Completing Schedule M-3 (Form 1065)

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

For any part of Schedule M-3 (Form 1065) that is completed, all columns must be completed, all applicable questions must be answered, all numerical data requested must be provided, and any statement required to support a line item must be attached and provide the information required for that line item. Any partnership required to file Schedule M-3 must check all boxes above Part I that apply for the reason(s) for which the Schedule M-3 is required to be filed. A partnership not required to file Schedule M-3, but that is doing so voluntarily, should check box E above Part I.

Total Assets and Adjusted Total Assets

The partnership should figure its adjusted total assets using the Adjusted Total Assets Worksheet, later.

For purposes of determining for Schedule M-3 whether the partnership's adjusted total assets (under these instructions) equal $10 million or more, the partnership's total assets at the end of the tax year must be determined on an overall accrual method of accounting unless both of the following apply: (a) the tax return of the partnership is prepared using an overall cash method of accounting, and (b) the partnership doesn't prepare financial statements using, and isn't included in financial statements prepared on, an accrual basis.

See Part I. Financial Information and Net Income (Loss) Reconciliation regarding non-tax-basis income statements and related non-tax-basis balance sheets to be used in the preparation of Schedule M-3 and the related non-tax-basis balance sheets to be used in the preparation of Schedule L.

In the case of a partnership year ending because of a section 708 termination, the total assets of the partnership at the end of the year for determining the requirement to file Schedule M-3 are determined immediately before the section 708 termination and any actual or deemed contribution or distribution of the partnership assets under the provisions of section 708 are taken into account.

Reportable Entity Partner Reporting Responsibilities

For the purposes of these instructions, a reportable entity partner with respect to a partnership filing Form 1065 is an entity that:

For the purposes of these instructions, the following rules apply.

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.

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.

For more information, see Item D. Reportable Entity Partner, later.

Other Form 1065 Schedules Affected by Schedule M-3 Requirements

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 7, 8, or 9, 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.

Line 1. Questions Regarding the Type of Income Statement Prepared

For lines 1 through 11, use only the financial statements of the U.S. partnership filing Form 1065. If the U.S. partnership filing Form 1065 is controlled by another entity, the U.S. partnership must use for its Schedule M-3, Part I, its own financial statements and not the financial statements of the controlling entity.

If no non-tax-basis financial statements are prepared for the U.S. partnership filing Schedule M-3, the U.S. partnership must check “No” on questions 1a, 1b, and 1c, skip lines 2 through 3b, and enter the net income (loss) per the books and records of the U.S. partnership on line 4a.

Lines 2 and 3. Questions Regarding Income Statement Period and Restatements

Enter the beginning and ending dates on line 2 for the partnership's annual income statement period ending with or within the current tax year.

The questions on lines 3a and 3b, regarding income statement restatements, refer to the worldwide consolidated income statement issued by the partnership filing Form 1065 and used to prepare Schedule M-3. Answer “Yes” on lines 3a and/or 3b if the partnership's annual income statement has been restated for any reason. Attach a short statement 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 statement period's net income. The attached statement isn't required to report restatements on an entity-by-entity basis.

Line 4. Worldwide Consolidated Net Income (Loss) per Income Statement

Report on line 4a the worldwide consolidated net income (loss) per the income statement (or books and records, if applicable) of the partnership.

In completing Schedule M-3, the partnership must use financial statement amounts from the financial statement type checked “Yes” on line 1, or from its books and records if line 1c is checked “No.” If line 1a is checked “Yes,” report on line 4a the net income amount reported in the income statement presented to the SEC on the partnership's Form 10-K.

If a partnership prepares non-tax-basis financial statements, the amount on 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 line 2.

If the partnership prepares non-tax-basis financial statements and the income statement period differs from the partnership's tax year, the income statement period indicated on line 2 applies for purposes of lines 4a through 8.

If the partnership doesn't prepare non-tax-basis financial statements and has checked “No” on line 1c, enter the net income (loss) per the books and records of the partnership on line 4a.

Check the appropriate box on line 4b to indicate which of the following accounting standards was used for line 4a.

Report on lines 5a through 10, as instructed below, all adjustment amounts required to adjust worldwide net income (loss) reported on line 4a (whether from financial statements or books and records) to net income (loss) of the partnership that must be reported on line 11. Report on line 12a the worldwide consolidated total assets and total liabilities amounts for the partnership using the same financial statements (or books and records) used for the worldwide consolidated income (loss) amount reported on line 4a.

Line 5. Net Income (Loss) of Nonincludible Foreign Entities

Remove the financial statement net income (line 5a) or loss (line 5b) of each foreign entity that is included on line 4a and isn't the partnership (nonincludible foreign entity). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible foreign entity and the partnership filing Form 1065. Don't remove in Part I the financial statement net income (loss) of any nonincludible foreign entity accounted for on line 4a using the equity method.

Attach a supporting statement that provides the name, EIN (if applicable), and net income (loss) included on 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 aren't reportable on 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 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 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 statement net income (line 6a) or loss (line 6b) of each U.S. entity that is included on line 4a and isn't an includible entity in the partnership return (nonincludible U.S. entity). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible U.S. entity and any includible entity. Don't remove in Part I the financial statement net income (loss) of any nonincludible U.S. entity accounted for on line 4a using the equity method.

Attach a supporting statement that provides the name, EIN (if applicable), and net income (loss) included on line 4a that is removed on line 6a or 6b 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 aren't reportable on 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 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).

Lines 7a and 7b. Net Income (Loss) of Other Foreign Disregarded Entities and Net Income (Loss) of Other U.S. Disregarded Entities

Include on line 7a or 7b the financial net income or (loss) of each disregarded entity in the U.S. tax return that isn't included in the consolidated financial group, and therefore not included in the income reported on line 4a, but that is included on line 11. Include on line 7a the financial income or (loss) of any foreign disregarded entity that isn't included in the income reported on line 4a but that is included on line 11 (other foreign disregarded entities). Include on line 7b the financial income or (loss) of any U.S. disregarded entity that isn't included in the income reported on line 4a but that is included on line 11 (other U.S. disregarded entities). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends for any other disregarded entity.

Attach a supporting statement that provides the name, EIN, and net income (loss) per the financial statement or books and records included on line 7a or 7b for each separate foreign or U.S. disregarded entity. Also state the total assets and total liabilities for each such separate included entity and include those assets and liabilities 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 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 separate other disregarded entities whose income (loss) is reported on the attached statement that aren't reportable on 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 separate other disregarded entity remains separately stated.

For example, if the net income (after consolidation and elimination entries) of a sub-consolidated group of other foreign disregarded entities is being reported on line 7a, the attached supporting statement should report the income (loss) of each separate other foreign disregarded entity from each disregarded 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 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 foreign disregarded entity's separate net income (loss).

Line 8. Adjustment to Eliminations of Transactions Between Includible Entities and Nonincludible Entities

Adjustments on 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 aren't eliminated, in order to report the correct total amount on line 11. Also, additional consolidation entries and elimination entries may be necessary on line 8 related to transactions between includible entities that are in the consolidated financial statement group and other includible entities that aren't in the consolidated financial statement group but that are reported on line 7a or 7b in order to report the correct total amount on line 11.

Include on 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 line 4a, required as a result of removing amounts on 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 line 7a or 7b. This is necessary in order that the consolidation entries and intercompany elimination entries included in the amount reported on 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 on line 4a that relate to the net income of entities removed on 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 eliminate any intercompany dividends between entities whose income is included on line 7a or 7b and other entities included in the U.S. income tax return.

If an entity owner of an interest in another entity (a) accounts for the interest in the other entity in the owner's separate general ledger on the equity method; and (b) fully consolidates the other entity in the owner's consolidated financial statements, but that entity isn't includible in the owner's Form 1065, then, as part of reversing all consolidation and elimination entries for the nonincludible entity, the owner must reverse on line 8 the elimination of the equity income inclusion from the other entity. If the owner doesn't account for the other entity on the equity method on its own general ledger, it won't 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 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 isn't necessary, but it is permitted, to report on line 8 intercompany eliminations that net to zero, 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 the partnership to reconcile differences between the partnership's income statement period reported on line 2 and the partnership's tax year. Attach a statement describing the adjustment.

Line 10. Other Adjustments to Reconcile to Amount on Line 11

Include on line 10 any other adjustments to reconcile net income (loss) on line 4a through line 9, with net income (loss) of the partnership reported on line 11.

For any adjustment reported on line 10, attach a supporting statement with an explanation of each net adjustment included on line 10.

Line 11. Net Income (Loss) per Income Statement of the Partnership

Report on line 11 the net income (loss) per the income statement (or books and records, if applicable) of the partnership. Amounts reported in column (a) of Parts II and III must be reported on the same accounting method as is used to report the amount of net income (loss) per income statement of the partnership on line 11.

Don't, in any event, report on line 11 the net income of entities other than the partnership filing Form 1065 for the tax year. For example, it isn't permissible to remove the income of nonincludible entities on lines 5 and/or 6, above, then to 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 U.S. income tax return. A principal purpose of Schedule M-3 is to report on line 11 only the financial accounting net income of only the partnership (including any other includible entities) filing Form 1065.

Whether or not the partnership prepares financial statements, line 11 must include all items that impact the net income (loss) of the partnership even if they aren't recorded in the profit and loss accounts in the partnership's general ledger, including, for example, all post-closing adjusting entries (including work paper adjustments) and dividend income or other income received from nonincludible entities. If the partnership prepares unconsolidated financial statements using the same accounting method used to determine worldwide consolidated net income (loss) for Part I, line 4, and if it uses the equity method for investments, the amount reported on Part I, line 11, will equal the amount of the unconsolidated net income (loss) reported on the unconsolidated financial statements. See Examples 5.3, 5.4, and 5.5 below.

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 partnerships that file Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total amounts (not just the partnership'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 on Part I, lines 12a through 12d, must be reported 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 4. 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 of the entities removed in completing Part I, line 6. On line 12d, enter the total assets and total liabilities of the entities included in completing Part I, line 7.

General Reporting Information

A schedule or statement may be attached to any line even if none is required.

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 on line 1 of the Analysis of Net Income (Loss) found on Form 1065.

Note. Part II, line 26, column (a), must equal Part I, line 11, and column (d) must equal line 1 of the Analysis of Net Income (Loss) found on Form 1065. Thus, column (d) on Part II and Part III must include certain of the separately stated items on Schedule K.

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).

If financial statements are prepared by the partnership in accordance with generally accepted accounting principles (GAAP), differences that are treated as temporary under 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, under GAAP, a temporary difference affects (creates, increases, or decreases) a deferred tax asset or liability.

If the partnership doesn't prepare financial statements, or the financial statements aren't prepared under GAAP, report in column (b) any difference that the partnership 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 partnership believes won't reverse in a future tax year (and isn't the reversal of such a difference that arose in a prior tax year).

If the partnership 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).

Reporting Requirements for Parts II and III

Lines 1 Through 9. Additional Information for Each Entity

For any item reported on lines 1 or 3 through 5, attach a supporting statement that provides 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 lines 2 and 6 through 9 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 or includible from foreign corporations on lines 2 through 4, 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 on line 1 of the Analysis of Net Income (Loss) found on Form 1065, and report on line 2, column (a), the amount of dividends from any foreign corporation included on Part I, line 11. Don't report on line 2 any amounts that must be reported on line 3 or dividends that were previously taxed and must be reported on line 4. (See the instructions below for lines 3 and 4.) Report withholding taxes on Part III, line 30, Other expense/deduction items with differences, or line 25, Other items with no differences, as applicable.

For any dividends reported on line 2 that are received on a class of voting stock of which the partnership 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 line 2: (a) the name of the dividend payer, (b) the payer's EIN (if applicable), (c) the class of voting stock on which the dividend was paid, (d) the percentage of the class directly or indirectly owned, and (e) 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), 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 QEFs). See Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, for more information.

Also include on line 3 passive foreign investment company mark-to-market gains and losses under section 1296. Don't report such gains and losses on line 14.

Line 4. Gross Foreign Distributions Previously Taxed

Report on line 4, column (a), any distributions received from foreign corporations that were 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 amounts in column (b) or (c), as applicable. Report the full amount of the distribution before any withholding tax. Report withholding taxes on Part III, line 30, Other expense/deduction items with differences, or line 25, Other items with no differences, as applicable. Because previously taxed foreign distributions aren't currently taxable, line 4, column (d), is shaded. (Also, see the instructions above for line 2.)

Line 5. Income (Loss) From Equity Method U.S. Corporations

Report on line 5, 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 line 6 the amount of dividends received from any U.S. corporations.

Line 6. U.S. Dividends

Report on line 6, column (a), the amount of dividends included on Part I, line 11, that were received from any U.S. corporation. Report on line 6, column (d), the amount of any U.S. dividends included in taxable income on line 1 of the Analysis of Net Income (Loss) found on Form 1065.

For any dividends reported on line 6 that are received on classes of voting stock in which the partnership 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 line 6: (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 7. Income (Loss) From U.S. Partnerships, and Line 8. Income (Loss) From Foreign Partnerships

For any interest owned by the partnership 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 line 7 or 8, as described below.

For each partnership reported on line 7 or 8, attach a supporting statement that provides the name, 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 7 or 8, as applicable.

Line 9. Income (Loss) From Other Pass-Through Entities

For any interest in a pass-through entity (other than an interest in a partnership reportable on line 7 or 8, as applicable) owned by the U.S. partnership (other than an interest in a disregarded entity), report the following on line 9.

For each pass-through entity reported on line 9, attach a supporting statement that provides that entity's name, EIN (if applicable), the partnership's end of year profit-sharing percentage (if applicable), the partnership's end of year loss-sharing percentage (if applicable), and the amounts reported by the partnership in column (a), (b), (c), or (d) of line 9, as applicable.

Line 10. Items Relating to Reportable Transactions

Any amounts attributable to any reportable transactions (as described in Regulations section 1.6011-4) must be included on line 10 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 line 10. In addition, all income and expense amounts attributable to a reportable transaction must be reported on line 10, columns (a) and (d), even if there is no difference between the financial statement amounts and the tax return amounts.

Each difference attributable to a reportable transaction must be separately stated and adequately disclosed. A partnership will be considered to have separately stated and adequately disclosed a reportable transaction on line 10 if the partnership sequentially numbers each Form 8886 and lists by statement number (shown on line A of Form 8886) on the supporting statement for line 10 each sequentially numbered reportable transaction and the amounts required for line 10, columns (a) through (d).

Instead of satisfying the requirements of the preceding paragraph, a partnership will be considered to have separately stated and adequately disclosed a reportable transaction if the partnership attaches a supporting statement that provides the following for each reportable transaction.

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 shown on line 3 of Form 8886. In addition, if the reportable transaction involves an investment in the transaction through another entity such as a partnership, the description must include the name and EIN (if applicable) of that entity as reported on line 5 of Form 8886.

Line 11. Interest Income

Attach Form 8916-A, Supplemental Attachment to Schedule M-3. Complete Part II and enter the amounts shown on line 6, columns (a) through (d), on Schedule M-3, line 11, columns (a) through (d), as applicable.

An entity that (a) is required to file a Schedule M-3 and has less than $50 million in total assets at the end of the tax year, or (b) isn't required to file a Schedule M-3 and voluntarily files a Schedule M-3, isn't required to file Form 8916-A but may voluntarily do so.

Report on line 11, column (a), the total amount of interest income included on Part I, line 11, and report on line 11, column (d), the total amount of interest income included on line 1 of the Analysis of Net Income (Loss) found on Form 1065 that isn't 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 instructions for line 16, Sale versus lease, should be made in columns (b) and (c) of line 11.

Don't report on line 11 amounts reported in accordance with the instructions for lines 7, 8, 9, 10, and 20.

Line 12. Total Accrual to Cash Adjustment

This line is completed by a partnership 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 line 10, the partnership must report on line 12, 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 25).

Line 13. Hedging Transactions

Report on line 13, column (a), the net gain or loss from hedging transactions 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 13. The hedge of a capital asset, which isn't 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 13 and not on line 14.

Report any gain or loss from inventory hedging transactions on line 13 and not on line 15.

Line 14. Mark-to-Market Income (Loss)

Report on line 14 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 described in section 475(c)(2)(E) do not include contracts to which section 1256(a) applies.

Report hedging gains and losses computed under the mark-to-market method of accounting on line 13, Hedging transactions, and not on line 14.

Line 15. Cost of Goods Sold

Report on line 15 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. However, don't report the items mentioned in the next paragraph on line 15. Examples of amounts that must be included on line 15 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, inventory shrinkage accruals, inventory obsolescence reserves, and lower of cost or market (LCM) write-downs.

Don't report the following on line 15 or on Form 8916-A.

Line 16. Sale Versus Lease (for Sellers and/or Lessors)

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 or deduction. If the transaction is treated as a sale, the seller/lessor reports gross profit (sale price less cost of goods sold) from the sale of assets and reports the periodic payments as payments of principal and interest income.

On line 16, 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 tax purposes. On line 16, 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 line 11 in column (a) or (d), as applicable. Depreciation expense for such transactions must be reported on Part III, line 25, in column (a) or (d), as applicable. Use columns (b) and (c) of lines 11 and 16, and Part III, line 25, as applicable, to report the differences between columns (a) and (d).

Line 17. Section 481(a) Adjustments

With the exception of a section 481(a) adjustment that is required to be reported on Part I, line 10, 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 line 17, regardless of whether a separate line for that income or expense item exists in Part II or Part III.

Line 18. Unearned/Deferred Revenue

Report on line 18, column (a), amounts of revenues included on Part I, line 11, that were deferred from a prior financial accounting year. Report on line 18, 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 18, column (d), any amount of revenues reported on line 18, column (a), that are recognizable for U.S. income tax purposes in the current tax year. Use columns (b) and (c) of line 18, as applicable, to report differences between columns (a) and (d).

Line 18 must not be used to report income recognized from long-term contracts. Instead, use line 19.

Line 19. Income Recognition From Long-Term Contracts

Report on line 19 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 20. Original Issue Discount and Other Imputed Interest

Report on line 20 any amounts of original issue discount (OID) and other imputed interest. The term “original issue discount and other imputed interest” includes, but isn't limited to:

Line 21a. Income Statement Gain/Loss on Sale, Exchange, Abandonment, Worthlessness, or Other Disposition of Assets Other Than Inventory and Pass-Through Entities

Report on line 21a, column (a), all gains and losses on the disposition of assets except for (a) gains and losses on the disposition of inventory, and (b) gains and losses allocated to the partnership from a pass-through entity (for example, on Schedule K-1) that are included in the net income (loss) of the partnership 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 lines 21b through 21g, as applicable.

Line 21b. Gross Capital Gains From Schedule D, Excluding Amounts From Pass-Through Entities

Report on line 21b gross capital gains reported on Schedule D, Capital Gains and Losses, excluding capital gains from pass-through entities, which must be reported on line 7, 8, or 9, as applicable.

Line 21c. Gross Capital Losses From Schedule D, Excluding Amounts From Pass-Through Entities, Abandonment Losses, and Worthless Stock Losses

Report on line 21c gross capital losses reported on Schedule D, excluding capital losses from (a) pass-through entities, which must be reported on line 7, 8, or 9, as applicable; (b) abandonment losses, which must be reported on line 21e; and (c) worthless stock losses, which must be reported on line 21f.

Line 21d. Net Gain/Loss Reported on Form 4797, Line 17, Excluding Amounts From Pass-Through Entities, Abandonment Losses, and Worthless Stock Losses

Report on line 21d the net gain or loss reported on line 17 of Form 4797, excluding amounts from (a) pass-through entities, which must be reported on line 7, 8, or 9, as applicable; (b) abandonment losses, which must be reported on line 21e; and (c) worthless stock losses, which must be reported on line 21f.

Line 21e. Abandonment Losses

Report on line 21e any abandonment losses, regardless of whether the loss is characterized as an ordinary loss or a capital loss.

Line 21f. Worthless Stock Losses

Report on line 21f 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 transaction that gives rise to a worthless stock loss and the amount of each loss.

Line 21g. Other Gain/Loss on Disposition of Assets Other Than Inventory

Report on line 21g any gains or losses from the sale or exchange of property other than inventory that aren't reported on lines 21b through 21f.

Line 22. Other Income (Loss) Items With Differences

Separately state and adequately disclose on line 22 all items of income (loss) with differences that aren't otherwise listed on lines 1 through 21. Attach a statement that describes and 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. The fifth column is Column (d), Income (Loss) per Tax Return. For every item listed on the attached statement for line 22, columns (a) + (b) + (c) must equal column (d). Each item with amounts in columns (a), (b), (c), and (d) will be totaled and included as one line on line 22.

A partnership should include tax-exempt income from forgiven Paycheck Protection Program (PPP) loans on line 22, column (c), as a negative number if it was included on line 22 in column (a) as Income per Income Statement.

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.”

Line 23. Total Income (Loss) Items

Combine lines 1 through 22 and enter the total on line 23.

Line 24. Total Expense/ Deduction Items

Report on line 24, columns (a) through (d), as applicable, the negative of the amounts reported on Part III, line 31, columns (a) through (d). For example, if Part III, line 31, column (a), reflects an amount of $1 million, then report on line 24, column (a), ($1,000,000). Similarly, if Part III, line 31, column (b), reflects an amount of ($50,000), then report on line 24, column (b), $50,000.

Line 25. 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 isn't described or included on lines 1 through 22, or Part III, lines 1 through 30, report the entire amount of the item in columns (a) and (d) of line 25. If a portion of an item of income, loss, expense, or deduction has a difference and a portion of the item doesn't have a difference, don't report any portion of the item on line 25. 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 lines 1 through 22, or Part III, lines 1 through 30. See Example 11, earlier.

Lines 1 Through 4. Income Tax Expense

If the partnership doesn't 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 and 3, as applicable.

Line 5. Equity-Based Compensation

Report on line 5 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. Examples of amounts reportable on line 5 include expense/deduction items attributable to options to acquire capital interest units, profits interest units, and other rights to acquire partnership equity, regardless of whether such payments are made to employees or nonemployees, or as payment for property or compensation for services.

Line 6. Meals and Entertainment

Report on line 6, column (a), any amounts paid or accrued by the partnership 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 partnership's financial income statement or the income and expense accounts maintained in the partnership's books and records. Report only amounts not otherwise reportable elsewhere on Schedule M-3, Parts II and III (for example, Part II, line 15).

Line 7. Fines and Penalties

Report on line 7 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 line 7, 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 partnership's financial income statement or the income and expense accounts maintained in the partnership's books and records. Also report on line 7, column (a), the reversal of any over accrual of any amount described in this paragraph. See sections 162(f) and 162(g) for additional guidance.

Report on line 7, column (d), any such amounts 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.

Don't report on line 7 amounts required to be reported in accordance with the instructions for line 8.

Don't report on line 7 amounts recovered from insurers or any other indemnitors for any fines and penalties described above.

Line 8. Judgments, Damages, Awards, and Similar Costs

Report on line 8, 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 8, column (a), the reversal of any over accrual of any amount described in this paragraph.

Report on line 8, column (d), any such amounts 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.

Don't report on line 8 amounts required to be reported in accordance with the instructions for line 7.

Don't report on line 8 amounts recovered from insurers or any other indemnitors for any judgments, damages, awards, or similar costs described above.

Line 9. Guaranteed Payments

Include on line 9, column (a), the amount of guaranteed payments expense that is included on Part I, line 11. Report in column (d) the net amount of guaranteed payments deduction. The net amount of the deduction reported in column (d) is the amount reported as a deduction on Form 1065, page 1, line 10, reduced by the amount reported as income on Form 1065, Schedule K, line 4. The net amount of the guaranteed payments reported in column (d) will be zero if no guaranteed payments are capitalized and all are deducted on Form 1065, page 1, line 10, or a negative amount (reported in parentheses) if any of the guaranteed payments are capitalized by the partnership. Generally, if guaranteed payments expense is recognized for financial accounting purposes, the amount reported in column (c) as a permanent difference will be the negative of the guaranteed payment income reported on Form 1065, Schedule K, line 4. If no guaranteed payment expense is recognized for financial accounting purposes, the amount reported in column (c) as a permanent difference will generally be zero. Any amount of guaranteed payments capitalized for tax purposes on Form 1065, page 1, but not capitalized for financial accounting purposes, will generally be reported as a negative temporary difference amount in column (b).

Line 10. Pension and Profit-Sharing

Report on line 10 any amounts attributable to the partnership's pension plans, profit-sharing plans, and any other retirement plans.

Line 11. Other Post-Retirement Benefits

Report on line 11 any amounts attributable to other post-retirement benefits not otherwise includible on line 10 (for example, retiree health and life insurance coverage, dental coverage, etc.).

Line 12. Deferred Compensation

Report on line 12, column (a), any compensation expense included in the net income (loss) amount reported on Part I, line 11, that isn't deductible for U.S. income tax purposes in the current tax year and that wasn't reported elsewhere on Schedule M-3, column (a). Report on line 12, column (d), any compensation deductible in the current tax year that wasn't included in the net income (loss) amount reported on Part I, line 11, for the current tax year and that isn't reportable elsewhere on Schedule M-3, including any compensation deductions deferred in a prior tax year. For example, report originations and reversals of deferred compensation subject to section 409A on line 12.

Line 14. Charitable Contribution of Intangible Property

Report on line 14 any charitable contribution of intangible property, for example, contributions of:

Line 15. Organizational Expenses as per Regulations Section 1.709-2(a)

Include on line 15, column (a), organizational expenses, as defined in Regulations section 1.709-2(a). Include on line 15, column (d), the amount of organizational expense deducted per section 709(b).

Line 16. Syndication Expenses as per Regulations Section 1.709-2(b)

Include on line 16 syndication expenses, as defined in Regulations section 1.709-2(b).

Line 17. Current Year Acquisition/Reorganization Investment Banking Fees

Report on line 17 any investment banking fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, ownership interests or assets) or a tax-free reorganization not otherwise reportable on Schedule M-3 (for example, line 15 or 16). Report on this line any investment banking 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 or reorganization.

Line 18. Current Year Acquisition/Reorganization Legal and Accounting Fees

Report on line 18 any legal and accounting fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, ownership interests or assets) or a tax-free reorganization not otherwise reportable on Schedule M-3 (for example, line 15 or 16). Report on this line any legal and accounting 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 or reorganization.

Line 19. Amortization/Impairment of Goodwill

Report on line 19 amortization of goodwill or amounts attributable to the impairment of goodwill.

Line 20. Amortization of Acquisition, Reorganization, and Start-up Costs

Report on line 20 amortization of acquisition, reorganization, and start-up costs. For purposes of columns (b), (c), and (d), include amounts amortizable under section 167 or 195.

Line 21. Other Amortization or Impairment Write-Offs

Report on line 21 any amortization or impairment write-offs not otherwise includible on Schedule M-3.

Line 22. Reserved

When using this line to figure amounts on other tax forms or worksheets, this line should be considered to be zero.

Line 23a. Depletion—Oil & Gas

Form 1065 filers report on line 23a, column (a), any oil and gas depletion included on Part I, line 11.

Line 23b. Depletion—Other Than Oil & Gas

Report on line 23b any depletion expense/deduction other than oil and gas that isn't required to be reported elsewhere on Schedule M-3 (for example, on Part II, line 7, 8, 9, or 15).

Line 24. Intangible Drilling and Development Costs (IDC)

Intangible drilling and development costs (IDC) are costs of developing oil, gas, or geothermal wells. Report on line 24, column (a), the total amount of intangible drilling and development costs (or such equivalent costs as classified in the partnership's financial statements) included on Part I, line 11, and report on line 24, column (d), the total amount of IDC paid or incurred during the current tax year under section 263(c) and Regulations section 1.612-4.

Line 25. Depreciation

Report on line 25 any depreciation expense/deduction that isn't required to be reported elsewhere on Schedule M-3 (for example, on Part II, line 7, 8, 9, or 15).

Line 26. Bad Debt Expense

Report on line 26, 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 27. Interest Expense

Attach Form 8916-A. Complete Part III and enter the amounts shown on line 5, columns (a) through (d), on Schedule M-3, line 27, columns (a) through (d), as applicable.

An entity that (a) is required to file a Schedule M-3 and has less than $50 million in total assets at the end of the tax year, or (b) isn't required to file a Schedule M-3 and voluntarily files a Schedule M-3, isn't required to file Form 8916-A but may voluntarily do so.

Report on line 27, column (a), the total amount of interest expense included on Part I, line 11, and report on line 27, column (d), the total amount of interest deduction included on line 1 of the Analysis of Net Income (Loss) found on Form 1065 that isn't 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 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 line 28 should be made in columns (b) and (c), as applicable, of line 27.

Don't report on Form 8916-A and on line 27 amounts reported in accordance with the instructions for (a) Part II, lines 7, 8, and 9, Income (loss) from U.S. partnerships, foreign partnerships, and other pass-through entities; and (b) Part II, line 10, items relating to reportable transactions.

Line 28. Purchase Versus Lease (for Purchasers and/or Lessees)

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 or deduction amounts for such transactions on line 27, in column (a) or (d), as applicable. Report depreciation expense or deductions for such transactions on line 25, in column (a) or (d), as applicable. Use columns (b) and (c) of lines 25, 27, and 28, as applicable, to report the differences between columns (a) and (d) for such recharacterized transactions.

Line 29. Research and Development Costs

For tax years beginning after December 31, 2021, for U.S. income tax purposes, research and experimental expenditures paid or incurred by a taxpayer in connection with the taxpayer's trade or business must be amortized. The expenditures must be amortized ratably over the 5-year period (15-year period for specified expenditures attributable to foreign research), beginning with the midpoint of the tax year in which the expenses are paid or incurred. See section 174.

Report in column (a) the amount of expenses included in net income reported on Part I, line 11, that are related to research and development expenses. Report in column (d) the amount of amortization deductions included in total deductions on page 1 of the return and/or separately reported on Schedule K of the return that are recognized and reported for section 174 research and experimental expenditures. In column (c), as applicable, include any adjustments for any amounts treated for U.S. income tax purposes as research or experimental expenditures that are treated as some other form of expense for financial accounting purposes, or vice versa. Report any difference in timing recognition in column (b).

Line 30. Other Expense/ Deduction Items With Differences

Separately state and adequately disclose on line 30 all items of expense/deduction that aren't otherwise listed on lines 1 through 29.

Attach a statement that describes and itemizes the type of expense/deduction and the amount of each item, and provides a description that states the expense/deduction 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 statement of details attached to the return for line 30 must separately state and adequately disclose the nature and amount of the expense related to each reserve and/or contingent liability. The appropriate level of disclosure depends upon each taxpayer's operational activity and the nature of its accounting records. For example, if a partnership's net income amount reported in the income statement includes anticipated expenses for a discontinued operation as a single amount, and its general ledger or other books, records, and work papers provide details for the anticipated expenses under more explanatory and defined categories such as employee termination costs, lease cancellation costs, loss on sale of equipment, etc., a supporting statement that lists those categories of expenses and their details will satisfy the requirement to separately state and adequately disclose. In order to separately state and adequately disclose the employee termination costs, it isn't required that an anticipated termination cost amount be listed for each employee, or that each asset (or category of asset) be listed along with the anticipated loss on disposition.

The attached statement should have five columns. The first column has the description for the next four columns; the second column is Column (a), Expense 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), Deduction per Tax Return. For every item listed on the attached statement for line 30, columns (a) + (b) + (c) must equal column (d). Each item with amounts in columns (a), (b), (c), and (d) will be totaled and included as one line on line 30 of the face of the schedule.

Line 31. Total Expense/ Deduction Items

Enter on Part II, line 24, columns (a) through (d), as applicable, positive amounts from line 31 as negative (in parentheses) and negative amounts as positive. For example, if line 31, column (a), reflects an amount of $1 million, then report on Part II, line 24, column (a), ($1,000,000). Similarly, if line 31, column (b), reflects an amount of ($50,000), then report on Part II, line 24, column (b), $50,000.