed to
own 20% of K on September 16, 2025. P is therefore deemed
to own 50% of K on October 16, 2025. Since P owns or is
deemed to own, directly or indirectly (under these
instructions), 50% or more of K on October 16, 2025, and
was required to file Schedule M-3 on its most recently filed
U.S. income tax return filed prior to that date, P is a
reportable entity partner of K as of October 16, 2025. On
November 5, 2025, P reports to K, as it is required to do, that
P is a reportable entity partner as of October 16, 2025,
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, 2025.

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

A consolidated tax return group with a parent corporation that
files a Form 1120 is a mixed group if any member is a life
insurance company (files using Form 1120-L) or a property
and casualty insurance company (files using Form 1120-PC).
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 will generally be necessary to complete
Parts II and III of a separate Schedule M-3 for consolidation
eliminations.
If a U.S. consolidated tax group that is not a mixed group
consists of four includible corporations (the parent and three
subsidiaries) all filing Form 1120, the U.S. consolidated tax
group must complete six Schedules M-3 as follows.
• One consolidated Schedule M-3 with Parts I, II, and III
completed to reflect the activity of the entire U.S.
consolidated tax group.
• Parts II and III of a separate Schedule M-3 for each of the
four includible corporations to reflect the activity of each
includible corporation.
• Parts II and III of a separate Schedule M-3 to eliminate
intercompany transactions between includible corporations
and to include limitations on deductions (charitable
contribution limitations and capital loss limitations) and
carryover amounts (charitable contribution carryovers and
capital loss carryovers).
See Completing Schedule M-3 and Certain Allocations,
Limitations, and Carryovers, earlier.
Note. Complete only one Schedule M-3, Part I, for each
consolidated group. A subsidiary of a consolidated group
does not complete Schedule M-3, Part I. Enter on
Schedule M-3, Part I, the name and EIN of the common
parent of the consolidated group. Indicate on Schedule M-3,
Parts II and III, on the line after the common parent's name
and EIN, whether the Schedule M-3, Parts II and III, is for the
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

(1) consolidated group, (2) parent corporation, (3)
consolidation eliminations, or (4) subsidiary corporation, by
checking the appropriate box. If Schedule M-3, Parts II and
III, are for a subsidiary in a consolidated return, also enter the
name and EIN of the subsidiary.

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

Special Schedule M-3 consolidation rules apply to a mixed
group, that is, a consolidated tax group that includes (a) both
a corporation that is an insurance company and a corporation
that is not an insurance company; or (b) both a life insurance
company and a property and casualty insurance company; or
(c) a life insurance company, a property and casualty
insurance company, and a corporation that is not an
insurance company.
Mixed group consolidation for Schedule M-3, Parts II and
III, requires (a) subgroup sub-consolidation of the 1120
subgroup, the 1120-PC subgroup, and the 1120-L subgroup,
each with its own sub-consolidated Schedule M-3, Parts II
and III; and (b) consolidation of the subgroup
sub-consolidation totals on a consolidated Schedule M-3,
Part II, that ties to a consolidated Schedule M-3, Part I, and a
consolidated Form 8916.
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 Schedules M-3, Part II, and six additional
Schedules M-3, Part III, for the subgroup sub-consolidations.
Specifically, there must be one Schedule M-3, Part II and one
Schedule M-3, Part III for each subgroup's sub-consolidated
amounts and one Schedule M-3, Part II, and one
Schedule M-3, Part III, for each subgroup's sub-consolidation
eliminations amounts.
At the mixed group consolidated level, there must be a
consolidated Schedule M-3, Part II, and, if applicable, a
Schedule M-3, Part II for consolidation eliminations not
includible in the subgroup eliminations. At the consolidated
level, there must also be a consolidated Schedule M-3, Part I,
and a consolidated Form 8916. For a mixed group, there is
no Schedule M-3, Part III, at the consolidated level.
The corporation must check the applicable mixed group
checkboxes on all Schedules M-3, Parts I, II, and III, as
discussed below.

Subgroup Sub-Consolidation: 1120 Subgroup,
1120-PC Subgroup, and 1120-L Subgroup
A subgroup Schedule M-3, Parts II and III, sub-consolidation
must be prepared with all necessary eliminations within the
subgroup for each of the three possible subgroups that are in
fact present: one subgroup for those corporations reporting
on Form 1120, one subgroup for those corporations reporting
on Form 1120-PC, and one subgroup for those reporting on
Form 1120-L. The parent corporation is included in the
subgroup that corresponds to the form on which it reports
and the entire consolidated group files. For example, in the
case of a Form 1120 parent and Form 1120 consolidated
group, the parent is included in the Form 1120 subgroup
sub-consolidation. Each subgroup uses its own
Schedule M-3 (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.
5

The three subgroup sub-consolidation taxable income
calculations on Schedule M-3 must follow the separate return
requirements of the regulation under section 1502 and all
other applicable regulations, taking into account the amounts
separately reported on Form 8916. Capital loss limitation and
carryforward used and charitable deduction limitation and
carryforward used are not taken into account in the
determination of the three subgroup sub-consolidated
taxable incomes on Schedule M-3, but are reflected on Form
8916 and in the calculation of the life/non-life loss limitation
and carryforward used. See Life/Non-Life Loss Limitation and
Carryforward Used Calculations, 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.
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, on the
consolidated Schedule M-3, Part II, lines 29a, 29b, and 29c,
report the applicable amounts from the three subgroup
sub-consolidation Part II, line 29a, amounts. (If a
consolidated level Part II for consolidation eliminations not
includible in the subgroup eliminations is applicable, the
applicable amounts must be adjusted by the applicable
elimination amounts.) The consolidated Schedule M-3, Part
II, line 30, amounts are the sum of the applicable amounts on
the consolidated Part II, lines 29a, 29b, and 29c. For a mixed
group, the consolidated Part II, lines 1 through 28, are blank
and no consolidated Part III is required to be completed.
For mixed groups, the consolidated Part II, line 30, column
(a), must equal Part I, line 11, with appropriate adjustments
for statutory accounting requirements reflected on Part I,
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 example, an 1120 parent corporation included in the
1120 subgroup must check Schedule M-3 (Form 1120), Parts
II and III, box (2) Parent corporation, and box (5) Mixed
1120/L/PC group. An 1120 subsidiary corporation within the
1120 subgroup must check Schedule M-3 (Form 1120), Parts
II and III, box (4) Subsidiary corporation, and box (5) Mixed
1120/L/PC group. An 1120-PC subsidiary corporation within
the 1120-PC subgroup must check Schedule M-3 (Form
1120-PC), Parts II and III, box (4) Subsidiary corporation, and
box (5) Mixed 1120/L/PC group. An 1120-L subsidiary
corporation within the 1120-L subgroup must check
Schedule M-3 (Form 1120-L), Parts II and III, box (4)
Subsidiary corporation, and box (5) Mixed 1120/L/PC group.
The 1120 subgroup sub-consolidation Schedule M-3
(Form 1120), Parts II and III, must be indicated by checking
box (5) Mixed 1120/L/PC group, and box (6) 1120 group for
the sub-consolidation, and by checking box (5) Mixed
1120/L/PC group, and box (7) 1120 eliminations for the
eliminations. The 1120-PC subgroup sub-consolidation
Schedule M-3 (Form 1120-PC), Parts II and III, must be
indicated by checking box (5) Mixed 1120/L/PC group, and
box (6) 1120-PC group for the sub-consolidation, and by
checking box (5) Mixed 1120/L/PC group, and box (7)
1120-PC eliminations for the eliminations. The 1120-L
subgroup sub-consolidation Schedule M-3 (Form 1120-L),
Parts II and III, must be indicated by checking box (5) Mixed
1120/L/PC group, and box (6) 1120-L group for the
sub-consolidation, and by checking box (5) Mixed 1120/L/PC
group, and box (7) 1120-L eliminations for the eliminations.
A mixed group with a Form 1120 parent corporation
completes a consolidated level Schedule M-3 (Form 1120),
Parts I and II, and a consolidated Form 8916. The mixed
group consolidated Schedule M-3, Part II, must be indicated
by checking box (1) Consolidated group, and box (5) Mixed
1120/L/PC group. (If a consolidated level Part II for
consolidation eliminations not includible in the subgroup
eliminations is applicable, that Part II must be indicated by
checking box (3) Consolidated eliminations, and box (5)
Mixed 1120/L/PC group.)

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

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

6

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

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

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

Line 1. Questions Regarding the Type of Income
Statement Prepared

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

Non-Tax-Basis Financial Statements and Tax-Basis
Financial Statements
A tax-basis income statement is allowed for Schedule M-3,
and a tax-basis balance sheet for Schedule L, only if no
non-tax-basis income statement and no non-tax-basis
balance sheet were prepared for any purpose and the books
and records of the corporation reflect only tax-basis amounts.
The corporation is deemed to have non-tax-basis income
statements and the related non-tax-basis balance sheets for
the current tax year for purposes of Schedule M-3 and
Schedule L if such non-tax-basis financial statements were
prepared for and presented to management, creditors,
shareholders, government regulators, or any other third
parties for a period ending with or within the tax year.
If a Form 10-K is filed with the SEC for the period ending
with or within the tax year, the corporation must check “Yes”
for Part I, line 1a, and use that income statement for
Schedule M-3. If Form 10-K is not filed and a non-tax-basis
income statement is prepared that is a certified non-tax-basis
income statement for the period ending with or within the tax
year, the corporation must check “Yes” for Part I, line 1b, and
use that income statement for Schedule M-3. If Form 10-K is
not filed and no certified non-tax-basis income statement is
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

prepared but an unaudited non-tax-basis income statement
is prepared for the period ending with or within the tax year,
the corporation must check “Yes” for Part I, line 1c, and use
that income statement for Schedule M-3.
Order of priority in accounting standards. If no Form
10-K is filed and two or more non-tax-basis income
statements are both certified non-tax-basis income
statements for the period, the income statement prepared
according to the following order of priority in accounting
standards 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 first listed of the
accounting standards listed above must be used.
If no non-tax-basis financial statements are prepared for a
U.S. corporation (or, in the case of a U.S. consolidated tax
group, for the U.S. parent corporation's consolidated group)
filing Schedule M-3 (Form 1120), the U.S. corporation (or the
U.S. parent corporation of a U.S. consolidated tax group)
must check “No” on questions 1a, 1b, and 1c; skip Part I,
lines 2a through 3c; and enter the net income (loss) per the
books and records of the U.S. corporation (or U.S.
consolidated tax group) on Part I, line 4a.
If no non-tax-basis financial statements are prepared for a
U.S. corporation (or, in the case of a U.S. consolidated tax
group, for the U.S. parent corporation's consolidated group)
filing Schedule M-3 (Form 1120) and the U.S. corporation is
owned by a foreign corporation that prepares financial
statements that includes the U.S. corporation (or the U.S.
parent corporation's consolidated group), the U.S.
corporation (or the U.S. parent corporation of the U.S.
consolidated tax group) must 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.

Line 2. Questions Regarding Income Statement
Period and Restatements

Enter the beginning and ending dates on line 2a for the
corporation's annual income statement period ending with or
within the current tax year.
The questions on Part I, lines 2b and 2c, regarding income
statement restatements refer to the worldwide consolidated
income statement issued by the corporation filing the U.S.
income tax return (the consolidated financial statements for
the U.S. parent corporation of a U.S. consolidated tax group)
and used to prepare Schedule M-3. Answer “Yes” on lines 2b
and/or 2c if the corporation's annual income statement has
been restated for any reason. Attach a short explanation of
the reasons for the restatement in net income for each annual
income statement period that is restated, including the
original amount and restated amount of each annual
7

statement period's net income. The attached statement is not
required to report restatements on an entity-by-entity basis.

the worldwide consolidated income (loss) amount reported
on Part I, line 4a.

Line 3. Questions Regarding Publicly Traded
Voting Common Stock

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

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 corporation. If the
corporation has more than one class of publicly traded voting
common stock, attach a list of the classes of publicly traded
voting common stock and the trading symbol and the
nine-digit CUSIP number of each class.

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

Report on Part I, line 4a, the worldwide consolidated net
income (loss) per the income statement (or books and
records, if applicable) of the corporation. A corporation filing
a non-consolidated Form 1120 for itself must report its
worldwide income on Part I, line 4a.
In completing Schedule M-3, the corporation must use
financial statement amounts from the financial statement type
checked “Yes” on Part I, line 1, or from its books and records
if Part I, line 1c, is checked “No.” If Part I, line 1a, is checked
“Yes,” report on Part I, line 4a, the net income amount
reported in the income statement presented to the SEC on
the corporation's Form 10-K (the Form 10-K for the security
identified on Part I, line 3b, if applicable).
If a corporation prepares non-tax-basis financial
statements, the amount on 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.
If the corporation prepares non-tax-basis financial
statements and the income statement period differs from the
corporation's tax year, the income statement period indicated
on Part I, line 2a, applies for purposes of Part I, lines 4a
through 8.
If the corporation does not prepare non-tax-basis financial
statements and has checked “No” on Part I, line 1c, enter the
net income (loss) per the books and records of the U.S.
corporation or the U.S. consolidated tax group on Part I,
line 4a.
Indicate on Part 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. Tax-basis.
5. Other (specify).
Report on Part I, lines 5a through 10, as instructed below,
all adjustment amounts required to adjust worldwide net
income (loss) reported on this Part I, line 4a (whether from
financial statements or books and records), to net income
(loss) of includible corporations that must be reported on Part
I, line 11.
Report on line 12a the worldwide consolidated total assets
and total liabilities amounts for the corporation using the
same financial statements (or books and records) used for
8

If line 4a includes net income (loss) for a corporation that
files Form 1120-PC or Form 1120-L, see the instructions for
Part I, line 10, for adjustments that may be necessary to
reconcile financial statement income to statutory income.

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

Remove the financial net income (line 5a) or loss (line 5b) of
each foreign entity that is included on 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 this line 5 for each separate
nonincludible foreign entity. Also, state the total assets and
total liabilities for each such separate nonincludible foreign
entity and include those assets and liabilities amounts in the
total assets and total liabilities reported on Part I, line 12b.
The amounts of income (loss) detailed on the supporting
statement should be reported for each separate
nonincludible foreign entity without regard to the effect of
consolidation or elimination entries. If there are consolidation
or elimination entries relating to nonincludible foreign entities
whose income (loss) is reported on the attached statement
that 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
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

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).

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

Remove the financial net income (line 6a) or loss (line 6b) of
each U.S. entity that is included on line 4a and is not an
includible corporation in the U.S. consolidated tax group
(nonincludible U.S. entity). In addition, on Part I, line 8, adjust
for consolidation eliminations and correct for minority interest
and intercompany dividends between any nonincludible U.S.
entity and any includible corporation. Do not remove in Part I
the financial net income (loss) of any nonincludible U.S. entity
accounted for on 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 this line 6 for each separate nonincludible U.S.
entity. Also, state the total assets and total liabilities for each
such separate nonincludible U.S. entity and include those
assets and liabilities amounts in the total assets and total
liabilities reported on Part I, line 12c. The amounts of income
(loss) detailed on the supporting 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 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).

Line 7. Net Income (Loss) of Other Includible
Foreign Disregarded Entities, Other Includible
U.S. Disregarded Entities, and 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 entity that is not included in the consolidated
financial group and therefore not included in the income
reported on Part I, line 4a. Include on line 7a or 7b financial
income of any disregarded entity that is not included in the
income reported on Part I, line 4a, but is included on Part I,
line 11 (other disregarded entities). Include on line 7c the
financial income of any entity not a disregarded entity that is
not included in the income reported on line 4a, but is included
on line 11 (other includible entities). In addition, on Part I,

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

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 on lines 7a, 7b, and 7c, for each separate
other U.S. disregarded entity or other includible entity. Also,
state the total assets and total liabilities for each such
separate includible entity and include those asset and liability
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
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 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 U.S.
disregarded entities is being reported on line 7b, the attached
supporting statement should report the income (loss) of each
separate other U.S. disregarded entity from each entity's own
financial accounting net income statement or books and
records, and any consolidation or elimination entries (for
intercompany dividends, minority interests, etc.) not
reportable on Part I, line 8, should be reported on the
attached supporting statement as a net amount on a line
separate and apart from lines that report each other
includible corporation's or entity's separate net income (loss).

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

Adjustments on Part I, line 8, to reverse certain financial
accounting consolidation or elimination entries are necessary
to ensure that transactions between includible entities and
nonincludible U.S. or foreign entities are not eliminated, in
order to report the correct total amount on Part I, line 11.
Also, additional consolidation entries and elimination entries
may be necessary on Part I, line 8, related to transactions
between includible entities that are in the consolidated
financial group and other disregarded entities and other
includible entities that are not in the consolidated financial
group but that are reported on Part I, line 7a, 7b, or 7c, in
order to report the correct total amount on Part I, line 11.
Include on Part I, line 8, the total of the following: (a)
amounts of any adjustments to consolidation entries and
elimination entries that are contained in the amount reported
on Part I, line 4a, required as a result of removing amounts on
Part I, line 5 or 6; and (b) amounts of any additional
consolidation entries and elimination entries that are required
as a result of including amounts on Part I, line 7a, 7b, or 7c.
This is necessary in order that the consolidation entries and
intercompany elimination entries included in the amount
reported on Part I, line 11, are only those applicable to the
financial net income (loss) of includible entities for the
financial statement period. For example, adjustments must
be reported on line 8 to remove minority interest and to
reverse the elimination of intercompany dividends included
9

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

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.
10

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 the 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 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), the type, and the
amount of each adjustment included in the net adjustment.

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

Report on line 11 the net income (loss) per the income
statement (or books and records, if applicable) of the
corporation. In the case of a U.S. consolidated tax group,
report the consolidated income statement net income (loss)
of all corporations listed on Form 851 and included in the
consolidated U.S. income tax return for the tax year. Amounts
reported in Parts II and III, column (a) (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 statutory accounting. If an insurance
company is included in a consolidated Form 1120, the
amount of net income reported on Part I, line 11, will include
the statutory accounting net income for the insurance
corporation and the GAAP net income for the non-insurance
corporations included in the U.S. consolidated tax group. (For
insurance companies included in the consolidated U.S.
income tax return, see the instructions for Part I, line 10, and
Part II, line 7.)
Do not, in any event, report on this line 11 the net income
of entities not listed on Form 851 and not included in the
consolidated U.S. income tax return for the tax year. For
example, it is not permissible to remove the income of
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

nonincludible entities on lines 5 and/or 6, discussed earlier,
then 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 nonincludible
corporations.
Example 4.
1. U.S. corporation P is publicly traded and files Form
10-K with the SEC. P owns 80% or more of the stock of 75
U.S. corporations, DS1 through DS75, between 51% and
79% of the stock of 25 U.S. corporations DS76 through
DS100, and 100% of the stock of 50 foreign subsidiaries FS1
through FS50. P eliminates all dividend income from DS1
through DS100, and FS1 through FS50 in financial statement
consolidation entries. Furthermore, P eliminates the minority
interest ownership, if any, of DS1 through DS100 in financial
statement consolidation entries. P's SEC Form 10-K includes
P, DS1 through DS100, and FS1 through FS50 on a fully
consolidated basis. P files a consolidated U.S. income tax
return with DS1 through DS75.
P must check “Yes” on Part I, line 1a. On Part I, line 4a, P
must report the consolidated net income from the SEC Form
10-K for the consolidated financial statement group of P, DS1
through DS100, and FS1 through FS50. P must remove the
net income (loss) of FS1 through FS50 on Part I, line 5a or
5b, as applicable. P must remove the net income (loss)
before minority interests of DS76 through DS100 on Part I,
line 6a or 6b, as applicable. P must reverse on Part I, line 8:
a. The elimination of dividends received by P and DS1
through DS75 from DS76 through DS100 and FS1 through
FS50; and
b. The recognition of minority interests' share of the net
income (loss) of DS76 through DS100. Note. The minority
interests' share, if any, of the income of DS1 through DS75
must be reported in Part II, line 8.
P reports on Part I, line 11, the consolidated financial
statement net income (loss) attributable to the includible
corporations. Intercompany transactions between the
includible corporations that had been eliminated in the net
income amount on line 4a remain eliminated in the net
income amount on line 11. Transactions between the
includible corporations and the nonincludible entities that are
eliminated in the net income amount on line 4a are included
in the net income amount on line 11 since the elimination of
those transactions was reversed on line 8.
2. Foreign corporation F owns 100% of the stock of U.S.
corporation P. P owns 100% of the stock of DS1, 60% of the
stock of DS2, and 100% of the stock of FS1. F prepares
certified audited financial statements. P does not prepare any
financial statements. P files a consolidated U.S. income tax
return with DS1.
P must not complete Schedule M-3, Part I, with reference
to the financial statements of its foreign parent F. P must
check “No” on Part I, lines 1a, 1b, and 1c; skip lines 2a
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

through 3c of Part I; and enter worldwide net income (loss)
per the books and records of the includible corporations (P
and DS1) on Part I, line 4a. P must enter any necessary
adjustments on lines 5a through 10 in order for Part I, line 11,
to report the net income (loss) of includible corporations P
and DS1, net of eliminations for transactions between P and
DS1.
Example 5.
1. U.S. corporation P owns 60% of corporation DS1
which is fully consolidated in P's financial statements. P does
not account for DS1 in P's separate general ledger on the
equity method. DS1 has net income of $100 (before minority
interests) and pays dividends of $50, of which P receives
$30. The dividend is eliminated in the consolidated financial
statements. In its financial statements, P consolidates DS1
and includes $60 of net income ($100 less the minority
interest of $40) on Part I, line 4a.
P must remove the $100 net income of DS1 on Part I,
line 6a. P must reverse on Part I, line 8, the elimination of the
$40 minority interest net income of DS1. In addition, P
reverses its 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 on 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. corporation C owns 60% of the capital and profits
interests in U.S. LLC N. C does not account for N in C's
separate general ledger on the equity method. N has net
income of $100 (before minority interests) and makes no
distributions during the tax year. C treats N as a corporation
for financial statement purposes and as a partnership for U.S.
income tax purposes. In its financial statements, C
consolidates N and includes $60 of net income ($100 less
the minority interest of $40) on Part I, line 4a.
C must remove the $100 net income of N on Part I, line 6a.
C must reverse on Part I, line 8, the elimination of the $40
minority interest net income of N. The result is that C includes
no income for N either on Part I, line 11, or on Part II, line 9,
column (a). C's taxable income from N must be reported by C
on Part II, line 9, column (d).
3. U.S. corporation P owns 60% of corporation DS1,
which is fully consolidated in P's financial statements. P
accounts for DS1 in P's separate general ledger on the equity
method. DS1 has net income of $100 (before minority
interests) and pays dividends of $50, of which P receives
$30. The dividend reduces P's investment in DS1 for equity
method reporting on P's separate general ledger where P
includes its 60% equity share of DS1 income, which is $60. In
its financial statements, P eliminates the DS1 equity method
income of $60 and consolidates DS1, including $60 of net
income ($100 less the minority interest of $40) on Part I,
line 4a.
P must remove the $100 net income of DS1 on Part I,
line 6a. P must reverse on Part I, line 8, the elimination of the
$40 minority interest net income of DS1 and the elimination
of the $60 of DS1 equity income. The net result is that P
includes the $60 of equity method income from DS1 on 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. corporation C owns 60% of the capital and profits
interests in U.S. LLC N. C accounts for N in C's separate
general ledger on the equity method. N has net income of
11

$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. corporation C owns 60% of the capital and profits
interests in U.S. LLC N. C accounts for N in C's separate
general ledger on the equity method. N has net income of
$100 (before minority interests) and pays a $50 cash
distribution, of which C receives $30. The distribution
reduces C's investment in N for equity method reporting on
C's separate general ledger. C treats N as a corporation for
financial statement purposes and as a partnership for U.S.
income tax purposes. For equity method reporting on C's
separate general ledger, C includes its 60% equity share of N
income, which is $60. In its financial statements, C eliminates
the $60 of N equity method income and consolidates N and
includes $60 of net income ($100 less the minority interest of
$40) on Part I, line 4a.
C must remove the $100 net income of N on Part I, line 6a.
C must reverse on Part I, line 8, the elimination of the $40
minority interest net income of N and the elimination of the
$60 of N equity method income. The result is that C includes
the $60 of equity method income for N on Part I, line 11, and
on Part II, line 9, column (a). C's taxable income from N must
be reported by C on Part II, line 9, column (d).
Example 6. U.S. corporation P owns 80% of the stock of
corporation DS1. DS1 is included in P's consolidated income
tax return, even though DS1 is not included in P's
consolidated financial statements on either a consolidated
basis or on the equity method. DS1 has current year net
income of $100 after taking into account its $40 interest
payment to P. P has net income of $1,040 after recognition of
the interest income from DS1. Because DS1 is an includible
corporation, 100% of the net income of both P and DS1 must
be reported on Form 1120, page 1, of the PDS consolidated
U.S. income tax return, and the intercompany interest income
and expense must be removed by consolidation elimination
entries.
P must report its financial statement net income of $1,040
on Part I, line 4a, and reports DS1's net income of $100 on
Part I, line 7c. Then, in order to reflect the full consolidation of
the financial accounting net income of P and DS1 on Part I,
line 11, the following consolidation and elimination entries are
reported on Part I, line 8: (a) offsetting entries to remove the
$40 of interest income received from DS1 included by P on
line 4a, and to remove the $40 of interest expense of DS1
included in line 7c for a net change of zero; and (b) an entry
to reflect the $20 minority interest in the net income of DS1
(DS1 net income of $100 times 20% minority interest). The
result is that Part I, line 11, reports $1,120: $1,040 from
line 4a, $100 from line 7c, and ($20) from line 8. Stated
another way, Part I, line 11, includes the entire $1,000 net
income of P, measured before recognition of the
12

intercompany interest income from DS1 and the
consolidation of DS1 operations, plus the entire $140 net
income of DS1, measured before interest expense to P, less
the minority interest ownership of $20 in DS1's separate net
income ($100). The consolidated U.S. income tax group is
required to include on the attached supporting 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).

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. All assets and liabilities reported for Schedule M-3,
Part I, lines 12a, 12b, 12c, and 12d, must be entered 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 consolidated U.S. income tax returns, attach supporting
statements for each includible corporation. See the
instructions for consolidated returns in the Instructions for
Form 1120.

General Format of Parts II and III

Check the applicable box(es) at the top of pages 2 and 3 of
Schedule M-3 to indicate whether the Schedule M-3 is for
the:
1. Consolidated group,
2. Parent corporation,
3. Consolidated eliminations,
4. Subsidiary corporation, or
5. Mixed 1120/L/PC group.
Also, check the applicable box to indicate whether the
Schedule M-3 is for a sub-consolidated (6) 1120 group, or (7)
1120 eliminations. See Consolidated Schedule M-3 Versus
Consolidating Schedules M-3 for Form 1120 Groups and
Schedule M-3 Consolidation for Mixed Groups (1120/L/PC),
earlier.
For each line item in Parts II and III, report in column (a)
the amount of net income (loss) included on Part I, line 11,
and report in column (d) the amount included in taxable
income on Form 1120, page 1, line 28.
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).
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Note. A statement or explanation may be attached to any
line item even if none is required.
If financial statements are prepared by the corporation in
accordance with generally accepted accounting principles
(GAAP), differences that are treated as temporary for GAAP
must be reported in column (b) and differences that are
permanent (that is, not temporary for GAAP) must be
reported in column (c). Generally, pursuant to GAAP, a
temporary difference affects (creates, increases, or
decreases) a deferred tax asset or liability.
If the corporation does not prepare financial statements, or
the financial statements are not prepared in accordance with
GAAP, report in column (b) any difference that the
corporation believes will reverse in a future tax year (that is,
have an opposite effect on taxable income in a future tax year
(or years) due to the difference in timing of recognition for
financial accounting and U.S. income tax purposes) or is the
reversal of such a difference that arose in a prior tax year.
Report in column (c) any difference that the corporation
believes will not reverse in a future tax year (and is not the
reversal of such a difference that arose in a prior tax year).
If the corporation is unable to determine whether a
difference between column (a) and column (d) for an item will
reverse in a future tax year or is the reversal of a difference
that arose in a prior tax year, report the difference for that
item in column (c).
Example 7. Corporation B is a U.S. publicly traded
corporation that files a consolidated U.S. income tax return
and prepares consolidated GAAP financial statements. In
prior years, B acquired intellectual property (IP) and goodwill
through several corporate acquisitions. The IP is amortizable
for both U.S. income tax and financial statement purposes. In
the current year, B's annual amortization expense for IP is
$9,000 for U.S. income tax purposes and $6,000 for financial
statement purposes. In its financial statements, B treats the
difference in IP amortization as a temporary difference. The
goodwill is not amortizable for U.S. income tax purposes and
is subject to impairment for financial statement purposes. In
the current year, B records an impairment charge on the
goodwill of $5,000. In its financial statements, B treats the
goodwill impairment as a permanent difference. B must
report the amortization attributable to the IP on Part III,
line 28, and report $6,000 in column (a), a temporary
difference of $3,000 in column (b), and $9,000 in column (d).
B must report the goodwill impairment on Part III, line 26, and
report $5,000 in column (a), a permanent difference of
($5,000) in column (c), and $0 in column (d).

Reporting Requirements for Parts II
and III

Except for mixed group consolidation, the number of Parts II
must equal the number of Parts III filed by the corporation.
Mixed groups should see Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), 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 Part II, line 12, columns (a), (b), (c), and
(d), as applicable, regardless of whether the amount would
otherwise be reported on Schedule M-3, Part II or Part III.
Thus, if a taxpayer files Form 8886, Reportable Transaction
Disclosure Statement, the amounts attributable to that
reportable transaction must be entered on Part II, line 12.
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

A corporation is required to report in Parts II and III,
column (a) the amount of any item specifically listed on
Schedule M-3 that is in any manner included in the
corporation's current year financial statement net income
(loss) or in an income or expense account maintained in the
corporation's books and records, even if there is no
difference between that amount and the amount included in
taxable income unless (a) otherwise provided in these
instructions, or (b) the amount is attributable to a reportable
transaction described in Regulations section 1.6011-4(b) and
is therefore reported on Part II, line 12. For example, with the
exception of interest income reflected on a Schedule K-1
received by a corporation as a result of the corporation's
investment in a partnership or other pass-through entity, all
interest income, included on Part I, line 11, whether from
unconsolidated affiliated companies, third parties, banks, or
other entities; whether from foreign or domestic sources;
whether taxable or exempt from tax; and whether classified
as some other type of income for U.S. income tax purposes
(such as dividends), must be included in Part II, line 13,
column (a). Likewise, all fines and penalties included on Part
I, line 11, paid to a government or other authority for the
violation of any law for which fines or penalties are assessed
must be included in Part III, line 12, column (a), regardless of
the government authority that imposed the fines or penalties;
regardless of whether the fines or penalties are civil or
criminal; and regardless of the classification, nomenclature,
or terminology attached to the fines or penalties by the
imposing authority in its actions or documents.
If a corporation 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 corporation has capitalized the item of income
or expense and reports the amount in its financial statement
balance sheet or in asset and liability accounts maintained in
the corporation's books and records, the corporation must
report the proper tax treatment of the item in columns (b), (c),
and (d), as applicable.
Furthermore, in applying the two preceding paragraphs, a
corporation is required to report in Parts II and III, column (a),
the amount of any item specifically listed on Schedule M-3
that is included in the corporation's financial statements or
exists in the corporation's books and records, regardless of
the nomenclature associated with that item in the financial
statements or books and records. Accurate completion of
Schedule M-3 requires reporting amounts according to the
substantive nature of the specific line items included on
Schedule M-3 and consistent reporting of all transactions of
like substantive nature that occurred during the tax year. For
example, all expense amounts that are included in the
financial statements or exist in the books and records that
represent some form of “Bad debt expense” must be reported
in Part III, line 32, column (a), regardless of whether the
amounts are recorded or stated under different nomenclature
in the financial statements or the books and records such as
“Provision for doubtful accounts,” “Expense for uncollectible
notes receivable,” or “Impairment of trade accounts
receivable.” Likewise, as stated in the preceding paragraph,
all fines and penalties must be included in Part III, line 12,
column (a), regardless of the terminology or nomenclature
attached to them by the corporation in its books and records
or financial statements.
With limited exceptions, Part II includes lines for specific
items of income, gain, or loss (income items). See Part II,
lines 1 through 24. If an income item is described on Part II,
13

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 on 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 37. If an expense item is described on Part III,
lines 1 through 37, 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 37, report and describe
the entire amount of the item on Part III, line 38.
If there is no difference between the financial accounting
amount and the taxable amount of an entire item of income,
loss, expense, or deduction and the item is not described or
included on Part II, lines 1 through 25, or Part III, lines 1
through 38, report the entire amount of the item in Part II,
line 28, columns (a) and (d).
Special instructions for Part II, lines 25 and 28, and Part
III, line 38. Whether a given income (loss) item is reported
on Part II, line 25, or on Part II, line 28, or a given expense/
deduction item on Part III, line 38, or on Part II, line 28, is
determined separately by each member of the U.S.
consolidated tax group and not at the U.S. consolidated tax
group level. For example, U.S. corporation P has two
subsidiaries, A and B, that are included in P's consolidated
financial statements and in P's consolidated U.S. income tax
return. For financial statement purposes, P, A, and B
recognize real estate tax expense when accrued. For U.S.
income tax purposes, P and A recognize such expense
consistent with the method used for financial statement
purposes, whereas B recognizes such deduction based on a
method different from that used for financial statement
purposes. P and A must report this expense/deduction in
columns (a) and (d) on Part II, line 28. B must report the
following on Part III, line 38: 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.
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. 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
entered on the applicable line and the amount(s) of the
item(s) is entered in the applicable columns of the applicable
line. See the instructions for Part II, lines 1 through 8, for
specific additional information required to be provided for
these particular lines.
14

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 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 38. A separate statement must be attached to
Schedule M-3 (Form 1120) that includes a detailed
description of each item and adjustment entered on Part II,
line 25, and Part III, line 38.
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 38.
Each description should adequately describe all four
columns of Part II, line 25, or Part III, line 38. If additional
information is required to provide an acceptable description,
provide a supporting statement.
Example 8. Corporation C is a calendar year taxpayer
that placed in service 10 depreciable fixed assets in a
previous tax year. C files and entirely completes
Schedule M-3 for its current tax year. 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 financial statements, C treats the differences
between financial statement and U.S. income tax
depreciation expense as giving rise to temporary differences
that will reverse in future years. C must combine all of its
depreciation adjustments. Accordingly, C must report on Part
III, line 31, for its 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. Corporation D is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
tax year. On December 31, D establishes three reserve
accounts in the amount of $100,000 for each account. One
reserve account is an allowance for accounts receivable that
are estimated to be uncollectible. The second reserve is an
estimate of coupons outstanding that may have to be paid.
The third reserve is an estimate of future warranty expenses.
In its financial statements, D treats the three reserve
accounts as giving rise to temporary differences that will
reverse in future years. The three reserves are expenses in
D's current financial statements 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 three reserve
accounts. D must report the amounts attributable to the
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

allowance for uncollectible accounts receivable on Part III,
line 32, Bad debt expense, and must separately state and
adequately disclose the amounts attributable to each of the
other two reserves, coupons outstanding, and warranty
costs, on a required, attached statement that supports the
amounts on Part III, line 38. D must also provide a description
for each reserve that meets the requirements for Part III,
line 38, discussed earlier under Required statements for Part
II, line 25, and Part III, line 38. In this example, an acceptable
description would be “Coupon Issue Reserves—Rewards
Expense” and “Future Warranty Expense Reserve.”
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. Corporation E is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
tax year. On January 2 of the current tax year, E establishes
an allowance for uncollectible accounts receivable (bad debt
reserve) of $100,000. During the current tax year, E
increased the reserve by $250,000 for additional accounts
receivable that may become uncollectible. Additionally,
during the current tax year, E decreases the reserve by
$75,000 for accounts receivable that were discharged in
bankruptcy during the current tax year. The balance in the
reserve account on December 31 of the current tax year is
$275,000. The $100,000 amount to establish the reserve
account and the $250,000 to increase the reserve account
are expenses on E's current year financial statements but are
not deductible for U.S. income tax purposes in the current tax
year. However, the $75,000 decrease to the reserve is
deductible for U.S. income tax purposes in the current tax
year. In its financial statements, E treats the reserve account
as giving rise to a temporary difference that will reverse in
future tax years. E must report on Part III, line 32, for its
current tax year income statement, bad debt expense of
$350,000 in column (a), a temporary difference of ($275,000)
in column (b), and U.S. income tax bad debt expense of
$75,000 in column (d).
Example 11. Corporation F is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
tax year. F incurs $200 of meal expenses and $100 of
entertainment expenses that F deducts in computing net
income per the income statement. All of the $200 of meal
expenses are subject to the 50% limitation under section
274(n). The $100 of entertainment expenses are
nondeductible under section 274(a). In its financial
statements, F treats the limitation on deductions for meals
and entertainment as a permanent difference. Because
meals and entertainment expenses are specifically described
in Part III, line 11, F must report all of its meals and
entertainment expenses on this line, regardless of whether
there is a difference. Accordingly, F must report $300 in
column (a), $200 in column (c), and $100 in column (d). All
meals and entertainment expenses, whether allowed fully or
subject to limitations, must be reported on Part III, line 11. No
amounts should be reported on Part II, line 28.

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Part II. Reconciliation of Net Income
(Loss) per Income Statement of
Includible Corporations With Taxable
Income per Return

Attach supporting statements for Parts II, lines 1 through 12.
For any item reported on lines 1, 3 through 6, or 8, include in
the supporting statement the name of the entity for which the
item is reported, the entity's EIN (if applicable), the type of
entity (corporation, partnership, etc.), and the item amounts
for columns (a) through (d). See the instructions for Part II,
lines 2, 7, and 9 through 12, for the specific information
required for those particular lines.

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

Report on line 1, column (a), the financial income (loss)
included on Part I, line 11, for any foreign corporation
accounted for on the equity method and remove such amount
in column (b) or (c), as applicable. Report the amount of
dividends received and other taxable amounts received 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 current year taxable income
on Form 1120, page 1, line 28, and report on line 2, column
(a), the amount of dividends from any foreign corporation
included on Part I, line 11. Do not report on line 2 any
amounts that must be reported on Part II, line 3 or 4, or
dividends that were previously taxed and must be reported
on Part II, line 5. See the instructions for Part II, lines 3, 4, and
5.
For any dividends reported on Part II, line 2, that are
received on a class of voting stock of which the corporation
directly or indirectly owned 10% or more of the outstanding
shares of that class at any time during the tax year, report on
an attached supporting statement (1) the name of the
dividend payer, (2) the payer's EIN (if applicable), (3) the
class of voting stock on which the dividend was paid, (4) the
percentage of the class directly or indirectly owned, and (5)
the amounts for columns (a) through (d).

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

Report on line 3, column (d), the amount included in taxable
income under section 951, relating to Subpart F; the amounts
included 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 any amount included in taxable income
pursuant to section 1293, relating to a qualified electing fund
(QEF). The amount included under section 951 corresponds
to the total of the amounts reported on Form 1120,
Schedule C, lines 16a, 16b, and 16c (or the corresponding
line on Form 1120-C, Schedule C, if applicable). The amount
of GILTI corresponds to the amount reported on Form 1120,
Schedule C, line 17 (or the corresponding line on Form
1120-C, Schedule C, if applicable). The amount of QEF
income corresponds to the total of the amounts of income
15

from a QEF reported by the corporation on all Forms 8621,
Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund. See Form
8621 and the Instructions for Form 8621.
Also, include on line 3 passive foreign investment
company (PFIC) mark-to-market gains and losses under
section 1296. Do not report such gains and losses on Part II,
line 16.

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 (1) the
name of the dividend payer; (2) the payer's EIN; (3) the class
of stock or security on which the dividends were paid; (4) the
amount of any net adjustment included on Part I, line 10a, for
such dividends; and (5) the item amounts for columns (a)
through (d).

Report on line 4, column (d), the amount of any foreign taxes
deemed paid not included in column (d) of Part II, lines 9, 10,
and 11, Income (loss) from U.S. partnerships, foreign
partnerships, and other pass-through entities. The foreign
taxes deemed paid amount on this line 4 must correspond to
the total foreign taxes deemed paid amounts reported by the
corporation on all Forms 1118, Foreign Tax
Credit—Corporations, excluding the amounts reported in Part
II, lines 9, 10, and 11, column (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 (5)
the item amounts for columns (a) through (d).

Line 5. Gross Foreign Distributions Previously
Taxed

Line 8. Minority Interest for Includible
Corporations

Line 4. Gross-up for Foreign Taxes Deemed Paid

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

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

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

Line 7. U.S. Dividends Not Eliminated in Tax
Consolidation

Report in line 7, column (a), the amount of dividends included
on Part I, line 11, that were received from any U.S.
corporation. Report in line 7, column (d), the amount of any
U.S. dividends included in taxable income on Form 1120,
page 1, line 28.
Usually, the amounts included in line 7, columns (a) and
(d), include only dividends received from U.S. corporations
that are not included in the U.S. consolidated tax group
because intercompany dividends (dividends received from
includible corporations listed on Form 851) are eliminated or
excluded for financial accounting purposes and eliminated for
the calculation of U.S. taxable income. In the case of an
insurance company included in the consolidated U.S. income
tax return required to report intercompany dividends as part
of statutory accounting net income, include such
intercompany dividends on Part II, line 7, column (a), and the
taxable amount of those dividends on Part II, line 7, column
(d). For insurance companies included in the consolidated
U.S. income tax return, see the instructions for Part I, lines 10
and 11.

16

Report on line 8, column (a), the minority interest included in
the financial income (loss) on Part I, line 11, for any member
of the U.S. consolidated tax group that is less than 100%
owned.
Example 12. Corporation G is a calendar year taxpayer
that files and entirely completes 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 GAAP
financial statements for the consolidated financial statement
group consisting of G and DS1. G has no net income of its
own, and G does not report its equity interest in the income of
DS1 on its separate financial statements. DS1 has financial
statement net income (before minority interests) and taxable
income of $1,000 ($2,500 of revenue less $1,500 cost of
goods sold).
On the consolidated Schedule M-3, Part I, line 4,
Worldwide consolidated net income (loss) per income
statement, and on line 11, Net income (loss) per income
statement of 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, lines 28 and 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, lines 8 and 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
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

$100; and taxable income on line 30, column (d), will total
$1,000.

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

For any interest owned by the corporation or a member of the
U.S. consolidated tax group that is treated as an investment
in a partnership for U.S. income tax purposes (other than an
interest in a disregarded entity), report amounts on Part II,
line 9 or 10, as described below.
1. In column (a), report the sum of the corporation's
distributive share of income or loss from a U.S. or foreign
partnership that is included on Part I, line 11.
2. In column (b) or (c), as applicable, report 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.
3. In column (d), report 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).
For each partnership reported on line 9 or 10, attach a
supporting statement that provides the name and 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 13. U.S. corporation H is a calendar year
taxpayer that files and entirely completes Schedule M-3. H
has an investment in a U.S. partnership, USP. H prepares
financial statements in accordance with GAAP. In its financial
statements, H treats the difference between financial
statement net income and taxable income from its investment
in USP as a permanent difference. For its current tax year,
H's financial statement net income includes $10,000 of
income attributable to its share of USP's net income. H's
Schedule K-1 from USP reports $5,000 of ordinary income,
$7,000 of long-term capital gains, $4,000 of charitable
contributions, and $200 of section 179 expense. H must
report on Part II, line 9, $10,000 in column (a), a permanent
difference of ($2,200) in column (c), and $7,800 in column
(d).
Example 14. The facts are the same as in Example 13,
except that corporation H's charitable contribution deduction
is wholly attributable to its partnership interest in USP and is
limited to $90 pursuant to section 170(b)(2) due to other
investment losses incurred by H. In its financial statements, H
treated this limitation as a temporary difference. H must not
report the charitable contribution limitation of $3,910
($4,000–$90) on Part II, line 9. H must report the limitation on
Part III, line 21, and report the disallowed charitable
contributions of ($3,910) in columns (b) and (d).

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

For any interest in a pass-through entity (other than an
interest in a partnership reportable on Part II, line 9 or 10, as
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

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), report the sum of the corporation's
distributive share of income or loss from the pass-through
entity that is included on Part I, line 11.
2. In column (b) or (c), as applicable, report the sum of all
differences, if any, attributable to the pass-through entity.
3. In column (d), report the sum of all taxable amounts of
income, gain, loss, or deduction reportable on the
corporation's Schedule(s) 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 and
EIN (if applicable); the corporation's end of year profit-sharing
percentage (if applicable); the corporation's end of year
loss-sharing percentage (if applicable); and the amounts
reported by the corporation in column (a), (b), (c), or (d) of
line 11, as applicable.

Line 12. Items Relating to Reportable
Transactions

Any amounts attributable to any reportable transactions (as
described in Regulations section 1.6011-4) must be included
on Part II, line 12, regardless of whether the difference, or
differences, would otherwise be reported elsewhere in Part II
or Part III. Thus, if a taxpayer files Form 8886 for any
reportable transaction described in Regulations section
1.6011-4, the amounts attributable to that reportable
transaction must be reported on Part II, line 12. In addition, all
income and expense amounts attributable to a reportable
transaction must be reported on Part II, line 12, columns (a)
and (d), even if there is no difference between the financial
amounts and the taxable amounts.
Each difference attributable to a reportable transaction
must be separately stated and adequately disclosed. A
corporation will be considered to have separately stated and
adequately disclosed a reportable transaction on line 12 if
the corporation sequentially numbers each Form 8886 and
lists by identifying number on the supporting statement for
Part II, line 12, each sequentially numbered reportable
transaction and the amounts required for Part II, line 12,
columns (a) through (d).
In lieu of the requirements of the preceding paragraph, a
corporation will be considered to have separately stated and
adequately disclosed a reportable transaction if the
corporation attaches a supporting 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 tax shelter registration number, if
applicable, as reported on lines 1a and 1c, respectively, of
Form 8886.
3. The type of reportable transaction (that is, listed
transaction, confidential transaction, transaction with
contractual protection, etc.) as reported on line 2 of Form
8886.
If a transaction is a listed transaction described in
Regulations section 1.6011-4(b)(2), the description must also
include the published guidance number provided on line 3 of
Form 8886. In addition, if the reportable transaction involves
an investment in the transaction through another entity such
17

as a partnership, the description must include the name and
EIN (if applicable) of that entity as reported on line 5 of Form
8886.
Example 15. Corporation J is a calendar year taxpayer
that files and entirely completes 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 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 tax shelter registration
numbers, if any, disclosed on the applicable Form 8886,
identifies the type of reportable transaction for the loss, and
reports the appropriate amounts required for Part II, line 12,
columns (a) through (d). J must report the losses attributable
to the other five abandonment losses on Part II, line 23e,
regardless of whether a difference exists for any or all of
those abandonment losses.
Example 16. Corporation K is a calendar year taxpayer
that files and entirely completes 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
financial accounting purposes and U.S. income tax purposes.
Although the transaction does not result in a difference, K is
required to report on Part II, line 12, the following amounts:
($7 million) in column (a), zero in columns (b) and (c), and
($7 million) in column (d). The transaction will be adequately
disclosed if K attaches a supporting 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 in Part II, line 13, column (a), the total amount of
interest income included on Part I, line 11, and report in Part
II, line 13, column (d), the total amount of interest income
included on Form 1120, page 1, line 28, that is not required to
be reported elsewhere on Schedule M-3. In column (b) or (c),
as applicable, adjust for any amounts treated for U.S. income
tax purposes as interest income that are treated as some
other form of income for financial accounting purposes, or
vice versa. For example, adjustments to interest income
resulting from adjustments made in accordance with the
18

instructions for Part II, line 18, should be made in columns (b)
and (c) of this line 13.
Complete Part II of Form 8916-A. Enter the amounts from
Form 8916-A, line 6, columns (a) through (d), in
Schedule M-3, Part II, line 13, columns (a) through (d), as
applicable. Attach Form 8916-A.
Do not report on this line 13 or include on Form 8916-A
amounts reported in accordance with the instructions for Part
II, lines 9, 10, 11, 12, and 22.
Note. Any corporation that files Form 1120 (or Form 1120-C)
that (a) is required to file Schedule M-3 (Form 1120) and has
less than $50 million in total assets at the end of the tax year,
or (b) is not required to file Schedule M-3 and voluntarily files
Schedule M-3, is not required to file Form 8916-A, but may
voluntarily do so.

Line 14. Total Accrual to Cash Adjustment

This line is completed by a corporation that prepares financial
statements (or books and records, if permitted) using an
overall accrual method of accounting and uses an overall
cash method of accounting for U.S. income tax purposes, or
vice versa. With the exception of amounts required to be
reported on Part II, line 12, the corporation must report on
Part II, line 14, a single amount net of all adjustments
attributable solely to the use of the different overall methods
of accounting (for example, adjustments related to accounts
receivable, accounts payable, compensation, accrued
liabilities, etc.), regardless of whether a separate line on
Schedule M-3 corresponds to an item within the accrual to
cash reconciliation. Differences not attributable to the use of
the different overall methods of accounting must be reported
on the appropriate lines of Schedule M-3 (for example, a
depreciation difference must be reported on Part III, line 31).
Example 17. Corporation L is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
tax year. L prepares financial statements in accordance with
GAAP using an overall accrual method of accounting. L uses
an overall cash method of accounting for U.S. income tax
purposes. L's financial statements for the year ending
December 31 report accounts receivable of $35,000, an
allowance for bad debts of $10,000, and accounts payable of
$17,000 related to current year acquisition and reorganization
legal and accounting fees. In addition, for L's year ending
December 31, L reported financial statement depreciation
expense of $15,000 and depreciation for U.S. income tax
purposes of $25,000. For L's current tax year using an overall
cash method of accounting, L does not recognize the
$35,000 of revenue attributable to the accounts receivable,
cannot deduct the $10,000 allowance for bad debt, and
cannot deduct the $17,000 of accounts payable. In its
financial statements, L treats both the difference in overall
accounting methods used for financial statement and U.S.
income tax purposes and the difference in depreciation
expense as temporary differences. L must combine all
adjustments attributable to the differences related to the
overall accounting methods on Part II, line 14. As a result, L
must report on Part II, line 14, $8,000 in column (a)
($35,000 - $10,000 - $17,000), ($8,000) in column (b), and
zero in column (d). L must not report the accrual to cash
adjustment attributable to the legal and accounting fees on
Part III, line 24, Current year acquisition or reorganization
legal and accounting fees. Because the difference in
depreciation expense does not relate to the use of the cash
or accrual method of accounting, L must report the
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

depreciation difference on Part III, line 31, Depreciation, and
report $15,000 in column (a), $10,000 in column (b), and
$25,000 in column (d).

Line 15. Hedging Transactions

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

Line 16. Mark-to-Market Income (Loss)

Report on line 16 any amount representing the
mark-to-market income or loss for any securities held by a
dealer in securities, a dealer in commodities having made a
valid election under section 475(e), or a trader in securities or
commodities having made a valid election under section
475(f). “Securities” for these purposes are securities
described in section 475(c)(2) and 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 15, and
not on line 16.

Traders in securities and commodities. For a trader in
securities or commodities that made a valid election under
section 475(f) to use the mark-to-market method to account
for securities or commodities held in connection with a
trading business that files Form 4797, 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 16, of Schedule M-3 (Form 1120);
(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), unless the
instructions for Schedule M-3 require the amounts to be
reported on another line.

Line 17. Cost of Goods Sold

Report on line 17 any amounts deducted as part of cost of
goods sold during the tax year, regardless of whether the
amounts would otherwise be reported elsewhere in Part II or
Part III.
Examples of amounts that must be included as cost of
goods sold items are amounts attributable to inventory
valuation, such as amounts attributable to cost-flow
assumptions, additional costs required to be capitalized
(including depreciation) such as section 263A costs,
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

inventory shrinkage accruals, inventory obsolescence
reserves, and lower of cost or market (LCM) write-downs.
Complete Part I of Form 8916-A. Enter the amounts from
line 8, columns (a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 17, columns (a) through (d), as
applicable. Attach Form 8916-A, if applicable.
Note. The entries in columns (a) and (d) of Schedule M-3,
Part II, line 17, are negative amounts.
Do not report on line 17 or on Form 8916-A amounts such
as:
• Amounts reportable on Part II, line 12;
• Any gain or loss from inventory hedging transactions
reportable on Part II, line 15;
• Amounts reportable on Part II, line 18;
• Amounts reportable on Part II, line 21;
• Mark-to-market income or (loss) associated with the
inventories of dealers in securities under section 475,
reportable on Part II, line 16;
• Section 481(a) adjustments related to cost of goods sold
or inventory valuation, reportable on Part II, line 19;
• Fines and penalties reportable on Part III, line 12;
• Judgments, damages, awards, and similar costs,
reportable on Part III, line 13; and
• Amounts included on Part III, line 34.
Note. Any corporation that files Form 1120 (or Form 1120-C)
that (a) is required to file Schedule M-3 (Form 1120) and has
less than $50 million in total assets at the end of the tax year,
or (b) is not required to file Schedule M-3 and voluntarily files
Schedule M-3, is not required to file Form 8916-A, but may
voluntarily do so.
Example 18. Corporation C is a calendar year taxpayer
that placed in service 10 depreciable fixed assets in a prior
tax year. C is required to file and entirely complete
Schedule M-3 for its current tax year. C's total depreciation
expense for its current tax year for five of the assets is
$50,000 for financial accounting purposes and $70,000 for
U.S. income tax purposes. C's total annual depreciation
expense for its current tax year for the other five assets is
$40,000 for financial accounting purposes and $30,000 for
U.S. income tax purposes. In addition, C incurs $200 of
meals expenses that C deducts in computing net income for
financial accounting purposes. All $200 of the meals
expenses are subject to the 50% limitation under section
274(n). In its financial statements, C treats the $50,000
depreciation and $100 of the meals as other costs in
computing cost of goods sold. C must include on Form
8916-A and in Schedule M-3, Part II, line 17, column (a), the
$50,000 of depreciation and $100 of meals. C must also
include a temporary difference of $20,000 in column (b), a
permanent difference of ($50) in column (c), and $70,050 in
column (d) ($70,000 depreciation and $50 meals expenses).
In addition, C must report on Part III, line 31, for its current tax
year income statement, depreciation expense of $40,000 in
column (a), a temporary difference of ($10,000) in column
(b), and $30,000 in column (d); and on Part III, line 11, meals
expenses of $100 in column (a), a permanent difference of
($50) in column (c), and $50 in column (d). All other cost of
goods sold items would be added to the amounts included
on Part II, line 17, detailed in this example and reported on
Form 8916-A and on Part II, line 17, in the appropriate
columns.

19

Line 18. Sale Versus Lease (for Sellers and/or
Lessors)
Note. Also, see the instructions for Part III, line 34, Purchase
versus lease.
Asset transfer transactions with periodic payments
characterized for financial accounting purposes as either a
sale or a lease may, under some circumstances, be
characterized as the opposite for tax purposes. If the
transaction is treated as a lease, the seller/lessor reports the
periodic payments as gross rental income and also reports
depreciation expense. If the transaction is treated as a sale,
the seller/lessor computes gain from the sale of assets and
reports the periodic payments as payments of principal and
interest income.
In Part II, line 18, column (a), report the gross profit or
gross rental income for financial accounting purposes for all
sale or lease transactions that must be given the opposite
characterization for U.S. income tax purposes. In Part II,
line 18, column (d), report the gross profit or gross rental
income for federal income tax purposes. Interest income
amounts for such transactions must be reported on Part II,
line 13, in column (a) or (d), as applicable. Depreciation
expense for such transactions must be reported on Part III,
line 31, in column (a) or (d), as applicable. Use columns (b)
and (c) of Part II, lines 13 and 18, and Part III, line 31, as
applicable to report the differences between columns (a) and
(d).
Example 19. Corporation M sells and leases property to
customers. M is a calendar year taxpayer that files and
entirely completes Schedule M-3. For financial accounting
purposes, M accounts for each transaction as a sale. For
U.S. income tax purposes, each of M's transactions must be
treated as a lease. In its financial statements, M treats the
difference in the financial accounting and the U.S. income tax
treatment of these transactions as temporary. During its
current tax year, M reports in its financial statements $1,000
of sales and $700 of cost of goods sold with respect to its
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 financial accounting purposes, M reports gross
profit of $300 ($1,000 - $700) and interest income of $100
from these transactions. For U.S. income tax purposes, M
reports $500 of gross rental income (the periodic payments)
and (based on other facts) $200 of depreciation deduction on
the property. On its current year Schedule M-3, M must report
on Part II, line 13, $100 in column (a), ($100) in column (b),
and zero in column (d). In addition, M must report on Part II,
line 18, $300 of gross profit in column (a), $200 in column (b),
and $500 of gross rental income in column (d). Lastly, M must
report on Part III, line 31, $200 in columns (b) and (d).

Line 19. Section 481(a) Adjustments

With the exception of a section 481(a) adjustment that is
required to be reported on Part II, line 12, for reportable
transactions, any difference between an income or expense
item attributable to an authorized (or unauthorized) change in
method of accounting made for U.S. income tax purposes
that results in a section 481(a) adjustment must be reported
on Part II, line 19, regardless of whether a separate line for
that income or expense item exists in Part II or Part III.
Example 20. Corporation N is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
20

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 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 financial statements,
N treats the section 481(a) adjustment as a temporary
difference. N must report on Part II, line 19, $25,000 in
columns (b) and (d) for its 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.

Line 20. Unearned/Deferred Revenue

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

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

Line 22. Original Issue Discount and Other
Imputed Interest

Report on line 22 any amounts of original issue discount
(OID) and other imputed interest. The term “original issue
discount and other imputed interest” includes, but is not
limited to:
1. The 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 23a. Income Statement Gain/Loss on Sale,
Exchange, Abandonment, Worthlessness, or
Other Disposition of Assets Other Than
Inventory and Pass-Through Entities

Report on line 23a, column (a), all gains and losses on the
disposition of assets except for (1) gains and losses on the
disposition of inventory, and (2) gains and losses allocated to
the corporation from a pass-through entity (for example, on
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

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

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

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

Report on line 23c gross capital losses reported on
Schedule D (Form 1120), excluding capital losses from (a)
pass-through entities, which must be reported on Part II,
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, Sales of Business Property, 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 16, earlier.

Line 23e. Abandonment Losses

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

Line 23f. Worthless Stock Losses

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

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

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Line 24. Capital Loss Limitation and
Carryforward Used

Report as a positive amount on line 24, column (b) or (c), as
applicable, and (d) the excess of the net capital losses over
the net capital gains reported on Schedule D (Form 1120) by
the corporation. For a U.S. consolidated tax group, the
Schedule M-3 adjustment for the amount of the consolidated
net capital loss that is disallowed should not be made on the
separate consolidating Schedules M-3 of the includible
corporations, but on the separate Schedule M-3 for
consolidated eliminations (or on Form 8916 in the case of a
mixed group) as described under Completing 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 in 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 Completing 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 itemizes the type of income (loss) and the
amount of each item and provides a description that states
the income (loss) name for book purposes for the amount
recorded in column (a) and describes the adjustment being
recorded in column (b) or (c). The entire description
completes the tax description for the amount included in
column (d) for each item separately stated on this line.
The attached statement should have five columns. The
first column has the description for the next four columns.
The second column is column (a) income (loss) per income
statement, the third column is column (b) temporary
difference, the fourth column is column (c) permanent
difference, and the fifth column is column (d) income (loss)
per tax return. Every item listed on the attached statement for
line 25 must always 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.
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.

Line 26. Total Income (Loss) Items

Combine lines 1 through 25 and enter the total on line 26.

21

Note. Line 17, Cost of goods sold, columns (a) and (d), if
applicable, are negative amounts which will affect the totals
entered on line 26.

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 39.

Line 27. Total Expense/Deduction Items

Lines 1 Through 6. Income Tax Expense

Report on Part II, line 27, columns (a) through (d), as
applicable, the negative of the amounts reported on Part III,
line 39, columns (a) through (d), as applicable. Report
positive amounts as negative and negative amounts as
positive. For example, if Part III, line 39, column (a), reflects
an amount of $1 million, then report on Part II, line 27, column
(a), ($1 million). Similarly, if Part III, line 39, column (b),
reflects an amount of ($50,000), then report on Part II,
line 27, column (b), $50,000.

Line 28. Other Items With No Differences

If there is no difference between the financial accounting
amount and the taxable amount of an entire item of income,
gain, loss, expense, or deduction and the item is not
described or included in Part II, lines 1 through 25, or Part III,
lines 1 through 38, report the entire amount of the item in
columns (a) and (d) of line 28. If a portion of an item of
income, loss, expense, or deduction has a difference and a
portion of the item does not have a difference, do not report
any portion of the item on line 28. Instead, report the entire
amount of the item (that is, both the portion with a difference
and the portion without a difference) on the applicable line of
Part II, lines 1 through 25, or Part III, lines 1 through 38. See
Example 11, earlier.

Line 29a. 1120 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. No Part III is required to be
completed for the consolidated Schedule M-3 of a mixed
group.

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

Line 29c. Life Insurance Subgroup
Reconciliation Totals

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

Line 30. Reconciliation Totals

Mixed groups, see Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC), earlier.

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

Note. Expense amounts that reduce financial accounting
income must be reported on Part III, column (a), as positive
amounts. Deduction amounts that reduce taxable income
22

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

Line 7. Foreign Withholding Taxes

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

Line 8. Interest Expense

Report in Part III, line 8, column (a), the total amount of
interest expense included on Part I, line 11, and report in Part
III, line 8, column (d), the total amount of interest deduction
included on Form 1120, page 1, line 28, that is not required to
be reported elsewhere on Schedule M-3. In column (b) or (c),
as applicable, include any adjustments for any amounts
treated for U.S. income tax purposes as interest deduction
that are treated as some other form of expense for financial
accounting purposes, or vice versa. For example,
adjustments to interest expense/deduction resulting from
adjustments made in accordance with the instructions for
Part III, line 34, Purchase versus lease (for purchasers and/or
lessees), should be made in columns (b) and (c), as
applicable, on this line 8.
Complete Part III of Form 8916-A. Enter the amounts from
Form 8916-A, Part III, line 5, columns (a) through (d), on
Schedule M-3, Part III, line 8, columns (a) through (d), as
applicable. Attach Form 8916-A.
Do not report on Form 8916-A and this line 8 amounts
reported in accordance with the instructions for Part II, lines
9, 10, 11, and 12.
Note. Any corporation that files Form 1120 (or Form 1120-C)
that (a) is required to file Schedule M-3 (Form 1120) and has
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

less than $50 million in total assets at the end of the tax year,
or (b) is not required to file Schedule M-3 and voluntarily files
Schedule M-3, is not required to file Form 8916-A, but may
voluntarily do so.

Line 9. Stock Option Expense

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

Line 10. Other Equity-Based Compensation

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

Line 11. Meals and Entertainment

Report in line 11, column (a), any amounts paid or accrued
by the corporation during the tax year for meals, beverages,
and entertainment that are accounted for in financial
accounting income, regardless of the classification,
nomenclature, or terminology used for such amounts, and
regardless of how or where such amounts are classified in
the corporation's financial income statement or the income
and expense accounts maintained in the corporation's books
and records. Report only amounts not otherwise reportable
elsewhere on Schedule M-3, Parts II and III (for example, Part
II, line 17).

Line 12. Fines and Penalties

Report on line 12 any fines or similar penalties paid to a
government or other authority for the violation of any law for
which fines or penalties are assessed. All fines and penalties
expensed in financial accounting income (paid or accrued)
must be included on this line 12, column (a), regardless of
the government or other authority that imposed the fines or
penalties; regardless of whether the fines and penalties are
civil or criminal; regardless of the classification,
nomenclature, or terminology used for the fines or penalties
by the imposing authority in its actions or documents; and
regardless of how or where the fines or penalties are
classified in the corporation's financial income statement or
the income and expense accounts maintained in the
corporation's books and records. Also, report in line 12,
column (a), the reversal of any overaccrual of any amount
described in this paragraph. See section 162(f) for additional
guidance.
Report on line 12, column (d), any such amounts as
described in the preceding paragraph that are includible in
taxable income, regardless of the financial accounting period
in which such amounts were or are included in financial
accounting net income. Complete columns (b) and (c) as
appropriate.
Do not report on line 12 amounts required to be reported
in accordance with the instructions for Part III, line 13.
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Do not report on line 12 amounts recovered from insurers
or any other indemnitors for any fines and penalties
described above.

Line 13. Judgments, Damages, Awards, and
Similar Costs

Report on line 13, column (a), the amount of any estimated or
actual judgments, damages, awards, settlements, and similar
costs, however named or classified, included in financial
accounting income, regardless of whether the amount
deducted was attributable to an estimate of future anticipated
payments or actual payments. Also, report on line 13, column
(a), the reversal of any overaccrual of any amount described
in this paragraph.
Report on line 13, column (d), any such amounts as are
described in the preceding paragraph that are includible in
taxable income, regardless of the financial accounting period
in which such amounts were or are included in financial
accounting net income. Complete columns (b) and (c) as
appropriate.
Do not report on line 13 amounts required to be reported
in accordance with the instructions for Part III, line 12.
Do not report on line 13 amounts recovered from insurers
or any other indemnitors for any judgments, damages,
awards, or similar costs described above.

Line 14. Parachute Payments

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

Line 15. Compensation With Section 162(m)
Limitation

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

Line 16. Pension and Profit-Sharing

Report on line 16 any amounts attributable to the
corporation's pension plans, profit-sharing plans, and any
other retirement plans.

Line 17. Other Post-Retirement Benefits

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

23

Line 18. Deferred Compensation

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

Line 20. Charitable Contribution of Intangible
Property

Report on line 20 any charitable contribution of intangible
property, for example, contributions of:
• Intellectual property, patents (including any amounts of
additional contributions allowable by virtue of income earned
by donees subsequent to the year of donation), copyrights,
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.

Line 21. Charitable Contribution Limitation/
Carryforward

Report as a negative amount on line 21, columns (b), (c), and
(d), as applicable, the excess of charitable contributions
made during the tax year over the amount of the charitable
contribution limitation amount.
If the corporation utilizes a contribution carryforward in the
current tax year, report the carryforward utilized as a positive
amount 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 Completing
Schedule M-3 and Certain Allocations, Limitations, and
Carryovers, earlier.

Line 22. Domestic Production Activities
Deduction

A deduction for income attributable to domestic production
activities is available for specified agricultural or horticultural
cooperatives (specified cooperatives). See section 199A(g).
Also, see the Instructions for Form 8903.
Report on line 22, column (d), the cooperative's section
199A(g) deduction that is reported on Form 1120-C.
Complete columns (b) and (c) as appropriate. Do not report
any portion of the cooperative’s section 199A(g) deduction
on any other line of Schedule M-3.

24

Line 23. Current Year Acquisition or
Reorganization Investment Banking Fees

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

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

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

Line 25. Current Year Acquisition/
Reorganization Other Costs

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

Line 26. Amortization/Impairment of Goodwill

Report on line 26 amortization of goodwill or amounts
attributable to the impairment of goodwill.

Line 27. Amortization of Acquisition,
Reorganization, and Start-Up Costs

Report on line 27 amortization of acquisition, reorganization,
and start-up costs. For purposes of columns (b), (c), and (d),
include amounts amortizable under section 167, 195, or 248.

Line 28. Other Amortization or Impairment
Write-Offs

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

Line 29. Reserved

When using this line to figure amounts on other tax forms or
worksheets, this line should be considered to be zero.
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

Line 31. Depreciation

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

Line 32. Bad Debt Expense

Report on line 32, column (a), any amounts attributable to an
allowance for uncollectible accounts receivable or actual
write-offs of accounts receivable included on Part I, line 11.
Report in column (d) the amount of bad debt expense
deductible for federal income tax purposes under section
166.

Line 33. Corporate Owned Life Insurance
Premiums

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

Line 34. Purchase Versus Lease (for Purchasers
and/or Lessees)
Note. Also, see the instructions for sellers and/or lessors in
the instructions for Part II, line 18.
Asset transfer transactions with periodic payments
characterized for financial accounting purposes as either a
purchase or a lease may, under some circumstances, be
characterized as the opposite for tax purposes.
If a transaction is treated as a lease, the purchaser/lessee
reports the periodic payments as gross rental expense. If the
transaction is treated as a purchase, the purchaser/lessee
reports the periodic payments as payments of principal and
interest and also reports depreciation expense or deduction
with respect to the purchased asset.
Report in column (a) gross rent expense for a transaction
treated as a lease for financial accounting purposes but as a
sale for U.S. income tax purposes. Report in column (d)
gross rental deductions for a transaction treated as a lease
for U.S. income tax purposes but as a purchase for financial
accounting purposes. Report interest expense for such
transactions on Part III, line 8, column (a) or (d), as
applicable. Report depreciation expense or deductions for
such transactions on Part III, line 31, column (a) or (d), as
applicable. Use columns (b) and (c) of Part III, lines 8, 31,
and 34, as applicable, to report the differences between
columns (a) and (d) for such recharacterized transactions.
Example 21. U.S. corporation X acquired property in a
transaction that, for financial accounting purposes, X treats
as a lease. X is a calendar year taxpayer that files and
entirely completes 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 financial
statements, X treats the difference between the financial
accounting and U.S. income tax treatment of this transaction
as a temporary difference. For its current tax year, X reports
in its financial statements $1,000 of gross rental expense
that, for U.S. income tax purposes, is recharacterized as a
$700 payment of principal and a $300 payment of interest,
accompanied by a depreciation deduction of $1,200 (based
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

on other facts). On its Schedule M-3, X must report the
following on Part III, line 34: column (a) $1,000, its financial
accounting gross rental expense; column (b), ($1,000); and
column (d), zero. On Part III, line 8, X reports zero in column
(a) and $300 in columns (b) and (d) for the interest deduction.
On Part III, line 31, X reports zero in column (a) and $1,200 in
columns (b) and (d) for the depreciation deduction.

Line 35. Research and Development Costs

Report in column (a) the amount of research and
development expenditures reported as a deduction in your
financial statements (or its books and records, if applicable),
on Part I, line 11. Report in column (d) the amount of
amortization deductions of specified research or
experimental expenditures and research or experimental
expenditures included on Form 4562, Part VI, line 44, and in
total deductions on Form 1120, page 1, line 27. In column (c),
as applicable, include any adjustments for any amounts
treated for U.S. income tax purposes as research or
experimental expenditures that are treated as some other
form of expense for financial accounting purposes, or vice
versa. Report any difference in timing recognition in column
(b). 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 that began in your current tax year, (2)
a section 59(e) election that began before your current tax
year, (3) reduction of section 174 expenditures under section
280C or section 482, (4) costs attributable to obtaining a
patent, and (5) research in social sciences.
Note. For tax years beginning after December 31, 2021, for
U.S. income tax purposes, research and experimental
expenditures paid or incurred by a taxpayer in connection
with the taxpayer's trade or business must be amortized. The
expenditures must be amortized ratably over the 5-year
period (15-year period for specified expenditures attributable
to foreign research), beginning with the midpoint of the tax
year in which the expenses are paid or incurred. See section
174. If properly adopted or elected under section 174(b) and
section 174(f) prior to amendment by P.L. 115-97 and section
59(e), any amortization otherwise allowable related to such
costs is reported in column (b).
Example 22. Corporation X is a calendar year taxpayer
that files and entirely completes Schedule M-3 for its current
tax year. During its current tax year, X incurred $100,000 of
research and development costs that X recognized as an
expense in its financial statements. In compliance with
section 174, X amortizes research and experimental
expenditures for U.S. income tax purposes. Accordingly, X
must report $100,000 in column (a), ($90,000) in column (b),
and $10,000 (($100,000/5 years) x 1/2) in column (d).
Example 23. Corporation X is a calendar year taxpayer
that files and entirely completes 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
amortizes 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 38, Other expense/deduction items with
differences.
25

Example 24. Corporation X is a calendar year taxpayer
that files and entirely completes 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 amortizes 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 36. Section 118 Exclusion

Report on line 36 any inducements received in the current
year and treated as contributions to the capital of a
corporation by a nonshareholder. Report in column (a) any
income amount as a negative number and any expense
amount as a positive number.

Under the general rule, any contribution in aid of
construction or any contribution by a governmental entity to
the capital of a corporation is not eligible for exclusion from
income under section 118. The following nonshareholder
contributions to capital are not eligible for exclusion under
section 118.
• Any contribution in aid of construction or any other
contribution as a customer or potential customer.
• Any contribution by any civic group.
• Any contribution by any governmental entity, except any
contribution made after December 22, 2017, and made
pursuant to a master development plan that was approved
prior to December 22, 2017, by a governmental entity.
Corporations must identify on an accompanying statement
referencing line 36 the fair market value of land or other
property (including cash) provided to the corporation by any
nonshareholder, including a governmental unit, 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 headquarters, distribution
center(s), or factory(ies) (“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 36.
Contributions in aid of construction for regulated water
and sewerage disposal utility companies. Under a
special rule, any amount of money or property received after
December 31, 2020, as a contribution in aid of construction
or a contribution to the capital of a regulated public utility
which provides water or sewerage disposal services is
eligible for exclusion from income under section 118. Include
amounts treated as contribution in aid of construction under
this provision on line 36. For more information, see section
118.
26

Line 37. Section 162(r)—FDIC Premiums Paid by
Certain Large Financial Institutions

Report on line 37, column (a), the total amount paid or
accrued as FDIC premiums included on Part I, line 11. Report
on line 37, column (c), any disallowed amounts, subject to
the applicable percentage, of any FDIC premiums paid or
included by the large financial institution. For this purpose,
the large financial institution includes members of its
expanded affiliated group, as defined in section 162(r)(6)(B).
The disallowance does not apply if the institution’s (including
members of its expanded affiliated group’s) total
consolidated assets (determined as of the close of the tax
year) do not exceed $10 billion.
The applicable percentage is the excess of the
corporation’s total consolidated assets over $10 billion,
divided by $40 billion. For taxpayers with total consolidated
assets of $50 billion or more, the applicable percentage is
100%. See section 162(r).
Example 25. Corporation X has total consolidated assets
of $20 billion. Under section 162(r), no deduction is allowed
for 25% (($20,000,000,000 – $10,000,000,000) /
$40,000,000,000) of FDIC premiums.

Line 38. Other Expense/ Deduction Items With
Differences

Separately state and adequately disclose on Part III, line 38,
all items of expense/deduction that are not otherwise listed
on Part III, lines 1 through 37.
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 attached to the Schedule M-3 for line 38
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 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
Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

line 38 must always 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 38.

operations, and reserves for acquisitions and dispositions.
Only report on line 38 items that are not required to be
reported elsewhere on Schedule M-3, Parts II and III.

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.”

Example 26. Corporation Q is a calendar year taxpayer
that files and entirely completes 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 expenses 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 difference attributable to the annual statement
treatment and U.S. income tax treatment of the prepaid
insurance as a temporary difference. As there is no
difference between the book and tax treatment of advertising
expense, it should be included on Part II, line 28, Other items
with no differences.
Q also has a legal reserve where $300,000 was expensed
for financial accounting purposes and a ($100,000)
temporary difference was calculated to arrive at the income
tax deduction of $200,000. The statement attached to Q's
return for Part III, line 38, must be separately stated and
adequately disclosed as follows.

Reserves and contingent liabilities. Report on line 38
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 13,
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. See Example 9, earlier.
Report on line 38 the amortization of various items of
prepaid expense, such as prepaid subscriptions and license
fees, prepaid insurance, etc.
Report on line 38, column (a), expenses included in net
income reported on Part I, line 11, that are related to reserves
and contingent liabilities. Report on line 38, 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 reserves that are allowed
for book purposes, but not for tax purposes, include warranty
reserves, restructuring reserves, reserves for discontinued

Line 38—Example 26
Statement Concerning Other Expense/Deduction Items With Differences
Description

Column (a) Expense Column (b) Temporary
per Income Statement
Difference

Column (c)
Column (d) Deduction
Permanent Difference
per Tax Return

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 38

$550,000

$150,000

-0-

$700,000

Line 39. 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 39, columns (a) through (d), as applicable. Report

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

positive amounts as negative and negative amounts as
positive. For example, if Part III, line 39, column (a), reflects
an amount of $1 million, then report on Part II, line 27, column
(a), ($1 million). Similarly, if Part III, line 39, column (b),
reflects an amount of ($50,000), then report on Part II,
line 27, column (b), $50,000.

27

Index

A
Abandonment 20
Accounting standards, order of
priority 7
Accrual to cash adjustment 18
Acquisition:
Amortization 24
Investment banking fees 24
Legal and accounting fees 24
Other costs 24
Adequately disclosed, separately
stated and 14
Adjustments 10
Allocations, limitations, and
carryovers 3
Amortization of goodwill 24
Amortization write-offs 24
Awards 23

B
Bad debt expense 25

C
Capital gains 21
Capital loss 21
Carryovers 3
Charitable contribution 24
Carryforward 24
Limitation 24
Compensation with section 162(m)
limitation 23
Comprehensive income 27
Consolidated return 4
Consolidated vs. consolidating 5
Consolidation 16
Consolidation for mixed groups:
1120/L/PC 5
Contingent liabilities, reserves
and 27
Corporate owned life insurance
premiums 25
Cost of goods sold 19

Equity method foreign
corporations 15
Equity-based compensation 23
Exchange 20
Expense/deduction:
Items with differences 26
Expense/deduction items:
Total 22, 27

Life insurance premiums, corporate
owned 25
Life insurance subgroup
reconciliation totals 22
Life/non-life loss limitation and
carryforward 6
Limitations 3
Long-term contracts 20

F

M

FDIC premiums 26
Financial information and net income
(loss) reconciliation 7
Financial statements:
Non-tax-basis 7
Tax-basis 7
Fines and penalties 23
Foreign:
Corporations 15
Distributions 16
Dividends 15
Entities, nonincludible 8
Partnerships 17
Withholding taxes 22
Form 4797 21

G
Gain/loss on disposition of assets 21
Gain/loss on sale 20
General instructions 1
Goodwill 24
Groups, consolidated vs.
consolidating 5

H
Hedging transactions 19

I

Damages 23
Deferred compensation 24
Deferred revenue 20
Depreciation 25
Disposition of assets 20
Disregarded entities 9
Dividend adjustments 10
Dividends 15
Domestic production activities
deduction 24

Includible corporations 10, 16
Includible entities:
Eliminations 9
Other 9
Inclusions 15
Income:
Statement 7
Statement period 7
Income (loss):
Differences 21
Equity method 16
Income statement period 10
Interest:
Expense 22
Imputed 20
Income 18

E

J

D

Entities:
Disregarded 9
Includible 9
Entity considerations 4
Equity method 16

28

Judgments 23

L
Lease vs. purchase 25
Lease, sale vs. 20

Mark-to-market 19
Meals and entertainment 23
Minority interest 16
Mixed group:
1120/L/PC 5
Checkboxes 6
Subgroup sub-consolidation 6

N
Non-tax-basis financial statements
and tax-basis financial
statements 7
Nonincludible:
Foreign entities 8
U.S. entities 9
Nonincludible entities:
Eliminations 9

O
Original issue discount 20

P
Parachute payments 23
Partnerships:
Foreign 17
U.S. 17
Pass-through entities 17
PC insurance subgroup reconciliation
totals 22
Pension and profit-sharing 23
Post-retirement benefits 23
Publicly traded common stock 8
Purchase vs. lease 25

R
Reconciliation:
1120 subgroup 22
Life insurance 22
Mixed group subgroup
sub-consolidation 6
PC insurance 22
Totals 22
Reorganization:
Amortization 24
Investment banking fees 24
Legal and accounting fees 24
Other costs 24
Reportable transactions 17
Reserved 24
Reserves and contingent liabilities 27
Restatements 7
Revenue, unearned/deferred 20

S
Sale vs. lease 20
Schedule:
L 3
M-2 3
Section 481(a) adjustments 20
Section 78 gross-up 16
Separately stated and adequately
disclosed 14
Start-up costs:
Amortization 24

Statutory accounting adjustments 10
Stock option expense 23
Subgroup sub-consolidation: 1120
subgroup, 1120-PC subgroup, and
1120-L subgroup 5

T
Tax-basis financial statements 7

U

Entities, nonincludible 9
Partnerships 17
Unearned revenue 20

W
Worldwide consolidated net income
(loss) 8
Worthless stock losses 21
Worthlessness 20

U.S.:
Dividends 16

29