Instructions for IRS Form 1065 Schedule M-3 "Net Income (Loss) Reconciliation for Certain Partnerships"

This document contains official instructions for IRS Form 1065 Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships - a tax form released and collected by the Internal Revenue Service (IRS), a subdivision of the U.S. Department of the Treasury. An up-to-date fillable IRS Form 1065 Schedule M-3 is available for download through this link.

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Download Instructions for IRS Form 1065 Schedule M-3 "Net Income (Loss) Reconciliation for Certain Partnerships"

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2019
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1065)
Net Income (Loss) Reconciliation for Certain Partnerships
1. The amount of total assets at the
equal line 11 of Part I of Schedule M-3
Section references are to the Internal Revenue
Code unless otherwise noted.
end of the tax year reported on
(Form 1065).
Schedule L, line 14, column (d), is equal to
Future Developments
For any part of Schedule M-3 (Form
$10 million or more.
1065) that is completed, all columns must
For the latest information about
2. The amount of adjusted total assets
be completed, all applicable questions
developments related to Schedule M-3
for the tax year is equal to $10 million or
must be answered, all numerical data
(Form 1065) and its instructions, such as
more. See Total Assets and Adjusted
requested must be provided, any
legislation enacted after they were
Total Assets, later.
statement required to support a line item
published, go to IRS.gov/Form1065.
3. The amount of total receipts for the
must be attached and provide the
tax year is equal to $35 million or more.
information required for that line item. Any
General Instructions
Total receipts is defined in the instructions
partnership required to file Schedule M-3
for Codes for Principal Business Activity
must check all boxes above Part I that
Applicable schedule and instructions.
and Principal Product or Service in the
apply for the reason(s) for which the
Use the 2019 Schedule M-3 (Form 1065)
Instructions for Form 1065.
Schedule M-3 is required to be filed. A
with these instructions for tax years ending
partnership not required to file
4. An entity that is a reportable entity
December 31, 2019, through December
Schedule M-3, but that is doing so
partner with respect to the partnership (as
30, 2020. For previous tax years, see the
voluntarily, should check box E above Part
defined under these instructions) owns or
applicable Schedule M-3 (Form 1065) and
I.
is deemed to own, directly or indirectly, an
instructions. (For example, use the 2018
interest of 50% or more in the
Total Assets and Adjusted
Schedule M-3 (Form 1065) with the 2018
partnership's capital, profit, or loss on any
instructions for tax years ending
Total Assets
day during the tax year of the partnership.
December 31, 2018, through December
The partnership should figure its adjusted
30, 2019.)
A common trust fund or foreign
total assets using the Adjusted Total
partnership must file Schedule M-3 if it
Assets Worksheet, later.
meets any of the tests discussed above.
Purpose of Schedule
For purposes of determining for
Note. All references to a U.S. partnership
Schedule M-3 whether the partnership's
Schedule M-3, Part I, asks certain
in these instructions refer to any entity
adjusted total assets (under these
questions about the partnership's financial
required to file Schedule M-3 (Form 1065),
instructions) equal $10 million or more, the
statements and reconciles financial
where appropriate.
partnership's total assets at the end of the
statement net income (loss) for the
tax year must be determined on an overall
consolidated financial statement group to
Partnerships not required to file
accrual method of accounting unless both
income (loss) per the income statement
Schedule M-3 may voluntarily file
of the following apply: (a) the tax return of
for the partnership.
Schedule M-3.
the partnership is prepared using an
Schedule M-3, Parts II and III, reconcile
overall cash method of accounting, and
Completing Schedule M-3
financial statement net income (loss) for
(b) the partnership doesn't prepare
(Form 1065)
the partnership (per Schedule M-3, Part I,
financial statements using, and isn't
line 11) to line 1 of the Analysis of Net
Form 1065 filers that are required to file
included in financial statements prepared
Income (Loss) found on Form 1065.
Schedule M-3 (Form 1065) and have at
on, an accrual basis.
least $50 million total assets at the end of
Where To File
See the instructions for Schedule M-3,
the tax year must complete Schedule M-3
Part I, line 1, regarding non-tax-basis
(Form 1065) entirely.
If the partnership is required to file (or
income statements and related
voluntarily files) Schedule M-3 (Form
non-tax-basis balance sheets to be used
Form 1065 filers that (a) are required to
1065), the partnership must file Form
in the preparation of Schedule M-3 and
file Schedule M-3 (Form 1065) and have
1065 and all attachments and schedules,
the related non-tax-basis balance sheets
less than $50 million total assets at the
including Schedule M-3 (Form 1065), at
to be used in the preparation of
end of the tax year or (b) aren't required to
the following address.
Schedule L.
file Schedule M-3 (Form 1065) and
voluntarily file Schedule M-3 (Form 1065)
Department of the Treasury
In the case of a partnership year ending
must either (i) complete Schedule M-3
Internal Revenue Service Center
because of a section 708 termination, the
(Form 1065) entirely or (ii) complete
Ogden, UT 84201-0011
total assets of the partnership at the end of
Schedule M-3 (Form 1065) through Part I
the year for determining the requirement
and complete Schedule M-1 instead of
Who Must File
to file Schedule M-3 are determined
completing Parts II and III of Schedule M-3
immediately before the section 708
Any entity that files Form 1065 must file
(Form 1065). If the filer chooses to
termination and any actual or deemed
Schedule M-3 (Form 1065) if any of the
complete Schedule M-1 instead of
contribution or distribution of the
following is true.
completing Parts II and III of Schedule M-3
partnership assets under the provisions of
(Form 1065), line 1 of Schedule M-1 must
section 708.
May 06, 2019
Cat. No. 38800Y
2019
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1065)
Net Income (Loss) Reconciliation for Certain Partnerships
1. The amount of total assets at the
equal line 11 of Part I of Schedule M-3
Section references are to the Internal Revenue
Code unless otherwise noted.
end of the tax year reported on
(Form 1065).
Schedule L, line 14, column (d), is equal to
Future Developments
For any part of Schedule M-3 (Form
$10 million or more.
1065) that is completed, all columns must
For the latest information about
2. The amount of adjusted total assets
be completed, all applicable questions
developments related to Schedule M-3
for the tax year is equal to $10 million or
must be answered, all numerical data
(Form 1065) and its instructions, such as
more. See Total Assets and Adjusted
requested must be provided, any
legislation enacted after they were
Total Assets, later.
statement required to support a line item
published, go to IRS.gov/Form1065.
3. The amount of total receipts for the
must be attached and provide the
tax year is equal to $35 million or more.
information required for that line item. Any
General Instructions
Total receipts is defined in the instructions
partnership required to file Schedule M-3
for Codes for Principal Business Activity
must check all boxes above Part I that
Applicable schedule and instructions.
and Principal Product or Service in the
apply for the reason(s) for which the
Use the 2019 Schedule M-3 (Form 1065)
Instructions for Form 1065.
Schedule M-3 is required to be filed. A
with these instructions for tax years ending
partnership not required to file
4. An entity that is a reportable entity
December 31, 2019, through December
Schedule M-3, but that is doing so
partner with respect to the partnership (as
30, 2020. For previous tax years, see the
voluntarily, should check box E above Part
defined under these instructions) owns or
applicable Schedule M-3 (Form 1065) and
I.
is deemed to own, directly or indirectly, an
instructions. (For example, use the 2018
interest of 50% or more in the
Total Assets and Adjusted
Schedule M-3 (Form 1065) with the 2018
partnership's capital, profit, or loss on any
instructions for tax years ending
Total Assets
day during the tax year of the partnership.
December 31, 2018, through December
The partnership should figure its adjusted
30, 2019.)
A common trust fund or foreign
total assets using the Adjusted Total
partnership must file Schedule M-3 if it
Assets Worksheet, later.
meets any of the tests discussed above.
Purpose of Schedule
For purposes of determining for
Note. All references to a U.S. partnership
Schedule M-3 whether the partnership's
Schedule M-3, Part I, asks certain
in these instructions refer to any entity
adjusted total assets (under these
questions about the partnership's financial
required to file Schedule M-3 (Form 1065),
instructions) equal $10 million or more, the
statements and reconciles financial
where appropriate.
partnership's total assets at the end of the
statement net income (loss) for the
tax year must be determined on an overall
consolidated financial statement group to
Partnerships not required to file
accrual method of accounting unless both
income (loss) per the income statement
Schedule M-3 may voluntarily file
of the following apply: (a) the tax return of
for the partnership.
Schedule M-3.
the partnership is prepared using an
Schedule M-3, Parts II and III, reconcile
overall cash method of accounting, and
Completing Schedule M-3
financial statement net income (loss) for
(b) the partnership doesn't prepare
(Form 1065)
the partnership (per Schedule M-3, Part I,
financial statements using, and isn't
line 11) to line 1 of the Analysis of Net
Form 1065 filers that are required to file
included in financial statements prepared
Income (Loss) found on Form 1065.
Schedule M-3 (Form 1065) and have at
on, an accrual basis.
least $50 million total assets at the end of
Where To File
See the instructions for Schedule M-3,
the tax year must complete Schedule M-3
Part I, line 1, regarding non-tax-basis
(Form 1065) entirely.
If the partnership is required to file (or
income statements and related
voluntarily files) Schedule M-3 (Form
non-tax-basis balance sheets to be used
Form 1065 filers that (a) are required to
1065), the partnership must file Form
in the preparation of Schedule M-3 and
file Schedule M-3 (Form 1065) and have
1065 and all attachments and schedules,
the related non-tax-basis balance sheets
less than $50 million total assets at the
including Schedule M-3 (Form 1065), at
to be used in the preparation of
end of the tax year or (b) aren't required to
the following address.
Schedule L.
file Schedule M-3 (Form 1065) and
voluntarily file Schedule M-3 (Form 1065)
Department of the Treasury
In the case of a partnership year ending
must either (i) complete Schedule M-3
Internal Revenue Service Center
because of a section 708 termination, the
(Form 1065) entirely or (ii) complete
Ogden, UT 84201-0011
total assets of the partnership at the end of
Schedule M-3 (Form 1065) through Part I
the year for determining the requirement
and complete Schedule M-1 instead of
Who Must File
to file Schedule M-3 are determined
completing Parts II and III of Schedule M-3
immediately before the section 708
Any entity that files Form 1065 must file
(Form 1065). If the filer chooses to
termination and any actual or deemed
Schedule M-3 (Form 1065) if any of the
complete Schedule M-1 instead of
contribution or distribution of the
following is true.
completing Parts II and III of Schedule M-3
partnership assets under the provisions of
(Form 1065), line 1 of Schedule M-1 must
section 708.
May 06, 2019
Cat. No. 38800Y
Example 1.
and either (i) complete Schedule M-3
Schedule M-2, line 6. T didn't report a loss
entirely, or (ii) complete Schedule M-3
for 2019 on Schedule M-2, line 3. T didn't
1. U.S. partnership A, a limited liability
through Part I and complete Schedule M-1
report adjustments to capital on
company (LLC), owns 60% of the income
instead of completing Parts II and III of
Schedule M-2, line 7, but did report a
and capital of U.S. partnership B, also an
Schedule M-3.
negative adjustment of ($3 million) on
LLC. For its tax year ending December 31,
Schedule M-2, line 4. T has adjusted total
2019, A prepares non-tax-basis GAAP
4. Same facts as in Example 1.3
assets for 2019 in the tentative amount of
(generally accepted accounting principles)
except that the amount of total liabilities at
$10.5 million, the sum of $7.5 million plus
consolidated financial statements with B
the end of 2019 reported to R's partners
$3 million (the amount of the negative
that report total assets at the end of the
on Schedules K-1 is $11 million. R made
adjustment stated as a positive amount
year of $12 million. A files Form 1065 and
distributions of $1.5 million during 2019 as
that must be added back to determine
reports on its non-tax-basis
reflected on Schedule M-2, line 6. R has
adjusted total assets for 2019), an amount
unconsolidated GAAP Schedule L total
adjusted total assets for 2019 equal to $11
that isn't less than the total liabilities at the
assets at the end of the year of $7 million.
million, the greater of the tentative amount
end of 2019 reported to T's partners on
The $7 million total includes $3 million for
of $9 million, the sum of $7.5 million plus
Schedules K-1. Because T has adjusted
its investment in B under the equity
$1.5 million (the amount of distributions
total assets of $10 million or more for its
method of accounting. The amount of total
that must be added back to determine
tax year ending December 31, 2019, T
liabilities at the end of the year reported to
adjusted total assets for 2019), or $11
must file Schedule M-3 for 2019 and either
A's partners on Schedules K-1 is $5
million (the amount of the total liabilities at
(i) complete Schedule M-3 entirely, or (ii)
million. A made distributions of $1 million
the end of 2019 reported to R's partners
complete Schedule M-3 through Part I and
during the year reflected on
on Schedules K-1). Because R has
complete Schedule M-1 instead of
Schedule M-2, line 6. The amount of A's
adjusted total assets of $10 million or
completing Parts II and III of
adjusted total assets is $8 million for the
more for its tax year ending December 31,
Schedule M-3.
tax year. A has total receipts for the tax
2019, R must file Schedule M-3 for 2019
year of $15 million. A has no reportable
and either (i) complete Schedule M-3
7. Z has $50 million in total assets at
entity partners (as defined under
entirely, or (ii) complete Schedule M-3
the end of its 2019 tax year ending
Reportable Entity Partner Reporting
through Part I and complete Schedule M-1
December 31, 2019, and files Form 1065.
Responsibilities, later). A isn't required to
instead of completing Parts II and III of
Z must file Schedule M-3 and complete it
file Schedule M-3 under any of the four
Schedule M-3.
entirely.
tests discussed earlier. A may voluntarily
5. S, a U.S. partnership, files Form
file Schedule M-3 for the tax year. If A
Reportable Entity Partner
1065 for the tax year ending December
doesn't file Schedule M-3, it must
31, 2019. S has total assets at the end of
Reporting Responsibilities
complete Schedule M-1. If A files
2019 reported on Schedule L, line 14,
For the purposes of these instructions, a
Schedule M-3, it must either (i) complete
column (d), of $7.5 million. The amount of
reportable entity partner with respect to a
Schedule M-3 entirely, or (ii) complete
total liabilities at the end of 2019 reported
partnership filing Form 1065 is an entity
Schedule M-3 through Part I and complete
to S's partners on Schedules K-1 is $5
that:
Schedule M-1 instead of completing Parts
million. S made no distributions during
Owns or is deemed to own, directly or
II and III of Schedule M-3.
2019 reflected on Schedule M-2, line 6. S
indirectly, under these instructions a 50%
2. Same facts as in Example 1.1
reported a loss of ($3 million) for 2019 on
or greater interest in the income, loss, or
except that A has total receipts for 2019 of
Schedule M-2, line 3. S didn't report
capital of the partnership on any day of the
$40 million. A must file Schedule M-3 for
adjustments to capital on Schedule M-2,
tax year; and
2019 and either (i) complete
line 4 or 7. S has adjusted total assets for
Was required to file Schedule M-3 on its
Schedule M-3 entirely, or (ii) complete
2019 in the tentative amount of $10.5
most recently filed U.S. federal income tax
Schedule M-3 through Part I and complete
million, the sum of $7.5 million plus $3
return or return of income filed prior to that
Schedule M-1 instead of completing Parts
million (the amount of the loss stated as a
day.
II and III of Schedule M-3.
positive amount that must be added back
to determine adjusted total assets for
3. R, a U.S. partnership, files Form
For the purposes of these instructions,
2019). This tentative amount is compared
1065 for the tax year ending December
the following rules apply.
to the total liabilities at the end of 2019 as
31, 2019. R has total assets at the end of
1. The parent corporation of a
reported to S's partners on Schedules K-1,
the tax year reported on Schedule L,
consolidated tax group is deemed to own
and the greater of the two amounts is
line 14, column (d), of $7.5 million. The
all corporate and partnership interests
considered the adjusted total assets.
aggregate amount of total liabilities at the
owned or deemed to be owned under
Because S has adjusted total assets of
end of 2019 reported to R's partners on
these instructions by any member of the
$10 million or more for its tax year ending
Schedules K-1 is $5 million. R made
tax consolidated group.
December 31, 2019, S must file
distributions of $3 million during 2019
2. The owner of a disregarded entity
Schedule M-3 for 2019 and either (i)
reflected on Schedule M-2, line 6. R didn't
is deemed to own all corporate and
complete Schedule M-3 entirely, or (ii)
report a loss for 2019 on Schedule M-2,
partnership interests owned or deemed to
complete Schedule M-3 through Part I and
line 3. R didn't report adjustments to
be owned under these instructions by the
complete Schedule M-1 instead of
capital on Schedule M-2, line 4 or 7. R has
disregarded entity.
completing Parts II and III of
adjusted total assets for 2019 in the
Schedule M-3.
3. The owner of 50% or more of a
tentative amount of $10.5 million, the sum
corporation by vote on any day of the
of $7.5 million plus $3 million (the amount
6. T, a U.S. partnership, files Form
corporation tax year is deemed to own all
of distributions that must be added back to
1065 for the tax year ending December
corporate and partnership interests owned
determine adjusted total assets for 2019),
31, 2019. T has total assets at the end of
or deemed to be owned under these
an amount that isn't less than the total
the tax year reported on Schedule L,
instructions by the corporation during the
liabilities at the end of 2019 reported to R's
line 14, column (d), of $7.5 million. The
corporation tax year.
partners on Schedules K-1. Because R
amount of total liabilities at the end of
has adjusted total assets of $10 million or
2019 reported to T's partners on
4. The owner of 50% or more of
more for its tax year ending December 31,
Schedules K-1 is $5 million. T made no
partnership income, loss, or capital on any
2019, R must file Schedule M-3 for 2019
distributions during 2019 reflected on
day of the partnership tax year is deemed
-2-
U.S. income tax return filed before that
date. Therefore, P is a reportable entity
Keep for Your Records
Adjusted Total Assets Worksheet
partner of K as of September 16, 2019. On
October 5, 2019, P reports to K, as it is
1. Enter total assets at the end of the tax year on Schedule L,
required to do, that P is a reportable entity
line 14, column (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
partner as of September 16, 2019,
2. Enter capital distributions on Schedule M-2, lines 6a and 6b
deemed to own under these instructions a
(shown as a positive amount)
. . . . . . . . . . . . . . . . . . . . .
2.
50% interest in K. K is therefore required
3. Enter any loss reported on Schedule M-2, line 3 (shown as a
to file Schedule M-3 when it files its Form
positive amount) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
1065 for its tax year ending December 31,
4. Enter the amount of any positive adjustment on Schedule M-2,
2019.
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.
2. Throughout 2019, A, an LLC filing
5. Enter the amount of any negative adjustment on Schedule M-2,
line 4 (shown as a positive amount)
. . . . . . . . . . . . . . . . .
5.
Form 1065 for calendar year 2019, owns,
as its only asset, 50% of each of B, C, D,
6. Add lines 1 through 5
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.
and E, each also an LLC filing Form 1065
7. Enter combined total liabilities (recourse and nonrecourse) on all
for calendar year 2019. A is owned by
Schedules K-1 (Form 1065), Part II, Item K . . . . . . . . . . . . .
7.
individuals and S corporations not
8. Adjusted Total Assets. Enter the greater of line 6 or
required to file Schedule M-3 for 2018,
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.
2019, or 2020. B, C, D, and E are owned
Note. For line 2 above, if the partnership reflects partner capital account changes resulting from the sale of a
by A and by individuals and S
partnership interest on Schedule M-2 as matching contributions and distributions (on lines 2a and 2b and on lines 6a
corporations not required to file
and 6b, respectively), reduce the amounts shown on lines 6a and 6b by such matching amounts.
Schedule M-3 for 2018, 2019, or 2020. For
the partnership tax years ending
December 31, 2019, each of B, C, D, and
to own all corporate and partnership
9. Any change in that interest as of the
E has no year-end liabilities, $3 million in
interests owned or deemed to be owned
date with respect to which it is reporting.
total assets and $6 million in adjusted total
under these instructions by the
assets (the difference equal to the
The reportable entity partner must
partnership during the partnership tax
distributions by each in 2019), and 2019
retain copies of required reports it makes
year.
total receipts of $20 million. As of
to partnerships under these instructions.
December 31, 2019, no owner, direct or
5. The beneficial owner of 50% or
Each partnership must retain copies of the
indirect, of B, C, D, or E was required to
more of the beneficial interest of a trust or
required reports it receives under these
file Schedule M-3 on its most recently filed
nominee arrangement on any day of the
instructions from reportable entity
U.S. income tax return or return of income.
trust or nominee arrangement tax year is
partners.
None of B, C, D, or E is required to file
deemed to own all corporate and
Schedule M-3 for 2019. For the
partnership interests owned or deemed to
For more information, see
Item D.
partnership tax year ending December 31,
be owned under these instructions by the
Reportable Entity
Partner, later.
2019, A has no year-end liabilities, $6
trust or nominee arrangement.
Example 2.
million in total assets and $12 million in
A reportable entity partner with respect
1. P, a U.S. corporation, is the parent
adjusted total assets (the difference equal
to a partnership (as defined above) must
of a financial consolidation group with 50
to the distributions in 2019), and 2019 total
report the following to the partnership
domestic subsidiaries, DS1 through DS50,
receipts of $6 million. As of December 31,
within 30 days of first becoming a
and 50 foreign subsidiaries, FS1 through
2019, no owner, direct or indirect, of A
reportable entity partner and, after first
FS50, all 100% owned on September 16,
was required to file Schedule M-3 on its
reporting to the partnership under these
2019. On September 15, 2019, P filed a
most recently filed U.S. income tax return.
instructions, thereafter within 30 days of
consolidated tax return on Form 1120 and
A must file Schedule M-3 when it files its
the date of any change in the interest it
was required to file Schedule M-3 for the
Form 1065 for 2019 because A has
owns or is deemed to own, directly or
tax year ending December 31, 2018. On
adjusted total assets of $10 million or
indirectly, under these instructions, in the
September 16, 2019, DS1, DS2, DS3,
more.
partnership.
FS1, and FS2 each acquire a 10%
3. Same ownership facts as in
partnership interest in partnership K,
Example 2.2 continued to calendar year
1. Name.
which files Form 1065 for the tax year
2020. On March 3, 2020, A files its Form
ending December 31, 2019. P is deemed
2. Mailing address.
1065 with Schedule M-3 for the
to own, directly or indirectly, under these
3. Employer identification number
partnership tax year ending December 31,
instructions all corporate and partnership
(EIN), if applicable.
2019. As of March 4, 2020, A becomes a
interests of DS1, DS2, and DS3, as the
reportable entity partner with respect to
4. Entity or organization type.
parent of the tax consolidation group, and
any partnership in which it owns or is
5. State or country in which it is
therefore is deemed to own 30% of K on
deemed to own, directly or indirectly,
organized.
September 16, 2019. P is deemed to own,
under these instructions a 50% or greater
directly or indirectly, under these
6. Date on which it first became a
interest in the income, loss, or capital of
instructions all corporate and partnership
reportable entity partner.
the partnership. A owns 50% of each of B,
interests of FS1 and FS2 as the owner of
7. Date with respect to which it is
C, D, and E and is therefore a reportable
50% or more of each corporation by vote
reporting a change in its ownership
entity partner with respect to each as of
and therefore is deemed to own 20% of K
interest in the partnership, if applicable.
March 4, 2020, the day after it filed its
on September 16, 2019. P is therefore
2019 Form 1065 with a required
8. The interest in the partnership it
deemed to own 50% of K on September
Schedule M-3. On March 20, 2020, A
owns or is deemed to own in the
16, 2019. P owns or is deemed to own,
reports to B, C, D, and E, as it is required
partnership, directly or indirectly (as
directly or indirectly, under these
to do within 30 days of March 4, that it is a
defined under these instructions), as of
instructions 50% or more of K on
reportable entity partner owning a 50%
the date with respect to which it is
September 16, 2019, and was required to
interest. Each of B, C, D, and E is required
reporting.
file Schedule M-3 on its most recently filed
-3-
to file Schedule M-3 for 2020 because
partnership's books and records reflect
income statements and balance sheets
each has a reportable entity partner. A will
only tax-basis amounts.
under an accounting method that requires
determine if it must file Schedule M-3 for
the use of the equity method of accounting
2020 based on its separate facts for 2020.
to account for its investment in B. On its
Generally, total assets at the beginning
non-tax-basis books and records, A
of the year (Schedule L, line 14, column
4. Same ownership facts as in
initially reports $2 million as its investment
(b)) must equal total assets at the close of
Example 2.2 for calendar year 2019,
in B, the amount of A's capital contribution.
the prior year (Schedule L, line 14, column
except that A is owned 50% by
A then reduces its $2 million investment in
(d)). For each Schedule L balance sheet
corporation Z that was first required to file
B by its share of B's allocable losses.
item reported for which there is a
Schedule M-3 for its corporate tax year
Because A's allocable share of B's losses
difference between the current opening
ending December 31, 2018, and that filed
is $6 million, A's investment in B under the
balance sheet amount and the prior
its Form 1120 with Schedule M-3 for 2018
equity method is reduced to $0. Because
closing balance sheet amount, attach a
on September 15, 2019. As of September
A isn't liable to repay any of B's liabilities
statement that reports the balance sheet
16, 2019, Z was a reportable entity partner
and isn't obligated to restore any deficit
item, the prior closing amount, the current
with respect to A and, through A, with
with respect to its capital account in B, A
opening amount, and a short explanation
respect to B, C, D, and E. On October 5,
doesn't report any of B's liabilities on A's
of the change. Such reasons for these
2019, Z reports to A, B, C, D, and E, as it
Schedule L balance sheet.
differences include technical terminations
is required to do within 30 days of
and mergers.
September 16, that Z is a reportable entity
Entity Considerations for
partner directly owning (with respect to A)
Schedule M-3
or deemed to own indirectly (with respect
For purposes of measuring total assets
For purposes of Schedule M-3, references
to B, C, D, and E) a 50% interest.
at the end of the year, the partnership's
to the classification of an entity (for
Therefore, because Z was a reportable
assets may not be netted or reduced by
example, as a corporation, a partnership,
entity partner for 2019, each of A, B, C, D,
partnership liabilities. In addition, total
or a trust) are references to the treatment
and E is required to file Schedule M-3 for
assets may not be reported as a negative
of the entity for U.S. income tax purposes.
2019, regardless of whether it would
amount. If Schedule L is prepared on a
An entity that generally is disregarded as
otherwise be required to file Schedule M-3
non-tax-basis method, an investment in
separate from its owner for U.S. income
for that year.
another partnership may be shown as
tax purposes (disregarded entity) must not
appropriate under the partnership's
be separately reported on Schedule M-3
Other Form 1065 Schedules
non-tax-basis method of accounting,
except, if required, on Part I, line 7a or 7b.
including, if required by the partnership's
Affected by Schedule M-3
On Schedule M-3, Parts II and III, any item
reporting methodology, the equity method
Requirements
of income, gain, loss, deduction, or credit
of accounting for investments. If
of a disregarded entity must be reported
Schedule L is prepared on a tax-basis
Schedule L
as an item of its owner. In particular, the
method, an investment by the partnership
If a non-tax-basis income statement and
income or loss of a disregarded entity
in another partnership must be shown as
related non-tax-basis balance sheet are
must not be reported on Part II, line 7, 8, or
an asset and measured by the
prepared for any purpose for a period
9, as from a separate partnership or other
partnership's adjusted basis in its
ending with or within the tax year,
pass-through entity. The financial
partnership interest. Any liabilities
Schedule L must be prepared showing
statement income or loss of a disregarded
contributing to such adjusted basis must
non-tax-basis amounts. See the
entity is included on Part I, line 7a or 7b,
be shown on Schedule L as partnership
discussion in the instructions for
only if its financial statement income or
liabilities.
Schedule M-3, Part I, line 1, of
loss is included on Part I, line 11, but not
Example 3. A, an LLC, files Form
non-tax-basis income statements and
on Part I, line 4a.
1065 for calendar year 2019. B, a general
related non-tax-basis balance sheets
partnership, also files Form 1065 for
prepared for any purpose and the impact
Specific Instructions
calendar year 2019. A is a general partner
on the selection of the income statement
in B. A's capital account in B at the close
used for Schedule M-3 and the related
of 2019 is negative $4 million. This reflects
non-tax-basis balance sheet amounts that
Item D. Reportable Entity
A's 2019 contribution to B's capital of $2
must be used for Schedule L.
million reduced by A's share of 2019
Partner
losses passing through to it from B, $6
Total assets at the end of the tax year
On Schedule M-3, page 1, if the
million. A's adjusted basis in B on
shown on Schedule L, line 14, column (d),
partnership has any reportable entity
December 31, 2019, is $16 million, its $4
must equal the total assets of the
partners for the year, check Item D. A
million negative tax capital account in B
partnership as of the last day of the tax
partnership must report the name, EIN (if
plus its $20 million share of B's liabilities
year, and must be the same total assets
applicable), and maximum percentage of
under section 752. A prepares only
reported by the partnership in the
actual or deemed ownership of each
tax-basis income statements and balance
non-tax-basis financial statements, if any,
reportable entity partner if there are one or
sheets. On its Schedule L, A reports as an
used for Schedule M-3. If the partnership
two reportable entity partners for the tax
asset the adjusted basis of its investment
prepares non-tax-basis financial
year of the partnership, or, if there are
in B, $16 million. A also reports its $20
statements, Schedule L must report the
more than two reportable entity partners
million share of B's liabilities in the
non-tax-basis financial statement total
for the tax year of the partnership, of the
liabilities section of Schedule L. A doesn't
assets. If the partnership doesn't prepare
two reportable entity partners with the
report its $4 million negative capital
non-tax-basis financial statements,
largest maximum percentage of actual or
account in B on Schedule L.
Schedule L must be based on the
deemed ownership for the tax year of the
partnership's books and records. The
Example 4. Same facts as in
partnership. The maximum percentage of
Schedule L balance sheet can show
Example 3, except that B is an LLC and A
actual or deemed ownership for a
tax-basis balance sheet amounts if the
is a member of B. None of B's liabilities
reportable entity partner for a tax year of
partnership is allowed to use books and
are recourse with respect to A. A isn't
the partnership is the maximum
records for Schedule M-3 and the
obligated to restore any deficit capital
percentage interest owned or deemed
account in B. A prepares non-tax-basis
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owned under these instructions by the
no certified non-tax-basis income
statements (certified or otherwise) of its
reportable entity partner in the
statement is prepared but an unaudited
own, independent of the amount of the
partnership's capital, profit, or loss on any
non-tax-basis income statement is
partnership's net income included in the
day during the tax year of the partnership.
prepared for the period ending with or
consolidated financial statements with the
within the tax year, the partnership must
entity parent, the partnership must answer
The reportable entity partner must
check “Yes” for line 1c and use that
questions 1a, 1b, and 1c, as appropriate,
retain copies of required reports it makes
income statement for Schedule M-3.
for its own tax return, based on its own
to partnerships under these instructions.
separate non-tax-basis income statement,
Each partnership must retain copies of the
Order of priority in accounting stand-
and must report on line 4a the net income
required reports it received under these
ards. If no Form 10-K is filed and two or
(loss) amounts shown on its separate
instructions from reportable entity
more non-tax-basis income statements
income statement.
partners. See Reportable Entity Partner
are both certified non-tax-basis income
Reporting Responsibilities, earlier.
Lines 2 and 3. Questions
statements for the period, the income
statement prepared according to the
Regarding Income Statement
following order of priority in accounting
Part I. Financial
Period and Restatements
standards must be used.
Information and Net
Enter the beginning and ending dates on
1. U.S. Generally Accepted
line 2 for the partnership's annual income
Income (Loss)
Accounting Principles (GAAP).
statement period ending with or within the
Reconciliation
2. International Financial Reporting
current tax year.
Standards (IFRS).
Line 1. Questions Regarding
The questions on lines 3a and 3b,
3. Any other International Accounting
regarding income statement restatements,
the Type of Income Statement
Standards (IAS).
refer to the worldwide consolidated
Prepared
4. Any regulatory accrual accounting.
income statement issued by the
partnership filing Form 1065 and used to
For lines 1 through 11, use only the
5. Any other accrual accounting
prepare Schedule M-3. Answer “Yes” on
financial statements of the U.S.
standard.
partnership filing Form 1065. If the U.S.
lines 3a and/or 3b if the partnership's
6. Section 704(b) book accounting.
partnership filing Form 1065 is controlled
annual income statement has been
7. Any other fair market value
by another entity, the U.S. partnership
restated for any reason. Attach a short
reporting standard.
statement of the reasons for the
must use for its Schedule M-3, Part I, its
8. Any cash basis standard.
restatement in net income for each annual
own financial statements and not the
financial statements of the controlling
income statement period that is restated,
If no non-tax-basis income statement is
entity.
including the original amount and restated
certified and two or more non-tax-basis
amount of each annual statement period's
income statements are prepared, the
net income. The attached statement isn't
Non-Tax-Basis Financial
income statement prepared according to
required to report restatements on an
Statements and Tax-Basis
the first listed of the accounting standards
entity-by-entity basis.
above must be used.
Financial Statements
Line 4. Worldwide Consolidated
A tax-basis income statement is allowed
If no non-tax-basis financial statements
Net Income (Loss) per Income
for Schedule M-3 and a tax-basis balance
are prepared for the U.S. partnership filing
Statement
sheet for Schedule L only if neither a
Schedule M-3, the U.S. partnership must
non-tax-basis income statement nor a
check “No” on questions 1a, 1b, and 1c,
Report on line 4a the worldwide
non-tax-basis balance sheet were
skip lines 2 through 3b, and enter the net
consolidated net income (loss) per the
prepared for any purpose and the books
income (loss) per the books and records
income statement (or books and records,
and records of the partnership reflect only
of the U.S. partnership on line 4a.
if applicable) of the partnership.
tax-basis amounts. The partnership is
In completing Schedule M-3, the
deemed to have non-tax-basis income
Consolidated Financial Statements
partnership must use financial statement
statements and the related non-tax-basis
amounts from the financial statement type
If a partnership filing a Schedule M-3
balance sheets for the current tax year for
checked “Yes” on line 1, or from its books
(a) is included in the non-tax-basis
purposes of Schedule M-3 and
and records if line 1c is checked “No.” If
consolidated financial statements of a
Schedule L if such non-tax-basis financial
line 1a is checked “Yes,” report on line 4a
group (consolidated financial statement
statements were prepared for and
the net income amount reported in the
group) with an entity parent filing a U.S tax
presented to management, creditors,
income statement presented to the SEC
return and Schedule M-3, (b) has its
members or partners, government
on the partnership's Form 10-K.
income (loss) included and removed by
regulators, or any other third parties for a
the entity parent on that entity parent's
period ending with or within the tax year.
If a partnership prepares non-tax-basis
Schedule M-3, Part I, and (c) doesn't have
financial statements, the amount on
a separate non-tax-basis financial
If a Form 10-K is filed with the
line 4a must equal the financial statement
statement (certified or otherwise) of its
Securities and Exchange Commission
net income (loss) for the income statement
own, the partnership must answer
(SEC) for the period ending with or within
period ending with or within the tax year as
the tax year, the partnership must check
questions 1a, 1b, and 1c as appropriate
indicated on line 2.
“Yes” for line 1a and use that income
for its own tax return and must report on its
If the partnership prepares
own Schedule M-3, as appropriate, the
statement for Schedule M-3. If Form 10-K
non-tax-basis financial statements and the
amount for the partnership's net income
isn't filed and a non-tax-basis income
income statement period differs from the
(loss) that is equal to the amount included
statement is prepared that is a certified
partnership's tax year, the income
non-tax-basis income statement for the
and removed in the entity parent's
statement period indicated on line 2
period ending with or within the tax year,
Schedule M-3, Part I. However, if in the
applies for purposes of lines 4a through 8.
circumstances described immediately
the partnership must check “Yes” for
above, the partnership does have
line 1b and use that income statement for
If the partnership doesn't prepare
separate non-tax-basis financial
Schedule M-3. If Form 10-K isn't filed and
non-tax-basis financial statements and
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