Instructions for IRS Form 1120S Schedule M-3 "Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More"

This document contains official instructions for IRS Form 1120S Schedule M-3, Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More - 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 1120S Schedule M-3 is available for download through this link.

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Download Instructions for IRS Form 1120S Schedule M-3 "Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More"

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2018
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1120S)
Net Income (Loss) Reconciliation for S Corporations With Total Assets of
$10 Million or More
Where To File
Section references are to the Internal Revenue
Schedule M-3, it must either: (i)
Code unless otherwise noted.
complete Schedule M-3 entirely; or (ii)
If the corporation is required to file (or
complete Schedule M-3 through Part I
Future Developments
voluntarily files) Schedule M-3 (Form
and complete Schedule M-1 instead of
1120S), the corporation must file Form
For the latest information about
completing Parts II and III of
1120S and all attachments, schedules,
developments related to Schedule M-3
Schedule M-3.
including Schedule M-3 (Form 1120S),
(Form 1120S) and its instructions, such
2. U.S. corporation C owns U.S.
and statements at the following
as legislation enacted after they were
subsidiary D. For its 2018 tax year, C
address.
published, go to
prepares consolidated financial
IRS.gov/Form1120S.
Department of the Treasury
statements with D, but C and D file
Internal Revenue Service Center
separate U.S. income tax returns. The
What’s New
Ogden, UT 84201-0013
consolidated accrual basis financial
The Tax Cuts and Jobs Act provides
statements for C and D report total
that entertainment expenses are no
Who Must File
assets at the end of the tax year of $12
longer deductible if paid or incurred
million after intercompany eliminations.
Any corporation required to file Form
after December 31, 2017.
C reports separate company total
1120S, U.S. Income Tax Return for an S
year-end assets on its Schedule L of $7
General Instructions
Corporation, that reports on Schedule L
million. D reports separate company
of Form 1120S total assets at the end of
total year-end assets on its Schedule L
the corporation's tax year that equal or
Applicable schedule and instruc-
of $6 million. Neither C nor D is required
exceed $10 million must file
tions. Use the 2018 Schedule M-3
to file Schedule M-3 for the 2018 tax
Schedule M-3 (Form 1120S). A
(Form 1120S) with these instructions for
year. C or D may voluntarily file
corporation or group of corporations that
tax years ending December 31, 2018,
Schedule M-3 for the 2018 tax year. If C
completes Parts II and III of
through December 30, 2019. For
or D doesn't file Schedule M-3, it must
Schedule M-3, isn't required to
previous tax years, see the applicable
file Schedule M-1. If C or D files
complete Form 1120S, Schedule M-1,
Schedule M-3 (Form 1120S) and
Schedule M-3, it must either: (i)
Reconciliation of Income (Loss) per
instructions. (For example, use the 2017
complete Schedule M-3 entirely; or (ii)
Books With Income (Loss) per Return.
Schedule M-3 (Form 1120S) with the
complete Schedule M-3 through Part I
2017 instructions for tax years ending
and complete Schedule M-1 instead of
A U.S. corporation filing Form 1120S
December 31, 2017, through December
completing Parts II and III of
that isn't required to file Schedule M-3
30, 2018.)
Schedule M-3.
may voluntarily file Schedule M-3
instead of Schedule M-1.
Purpose of Schedule
Completing Schedule M-3
Any corporation filing Schedule M-3
Schedule M-3, Part I, asks certain
(Form 1120S)
must check the box on Form 1120S,
questions about the corporation's
A corporation that is required to file
item C, indicating that Schedule M-3 is
financial statements and reconciles
Schedule M-3 (Form 1120S) and has at
attached (whether required or
financial statement worldwide net
least $50 million total assets at the end
voluntary).
income (loss) for the corporation (or
of the tax year must complete
consolidated financial statement group,
Example 1.
Schedule M-3 (Form 1120S) entirely.
if applicable), as reported on Part I,
1. U.S. corporation A owns U.S.
line 4a, to income (loss) per the income
A corporation that (a) is required to
subsidiary B and foreign subsidiary F.
statement of the corporation for U.S.
For its 2018 tax year, A prepares
file Schedule M-3 (Form 1120S) and
income tax purposes, as reported on
consolidated financial statements with B
has less than $50 million total assets at
Part I, line 11.
the end of the tax year or (b) isn't
and F that report total assets of $12
million. A files a U.S. income tax return
required to file Schedule M-3 (Form
Schedule M-3, Parts II and III,
with B (a corporation that has made a
1120S) and voluntarily files
reconcile financial statement net income
Schedule M-3 (Form 1120S) must either
qualified subchapter S subsidiary
(loss) for the U.S. tax return (per
election) and reports total assets on
(i) complete Schedule M-3 (Form 1065)
Schedule M-3, Part I, line 11) to total
Schedule L of $8 million. A's U.S. tax
entirely or (ii) complete Schedule M-3
income (loss) on Form 1120S,
(Form 1120S) through Part I and
group isn't required to file Schedule M-3
Schedule K, line 18.
for the 2018 tax year. A may voluntarily
complete Form 1120S, Schedule M-1
file Schedule M-3 for the 2018 tax year.
instead of completing Parts II and III of
Schedule M-3 (Form 1120S). If the
If A doesn't file Schedule M-3, it must
file Schedule M-1. If A files
corporation chooses to complete Form
Nov 28, 2018
Cat. No. 48245B
2018
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1120S)
Net Income (Loss) Reconciliation for S Corporations With Total Assets of
$10 Million or More
Where To File
Section references are to the Internal Revenue
Schedule M-3, it must either: (i)
Code unless otherwise noted.
complete Schedule M-3 entirely; or (ii)
If the corporation is required to file (or
complete Schedule M-3 through Part I
Future Developments
voluntarily files) Schedule M-3 (Form
and complete Schedule M-1 instead of
1120S), the corporation must file Form
For the latest information about
completing Parts II and III of
1120S and all attachments, schedules,
developments related to Schedule M-3
Schedule M-3.
including Schedule M-3 (Form 1120S),
(Form 1120S) and its instructions, such
2. U.S. corporation C owns U.S.
and statements at the following
as legislation enacted after they were
subsidiary D. For its 2018 tax year, C
address.
published, go to
prepares consolidated financial
IRS.gov/Form1120S.
Department of the Treasury
statements with D, but C and D file
Internal Revenue Service Center
separate U.S. income tax returns. The
What’s New
Ogden, UT 84201-0013
consolidated accrual basis financial
The Tax Cuts and Jobs Act provides
statements for C and D report total
that entertainment expenses are no
Who Must File
assets at the end of the tax year of $12
longer deductible if paid or incurred
million after intercompany eliminations.
Any corporation required to file Form
after December 31, 2017.
C reports separate company total
1120S, U.S. Income Tax Return for an S
year-end assets on its Schedule L of $7
General Instructions
Corporation, that reports on Schedule L
million. D reports separate company
of Form 1120S total assets at the end of
total year-end assets on its Schedule L
the corporation's tax year that equal or
Applicable schedule and instruc-
of $6 million. Neither C nor D is required
exceed $10 million must file
tions. Use the 2018 Schedule M-3
to file Schedule M-3 for the 2018 tax
Schedule M-3 (Form 1120S). A
(Form 1120S) with these instructions for
year. C or D may voluntarily file
corporation or group of corporations that
tax years ending December 31, 2018,
Schedule M-3 for the 2018 tax year. If C
completes Parts II and III of
through December 30, 2019. For
or D doesn't file Schedule M-3, it must
Schedule M-3, isn't required to
previous tax years, see the applicable
file Schedule M-1. If C or D files
complete Form 1120S, Schedule M-1,
Schedule M-3 (Form 1120S) and
Schedule M-3, it must either: (i)
Reconciliation of Income (Loss) per
instructions. (For example, use the 2017
complete Schedule M-3 entirely; or (ii)
Books With Income (Loss) per Return.
Schedule M-3 (Form 1120S) with the
complete Schedule M-3 through Part I
2017 instructions for tax years ending
and complete Schedule M-1 instead of
A U.S. corporation filing Form 1120S
December 31, 2017, through December
completing Parts II and III of
that isn't required to file Schedule M-3
30, 2018.)
Schedule M-3.
may voluntarily file Schedule M-3
instead of Schedule M-1.
Purpose of Schedule
Completing Schedule M-3
Any corporation filing Schedule M-3
Schedule M-3, Part I, asks certain
(Form 1120S)
must check the box on Form 1120S,
questions about the corporation's
A corporation that is required to file
item C, indicating that Schedule M-3 is
financial statements and reconciles
Schedule M-3 (Form 1120S) and has at
attached (whether required or
financial statement worldwide net
least $50 million total assets at the end
voluntary).
income (loss) for the corporation (or
of the tax year must complete
consolidated financial statement group,
Example 1.
Schedule M-3 (Form 1120S) entirely.
if applicable), as reported on Part I,
1. U.S. corporation A owns U.S.
line 4a, to income (loss) per the income
A corporation that (a) is required to
subsidiary B and foreign subsidiary F.
statement of the corporation for U.S.
For its 2018 tax year, A prepares
file Schedule M-3 (Form 1120S) and
income tax purposes, as reported on
consolidated financial statements with B
has less than $50 million total assets at
Part I, line 11.
the end of the tax year or (b) isn't
and F that report total assets of $12
million. A files a U.S. income tax return
required to file Schedule M-3 (Form
Schedule M-3, Parts II and III,
with B (a corporation that has made a
1120S) and voluntarily files
reconcile financial statement net income
Schedule M-3 (Form 1120S) must either
qualified subchapter S subsidiary
(loss) for the U.S. tax return (per
election) and reports total assets on
(i) complete Schedule M-3 (Form 1065)
Schedule M-3, Part I, line 11) to total
Schedule L of $8 million. A's U.S. tax
entirely or (ii) complete Schedule M-3
income (loss) on Form 1120S,
(Form 1120S) through Part I and
group isn't required to file Schedule M-3
Schedule K, line 18.
for the 2018 tax year. A may voluntarily
complete Form 1120S, Schedule M-1
file Schedule M-3 for the 2018 tax year.
instead of completing Parts II and III of
Schedule M-3 (Form 1120S). If the
If A doesn't file Schedule M-3, it must
file Schedule M-1. If A files
corporation chooses to complete Form
Nov 28, 2018
Cat. No. 48245B
1120S, Schedule M-1 instead of
ending with or within the tax year,
partnership interest. Any liabilities
completing Parts II and III of
Schedule L must be prepared showing
contributing to such adjusted basis must
Schedule M-3 (Form 1120S), line 1 of
non-tax-basis amounts. See the
be shown on Schedule L as corporate
Form 1120S, Schedule M-1 must equal
instructions for Part I, line 1, for a
liabilities. In any event, any investments
line 11 of Part I of Schedule M-3 (Form
discussion of non-tax-basis income
or other assets reported on Schedule L
1120S).
statements and related non-tax-basis
can never be reported as negative
balance sheets prepared for any
amounts.
For any part of Schedule M-3 (Form
purpose and the impact on the selection
Schedule M-1
1120S) that is completed, all columns
of the income statement used for
must be completed, all applicable
A corporation that completes Parts II
Schedule M-3 and the related
questions must be answered, all
and III of Schedule M-3 isn't required to
non-tax-basis balance sheet amounts
numerical data asked for must be
complete Form 1120S, Schedule M-1.
that must be used for Schedule L.
provided, any statement required to
Entity Considerations for
Total assets shown on Schedule L,
support a line item must be attached
line 15, column (d), must equal the total
and provide the information required for
Schedule M-3
assets of the corporation as of the last
that line item.
For purposes of Schedule M-3,
day of the tax year, and must be the
Any corporation filing Schedule M-3
references to the classification of an
same total assets reported by the
must check the box on Form 1120S,
entity (for example, as a corporation, a
corporation in the non-tax-basis
item C, indicating that Schedule M-3 is
partnership, or a trust) are references to
financial statements, if any, used for
attached (whether required or
the treatment of the entity for U.S.
Schedule M-3. If the corporation doesn't
voluntary).
income tax purposes. An entity that
prepare non-tax-basis financial
generally is disregarded as separate
statements, Schedule L must be based
Other Issues Affecting
from its owner for U.S. income tax
on the corporation's books and records.
Schedule M-3 Filing
purposes (disregarded entity) mustn't
The Schedule L balance sheet can
be separately reported on Schedule M-3
show tax-basis balance sheet amounts
Requirements
except, if required, on Part I, line 7a, 7b,
if the corporation is allowed to use
If a corporation was required to file
or 7c. On Schedule M-3, Parts II and III,
books and records for Schedule M-3
Schedule M-3 for the preceding tax
any item of income, gain, loss,
and the corporation's books and records
year, but reports on Form 1120S,
deduction, or credit of a disregarded
reflect only tax-basis amounts.
Schedule L, total assets at the end of
entity must be reported as an item of its
Generally, total assets at the
the current tax year of less than $10
owner. In particular, the income or loss
beginning of the year (Schedule L,
million, the corporation isn't required to
of a disregarded entity mustn't be
line 15, column (b)) must equal total
file Schedule M-3 for the current tax
reported on Part II, line 7, 8, or 9 as from
assets at the close of the prior year
year.
a separate partnership or other
(Schedule L, line 15, column (d)). For
pass-through. The financial statement
For purposes of determining whether
each Schedule L balance sheet item
income or loss of a disregarded entity
the corporation has total assets at the
reported for which there is a difference
other than a qualified subchapter S
end of the current tax year of $10 million
between the current opening balance
subsidiary (QSub) is included on Part I,
or more, the corporation's total assets
sheet amount and the prior closing
line 7b, if and only if its financial
must be determined on an overall
balance sheet amount, attach a
statement income or loss is included on
accrual method of accounting unless
statement that reports the balance sheet
Part I, line 11, but not on Part I, line 4a.
both of the following apply: (a) the tax
item, the prior closing amount, the
The financial statement income or loss
return of the corporation is prepared
current opening amount, and a short
of a QSub is included on Part I, line 7c, if
using an overall cash method of
explanation of the difference. In
and only if its financial statement
accounting, and (b) no includible entity
particular, indicate if the differences
income or loss is included on Part I,
in the U.S. tax return prepares or is
occurred because of acquisitions or
line 11, but not on Part I, line 4a.
included in financial statements
mergers.
Qualified Subchapter S Subsidiaries
prepared on an accrual basis.
For purposes of measuring total
(QSubs). Because a QSub is a
See the instructions for Part I,
assets at the end of the year, the
disregarded entity, for purposes of
line 1, for a discussion of
corporation's assets may not be netted
TIP
Schedule M-3, Schedule L, and the tax
non-tax-basis income
or reduced by the corporation's
return in general, the subsidiary is
statements and related non-tax-basis
liabilities. In addition, total assets may
deemed to have liquidated into the
balance sheets to be used in the
not be reported as a negative amount. If
parent S corporation. As such, all
preparation of Schedule M-3 and of
Schedule L is prepared on a
QSubs are treated as divisions of the S
Form 1120S, Schedule L.
non-tax-basis method, an investment in
corporation parent and they mustn't be
a partnership may be shown as
separately reported on Schedule M-3
Other Form 1120S
appropriate under the corporation's
except, if required, on Part I, line 7c.
non-tax-basis method of accounting,
Schedules Affected by
Reportable Entity Partner
including, if required by the
Schedule M-3
Reporting Responsibilities
corporation's reporting methodology,
Requirements
the equity method of accounting for
A reportable entity partner to a
investments. If Schedule L is prepared
partnership filing Form 1065, U.S.
Schedule L
on a tax-basis method, an investment
Return of Partnership Income, is an
If a non-tax-basis income statement and
by the corporation in a partnership must
entity that:
related non-tax-basis balance sheet is
be shown as an asset and measured by
prepared for any purpose for a period
the corporation's adjusted basis in its
-2-
Instructions for Schedule M-3 (Form 1120S) (2018)
Owns or is deemed to own, directly or
6. Date on which it first became a
corporation filing the U.S. income tax
indirectly, under these instructions, a
reportable entity partner.
return.
50% or greater interest in the income,
7. Date for which it is reporting a
loss, or capital of the partnership on any
Non-Tax-Basis Financial
change in its ownership interest in the
day of the tax year; and
partnership, if applicable.
Statements and Tax-Basis
Was required to file Schedule M-3 on
8. The interest in the partnership it
Financial Statements
its most recently filed U.S. federal
owns or is deemed to own in the
income tax return or return of income
A tax-basis income statement is allowed
partnership, directly or indirectly (as
filed prior to that day.
for Schedule M-3 and a tax-basis
defined under these instructions) as of
balance sheet for Schedule L only if no
For the purposes of these
the date for which it is reporting.
non-tax-basis income statement and no
instructions:
9. Any change in that interest as of
non-tax-basis balance sheet was
1. The parent corporation of a
the date for which it is reporting.
prepared for any purpose and the books
consolidated tax group is deemed to
and records of the corporation reflect
The reportable entity partner must
own all corporate and partnership
only tax-basis amounts. The corporation
keep copies of required reports it makes
interests owned or deemed to be owned
is deemed to have non-tax-basis
to partnerships under these instructions.
under these instructions by any member
income statements and the related
Each partnership must keep copies of
of the tax consolidated group;
non-tax-basis balance sheets for the
the required reports it receives under
2. The owner of a disregarded entity
current tax year for purposes of
these instructions from reportable entity
is deemed to own all corporate and
Schedule M-3 and Schedule L if such
partners.
partnership interests owned or deemed
non-tax-basis financial statements were
Example 2. A, a limited liability
to be owned under these instructions by
prepared for and presented to
company (LLC) filing a Form 1065 for
the disregarded entity;
management, creditors, shareholders,
2018, is owned 50% by U.S. corporation
government regulators, or any other
3. The owner of 50% or more of a
Z which files Form 1120S. A owns 50%
third parties for a period ending with or
corporation by vote on any day of the
of each of B, C, D, and E, each also an
within the tax year.
corporation tax year is deemed to own
LLC filing a Form 1065 for calendar year
all corporate and partnership interests
2018. Z was first required to file
If a non-tax-basis income statement
owned or deemed to be owned under
Schedule M-3 (Form 1120S) for its
is prepared that is a certified
these instructions by the corporation
corporate tax year ended December 31,
non-tax-basis income statement for the
during the corporation tax year;
2017, and filed its Form 1120S with
period ending with or within the tax year,
4. The owner of 50% or more of
Schedule M-3 for 2017 on September
the corporation must check “Yes” for
partnership income, loss, or capital on
15, 2018. As of September 16, 2018, Z
Part I, line 1a, and use that income
any day of the partnership tax year is
was a reportable entity partner
statement for Schedule M-3. If no
deemed to own all corporate and
regarding A and, through A, regarding
certified non-tax-basis income
partnership interests owned or deemed
B, C, D, and E. On October 5, 2018, Z
statement is prepared but an unaudited
to be owned under these instructions by
reports to A, B, C, D, and E, as it is
non-tax-basis income statement is
the partnership during the partnership
required to do within 30 days of
prepared for the period ending with or
tax year; and
September 16, that Z is a reportable
within the tax year, the corporation must
entity partner directly owning (regarding
5. The beneficial owner of 50% or
check “Yes” for Part I, line 1b, and use
A) or deemed to own indirectly
more of the beneficial interest of a trust
that income statement for
(regarding B, C, D, and E) a 50%
or nominee arrangement on any day of
Schedule M-3.
interest. So, because Z was a
the trust or nominee arrangement tax
Order of priority in accounting
reportable entity partner for 2018, each
year is deemed to own all corporate and
standards. If two or more
of A, B, C, D, and E is required to file
partnership interests owned or deemed
non-tax-basis income statements are
Schedule M-3 (Form 1065) for 2018,
to be owned under these instructions by
both certified non-tax-basis income
regardless of whether they would
the trust or nominee arrangement.
statements for the period, the income
otherwise be required to file
statement prepared according to the
A reportable entity partner to a
Schedule M-3 for that year.
following order of priority in accounting
partnership (as defined above) must
standards must be used.
report the following to the partnership
Specific Instructions
within 30 days of first becoming a
1. U.S. Generally Accepted
for Part I
reportable entity partner and, after first
Accounting Principles (GAAP).
reporting to the partnership under these
2. International Financial Reporting
Part I. Financial
instructions, after that within 30 days of
Standards (IFRS).
the date of any change in the interest it
Information and Net
3. Any other International
owns or is deemed to own, directly or
Income (Loss)
Accounting Standards (IAS).
indirectly, under these instructions, in
Reconciliation
the partnership.
4. Other regulatory accrual
accounting.
1. Name.
Line 1. Questions Regarding
5. Any other accrual accounting
2. Mailing address.
the Type of Income Statement
standard.
3. Taxpayer identification number
Prepared
6. Any fair market value standard.
(TIN or EIN), if applicable.
For Part I, lines 1 through 12, use only
7. Any cash basis standard.
4. Entity or organization type.
the financial statements of the U.S.
5. State or country in which it is
organized.
Instructions for Schedule M-3 (Form 1120S) (2018)
-3-
If no non-tax-basis income statement
the income statement period differs
amounts of income (loss) detailed on
is certified and two or more
from the corporation's tax year, the
the supporting statement should be
non-tax-basis income statements are
income statement period indicated on
reported for each separate
prepared, the income statement
Part I, line 2, applies for purposes of
nonincludible foreign entity without
prepared according to the first listed of
Part I, lines 4 through 8.
regard to the effect of consolidation or
the accounting standards listed above
elimination entries. If there are
If the corporation doesn't prepare
must be used.
consolidation or elimination entries
non-tax-basis financial statements and
relating to nonincludible foreign entities
has checked “No” on Part I, line 1b,
If no non-tax-basis financial
whose income (loss) is reported on the
enter the net income (loss) per the
statements are prepared for a U.S.
attached statement that aren't
books and records of the U.S.
corporation filing Schedule M-3 (Form
reportable on Part I, line 8, the net
corporation on Part I, line 4a.
1120S), the U.S. corporation must
amounts of all such consolidation and
check “No” on questions 1a and 1b, skip
elimination entries must be reported on
Indicate on Part I, line 4b, which of
Part I, lines 2, 3a, and 3b, and enter the
a separate line on the attached
the following accounting standards were
net income (loss) per the books and
statement, so that the separate financial
used for line 4a.
records of the U.S. corporation on Part I,
accounting income (loss) of each
1. U.S. Generally Accepted
line 4a.
nonincludible foreign entity remains
Accounting Principles (GAAP).
separately stated.
Lines 2 and 3. Questions
2. International Financial Reporting
For example, if the net income (after
Regarding Income Statement
Standards (IFRS).
consolidation and elimination entries) of
Period and Restatements
3. Tax basis.
a nonincludible foreign
Enter the beginning and ending dates
sub-consolidated group is being
4. Other (Specify).
on line 2 for the corporation's annual
reported on line 5a, the attached
Report on Part I, lines 5a through 10,
income statement period ending with or
supporting statement should report the
as instructed below, all adjustment
within the current tax year.
income (loss) of each separate
amounts required to adjust worldwide
nonincludible foreign legal entity from
The questions on Part I, lines 3a and
net income (loss) reported on this Part I,
each such entity's own financial
3b, regarding income statement
line 4a (whether from financial
accounting net income statement or
restatements refer to the worldwide
statements or books and records), to
books and records, and any
consolidated income statement issued
net income (loss) of the corporation that
consolidation or elimination entries (for
by the corporation filing the U.S. income
must be reported on Part I, line 11.
intercompany dividends, minority
tax return and used to prepare
Report on line 12a the worldwide
interests, etc.) not reportable on Part I,
Schedule M-3. Answer “Yes” on lines 3a
consolidated total assets and total
line 8, should be reported on the
and/or 3b if the corporation's annual
liabilities amounts for the corporation
attached supporting statement as a net
income statement has been restated for
using the same financial statements (or
amount on a line separate and apart
any reason. Attach a short explanation
book and records) used for the
from lines that report each nonincludible
of the reasons for the restatement in net
worldwide consolidated income (loss)
foreign entity's separate net income
income for each annual income
amount reported on line 4a.
(loss).
statement period that is restated,
including the original amount and
Line 5. Net Income (Loss) of
Line 6. Net Income (Loss) of
restated amount of each annual
Nonincludible Foreign Entities
Nonincludible U.S. Entities
statement period's net income.
Remove the financial net income
Remove the financial net income
Line 4. Worldwide Consolidated
(line 5a) or loss (line 5b) of each foreign
(line 6a) or loss (line 6b) of each U.S.
Net Income (Loss) per Income
entity that is included on line 4a and isn't
entity that is included on line 4a and isn't
an includible entity in the U.S. tax return
Statement
an includible entity in the U.S. tax return
(nonincludible foreign entity). In
(nonincludible U.S. entity). In addition,
Report on Part I, line 4a, the worldwide
addition, on Part I, line 8, adjust for
on Part I, line 8, adjust for consolidation
consolidated net income (loss) per the
consolidation eliminations and correct
eliminations and correct for minority
income statement (or books and
for minority interest and intercompany
interest and intercompany dividends
records, if applicable) of the
dividends between any nonincludible
between any nonincludible U.S. entity
corporation.
foreign entity and the entity filing Form
and any includible entity. Don't remove
In completing Schedule M-3, the
1120S. Don't remove in Part I the
in Part I the financial net income (loss)
corporation must use financial
financial net income (loss) of any
of any nonincludible U.S. entity
statement amounts from the financial
nonincludible foreign entity accounted
accounted for on line 4a using the
statement type checked “Yes” on Part I,
for on line 4a using the equity method.
equity method.
line 1, or from its books and records if
Attach a supporting statement that
Attach a supporting statement that
Part I, line 1b, is checked “No.”
provides the name, EIN (if applicable),
provides the name, EIN, and net income
If a corporation prepares
and net income (loss) included on
(loss) included on line 4a that is
non-tax-basis financial statements, the
line 4a that is removed on this line 5 for
removed on this line 6 for each separate
amount on line 4a must equal the
each separate nonincludible foreign
nonincludible U.S. entity. Also state the
financial statement net income (loss) for
entity. Also state the total assets and
total assets and total liabilities for each
the income statement period ending
total liabilities for each such separate
such separate nonincludible U.S. entity
with or within the tax year as indicated
nonincludible foreign entity and include
and include those assets and liabilities
on Part I, line 2.
those assets and liabilities amounts in
amounts in the total assets and total
If the corporation prepares
the total assets and total liabilities
liabilities reported on Part I, line 12c.
non-tax-basis financial statements and
reported on Part I, line 12b. The
The amounts of income (loss) detailed
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Instructions for Schedule M-3 (Form 1120S) (2018)
on the supporting statement should be
that isn't included in the income
necessary to ensure that transactions
reported for each separate
reported on line 4a, but is included on
between includible entities and
nonincludible U.S. entity without regard
line 11 (other QSub). In addition, on Part
nonincludible U.S. or foreign entities
to the effect of consolidation or
I, line 8, adjust for consolidation
aren't eliminated, in order to report the
elimination entries. If there are
eliminations and correct for minority
correct total amount on Part I, line 11.
consolidation or elimination entries
interest and intercompany dividends for
Also, additional consolidation entries
relating to nonincludible U.S. entities
any other disregarded entity or other
and elimination entries may be
whose income (loss) is reported on the
QSub.
necessary on Part I, line 8, related to
attached statement that aren't
transactions between includible entities
Attach a supporting statement that
reportable on Part I, line 8, the net
that are in the consolidated financial
provides the name, EIN, and net income
amounts of all such consolidation and
group and other disregarded entities
(loss) per the financial statement or
elimination entries must be reported on
and QSubs that aren't in the
books and records on this line 7 for
a separate line on the attached
consolidated financial group but that are
each separate other disregarded entity
statement, so that the separate financial
reported on Part I, line 7a, 7b, or 7c, in
or other QSub. Also state the total
accounting income (loss) of each
order to report the correct total amount
assets and total liabilities for each such
nonincludible U.S. entity remains
on Part I, line 11.
separate included entity and include
separately stated. For example, if the
those assets and liabilities amounts in
Include on Part I, line 8, the total of
net income (after consolidation and
the total assets and total liabilities
the following: (a) amounts of any
elimination entries) of a nonincludible
reported on Part I, line 12d. The
adjustments to consolidation entries
U.S. sub-consolidated group is being
amounts of income (loss) detailed on
and elimination entries that are
reported on line 6a, the attached
the supporting statement should be
contained in the amount reported on
supporting statement should report the
reported for each separate other
Part I, line 4a, required as a result of
income (loss) of each separate
disregarded entity or other QSub
removing amounts on Part I, line 5 or 6;
nonincludible U.S. legal entity from each
without regard to the effect of
and (b) amounts of any additional
such entity's own financial accounting
consolidation or elimination entries
consolidation entries and elimination
net income statement or books and
solely between or among the entities
entries that are required as a result of
records, and any consolidation or
listed. If there are consolidation or
including amounts on Part I, line 7a, 7b,
elimination entries (for intercompany
elimination entries relating to such other
or 7c. This is necessary in order that the
dividends, minority interests, etc.) not
disregarded entities or other QSub
consolidation entries and intercompany
reportable on Part I, line 8, should be
whose income (loss) is reported on the
elimination entries included in the
reported on the attached supporting
attached statement that aren't
amount reported on Part I, line 11, are
statement as a net amount on a line
reportable on Part I, line 8, the net
only those applicable to the financial net
separate and apart from lines that report
amounts of all such consolidation and
income (loss) of includible entities for
each nonincludible U.S. entity's
elimination entries must be reported on
the financial statement period. For
separate net income (loss).
a separate line on the attached
example, adjustments must be reported
statement, so that the separate financial
Lines 7a, 7b, and 7c. Net
on line 8 to remove minority interest and
accounting income (loss) of each other
to reverse the elimination of
Income (Loss) of Other Foreign
disregarded entity or other QSub
intercompany dividends included on
Disregarded Entities, Net
remains separately stated. For example,
Part I, line 4a, that relate to the net
Income (Loss) of Other
if the net income (after consolidation
income of entities removed on Part I,
Disregarded Entities (Except
and elimination entries) of a
line 5 or 6, because the income to which
sub-consolidated group of other
the consolidation or elimination entries
Qualified Subchapter S
disregarded entities is being reported
relate has been removed. Also, for
Subsidiaries), and Net Income
on line 7b, the attached supporting
example, consolidation or elimination
(Loss) of Other Qualified
statement should report the income
entries must be reported on line 8 to
Subchapter S Subsidiaries
(loss) of each separate other
eliminate any intercompany dividends
(QSubs)
disregarded entity from each entity's
between entities whose income is
own financial accounting net income
included on Part I, line 7a, 7b, or 7c, and
Include on line 7a the financial income
statement or books and records, and
other entities included in the U.S.
of any foreign disregarded entity that
any consolidation or elimination entries
income tax return. See
Example
3A, 3B,
isn't included on Part I, line 4a, but is
(for intercompany dividends, minority
and
4
in the instructions for line 11.
included in Part I, line 11 (other foreign
interests, etc.) not reportable on Part I,
disregarded entities). Include on line 7b
If a corporate owner of an interest in
line 8, should be reported on the
or 7c the financial net income or (loss)
another entity: (a) accounts for the
attached supporting statement as a net
of each disregarded entity in the U.S.
interest in entity in the owner
amount on a line separate and apart
tax return that isn't included in the
corporation's separate general ledger
from lines that report each other
consolidated financial group and
on the equity method, and (b) fully
disregarded entity's separate net
therefore not included in the income
consolidates entity in the owner
income (loss).
reported on Part I, line 4a. Include on
corporation's consolidated financial
Line 8. Adjustment to
line 7b the financial income of any U.S.
statements, but entity isn't includible in
disregarded entity that isn't a qualified
the owner corporation's U.S. income tax
Eliminations of Transactions
subchapter S subsidiary (QSub) or a
return, then, as part of reversing all
Between Includible Entities and
foreign disregarded entity and that isn't
consolidation and elimination entries for
Nonincludible Entities
included in the income reported on Part
the nonincludible entity, the corporate
I, line 4a, but is included in Part I, line 11
Adjustments on Part I, line 8, to reverse
owner must reverse on Schedule M-3,
(other disregarded entities). Include on
certain financial accounting
Part I, line 8, the elimination of the equity
line 7c the financial income of any QSub
consolidation or elimination entries are
income inclusion from entity. If the
Instructions for Schedule M-3 (Form 1120S) (2018)
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