Information about Schedule M-3

Below, you'll find an overview of the Schedule M-3 in certain modules within Lacerte, ProConnect Tax, and ProSeries:

Table of contents:

What is the Schedule M-3?

• The Schedule M-3 gives the IRS additional information about tax-return calculations and the differences between book income numbers and taxable income numbers.
• The Schedule M-3 contains three main sections:
  • Financial statement reconciliation (Part I)
  • Detail of income/loss items (Part II)
  • Detail of expenses/deductions (Part III)
• The Schedule M-3 requires companies to expose the types of adjustments they're making to book numbers to arrive at taxable income. 

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Who must file the Schedule M-3?

• Corporations and S corporations with assets of $10 million or greater.
• Partnerships must file Schedule M-3 if any of the following are true:
  1. The amount of total assets at the end of the tax year reported on Schedule L, line 14, column (d), is equal to $10 million or more.
  2. The amount of adjusted total assets for the tax year is equal to $10 million or more.
  3. The amount of total receipts for the tax year is equal to $35 million or more.
  4. An entity that's a reportable entity partner with respect to the partnership (as defined under these instructions) owns or is believed to own, directly or indirectly, an interest of 50% or more in the partnership's capital, profit, or loss, on any day during the tax year of the partnership.

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Completing Schedule M-3

For corporations and S corporations:

• A corporation (or any member of a U.S. consolidated tax group) 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.
• Form 1120, Form 1120C, and 1120S filers that:
  • Are required to file Schedule M-3 and have less than $50 million total assets at the end of the tax year
  • Aren't required to file Schedule M-3 and voluntarily file Schedule M-3, must either:
    • Complete Schedule M-3 entirely
    • Complete Schedule M-3 through Part I, and complete Schedule M-1 of Form 1120 (1120C, if applicable) or 1120S instead of completing Parts II and III of Schedule M-3. If you choose to complete Schedule M-1 instead of completing Parts II and III of Schedule M-3, line 1 of the applicable M-1 must equal line 11 of Part I of Schedule M-3.

For partnerships:

• Form 1065 and Form 1065-B filers that are required to file Schedule M-3 (Form 1065) and have at least $50 million total assets at the end of the tax year must complete Schedule M-3 (Form 1065) entirely.
• Form 1065 and Form 1065-B filers that:
  • Are required to file Schedule M-3 and have less than $50 million total assets at the end of the tax year or
  • Aren't required to file Schedule M-3 and voluntarily file Schedule M-3 must either:
    • Complete Schedule M-3 entirely or
    • Complete Schedule M-3 through Part I and complete Form 1065, Schedule M-1 instead of completing Parts II and III of Schedule M-3. If the filer chooses to complete Form 1065, Schedule M-1 instead of completing Parts II and III of Schedule M-3, line 1 of Form 1065, Schedule M-1 must equal line 11 of Part I of Schedule M-3.

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Understanding Schedule M-3, Part I

• Lines 1a–1c finds the source you used to reconcile income.
  • Select line 1a if you filed and completed Form 10-K (an annual report that summarizes the company's performance) with the US Securities and Exchange Commission (SEC). An entity that selects line 1a must use Form 10-K to complete the Schedule M-3.
    • This particular question doesn't pertain to S corporations.
  • Select line 1b (line 1a for S corporations) if:
    • You didn't file Form 10-K with the SEC.
    • You did prepare a certified non-tax-basis income statement that should be used to complete Schedule M-3.
  • Select line 1c (line 1b for S corporations) if:
    • You filed Form 10-K and you didn't prepare a non-tax-basis income.
    • You did prepare an unaudited non-tax-basis income for the tax period that should be used to complete Schedule M-3.
• Line 4, worldwide consolidated net income (loss) from income source identified in Part I, line 1.
  • This is a manual entry found on the Schedule M-3 input screen, mandatory input for reconciliation.
• Line 11, net income (loss) per income statement. Combine lines 4–10.

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Understanding Schedule M-3, Part II

The Schedule M-3, Part II consists of four columns:

1. Column (A) - Income (Loss) per Income Statement

Column A represents a financial statement income maintained in the entities' books and records (you can find this amount in the income statement source determined in Part I, line 1a–1c).

2. Column (B) - Temporary Difference (or Timing Difference)

A temporary difference is any difference that the entity believes will reverse in a future tax year. There are two basic categories of temporary difference for income:

• Income recognized in financial statements before it's taxable
• Income reported as taxable before it's recognized in financial statements

3. Column (C) - Permanent Difference

Permanent differences are transactions that the entity believes won't reverse in a future tax year.

4. Column (D) - Income (Loss) per Tax return

The total of column (A) plus or minus columns (B) and (C).

• The bottom line of Part II Column (A) should reconcile to Part I, line 11. 
• The bottom line of Part II Column (D) should reconcile to the Main Forms taxable income (1120) or net income (loss).

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Understanding Schedule M-3, Part III

The Schedule M-3, Part III consists of four columns:

1. Column (A) - Expense per Income Statement

Column A, Expense per Income Statement represents financial statement expenses maintained in the entity's books and records, using hte income statement source determined in Part I.

2. Column (B) - Temporary Difference

Temporary difference is any difference the entity believes will reverse in a future tax year.

There are two basic categories of temporary difference for expenses:

• Expenses recognized in financial statements before they're deducted on the tax return
• Expenses deductible on the tax return before they're recognized on financial statements

3. Column (C)- Permanent Difference

Same as Part II.

4. Column (D)- Deduction per Tax return

Same as Part II.

• The bottom line amounts on Schedule M-3, Part III will flow over to the Schedule M-3, Part II, and are combined in the reconciliation totals.

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Understanding Schedule M-3, Parts II and III, Columns A–D

For tax year 2014–2023:

• Any filer that completes Parts II and III of Form 1120, Schedule M-3, must complete all columns, without exception.
• The program calculates the columns from left to right. For example, Column (A) plus or minus columns (B) and (C) equal column (D)
• If column (A) or column (D) is grayed out then that amount is zero.
• Most inputs on the Schedule M-3 screen are direct inputs. Any field suggested as an override will flow over automatically (like Meals and Entertainment or Depreciation).

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For corporations

• You can find all Schedule M-3 inputs on the Schedule M-3 screen.
• Schedule M-3, Part II, line 30, column (A) must equal Schedule M-3, Part I, line 11.
• Schedule M-3, Part II, line 30, column (D) must equal Form 1120, page 1, line 28.
• Beginning in 2008, any corporation filing a Schedule M-3 must also complete a Schedule B. You can find inputs on the screen labeled Additional Information for Schedule M-3 Filers.
• You can find Form 8916-A inputs on the screen labeled Supplemental Attachment to Schedule M-3.

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For partnerships

• You can find all Schedule M-3 inputs on the Schedule M-3 screen.
• Schedule M-3, Part II, line 26, column (A) must equal Schedule M-3, Part I, line 11.
• Schedule M-3, Part II, line 26, column (D) must equal the 1065 Analysis of Net Income, line 1.
• Beginning in 2008, partnerships must file a Schedule C. You can find the inputs on the Additional Information for Schedule M-3 Filers screen.
• You can find Form 8916-A inputs on the Supplemental Attachment to Schedule M-3 screen.

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For S corporations

• You can find all Schedule M-3 inputs on the Schedule M-3 screen.
• Schedule M-3, Part II, line 26, column (A) must equal Schedule M-3, Part I, line 11.
• Schedule M-3, Part II, line 26, column (D) must equal the Form 1120S, Schedule K, line 18.
• You can find all Form 8916-A inputs on the Supplemental Attachment to Schedule M-3 screen.

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