Schedule M-3 FAQs
From Wikicpa
In 2005, the IRS issued a new schedule, Schedule M-3, that requires vastly greater detail than the present Schedule M-1, which it will replace for large corporations. The government’s goal in requiring this new schedule is greater “transparency” with regard to differences between taxable income and financial accounting income. Stated differently, the government wants taxpayers to provide up front, without an audit, far more information from which the government can then determine whether to pursue an audit. This greater transparency comes at a cost to large corporate taxpayers. A significantly increased burden in recordkeeping and reporting represents the obvious cost. A more subtle cost lies in the increased intrusion of the IRS into the details of the taxpayers’ business affairs.
Mechanics
For tax years ending on or after December 31, 2004, a corporation filing Form 1120 having total assets at the end of the year of at least $10 million is required to file Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, in lieu of Schedule M-1.
While Schedule M-1 is a brief (10 lines) reconciliation of book income to taxable income that hasn't changed in many years, Schedule M-3 is three pages in length. The first page asks for basic financial statement information while the second and third pages are dedicated to a very detailed book income to taxable income reconciliation (66 lines and 4 columns).
Although the instructions are comprehensive, they do not address all the questions that may arise in completing this new schedule. The IRS is partnering with various stakeholder groups to provide answers to questions that are not addressed in the instructions. Schedule M-3 questions should be sent to special e-mail addresses that the IRS lists on its web site - Submitting M-3 Questions. The IRS publishes and updates this list of questions and answers on its web site - FAQs for Schedule M-3.
Tip. Be sure to verify that amounts reported on Schedule M-3 agree with lines elsewhere on the schedule or on Form 1120. For example,
- Page 1, line 11 must equal Form 1120, Schedule M-2, line 2.
- Page 2, line 30, column (a) must equal Page 1, line 11.
- Page 2, line 30, column (d) must equal Form 1120, page 1, line 28.
Note. For the first year a corporation is required to file Schedule M-3, only columns (b) and (c) of the reconciliation on pages 2 and 3 must be completed . In subsequent years, all four columns must be completed.
