Schedule M-3 (Form 1120)

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

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