New developments for Schedule M-3 reporting

By Nick Fiore

Schedule M-3 was developed by the IRS and the Treasury to replace Schedule M-1 for most publically traded corporations. Its goal is to provide consistency and standardization in the reporting of corporate book-to-tax differences, and to help the IRS identify possible areas that might require examination or audit.
 
Schedule M-3 is required to be filed by any corporation (or U.S. consolidated tax group) filing Form 1120, that reported (on Schedule L of Form 1120) total assets at the end of the corporation’s (or U.S. consolidated tax group’s) tax year that equal or exceed $10 million. (Note: This is the same standard used to determine if a corporation is within the jurisdiction of the IRS Large and Mid-Size Business Division (LMSB)). Similarly, certain corporations that file Forms 1120-S, 1120-PC, and 1120-L, and certain partnerships that file Form 1065, must also file Schedule M-3s.
 
Parts II and III of Schedule M-3 deal with the reconciliation of net income (or loss) as found on a corporation’s income statement with its taxable income as reported on its return; Part III deals specifically with the reconciliation of expense and deduction items. For Schedule M-3 of Form 1120, this includes items such as (among others) income tax expenses (lines 1–6); interest expense (line 8); meals and entertainment (line 11); fines and penalties (line 12); pensions and profit-sharing (line 16); deferred compensation (line 18); charitable contributions (lines 19—21); depletion (line 30); depreciation (line 31); and bad debt expenses (line 32).
 
Recent Developments
 
The 2010 Schedule M-3 for Forms 1120, 1120-L, 1120-PC, and 1120-S, each have added two new lines in Part III, one for research and development (R&D) costs (line 35) and one for Section 118 (contributions to the capital of a corporation by a non-shareholder) exclusions (line 36). The 2010 Schedule M-3 for Form 1065 has one new line in Part III for R&D costs (line 29). In addition, the instructions for all Schedule M-3s are clarified as to the attachment required for the "other with difference" lines (one in Part II and one in Part III), and as to the "separately stated and adequately disclosed" requirement for those lines.
 
More information can be found by examining the 2010 Schedule M-3 for Forms 1120, 1120-L, 1120-PC, 1120S, and 1065, and their related instructions.
 
Important Note. Although the new lines for R&D costs in Part III of the 2010 Schedule M-3 for Forms 1120, 1120-L, 1120-PC, 1120S, and 1065 (and the related instructions) indicate a supporting attachment is required, the supporting attachment for R&D costs is no longer required for 2010, and will not be a requirement for 2011.
 
New Additional Schedules for Corporations and Partnerships Filing Schedule M-3. Note that, for tax years ending on or after December 31, 2008, corporations filing Form 1120 Schedule M-3 must also file new Form 1120 Schedule B (Additional Information for Schedule M-3 Filers) and partnerships filing Schedule M-3 must also file new Form 1065 Schedule C (Additional Information for Schedule M-3 Filers).

 

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