Page 18 of 28 Fileid: … 20schm-3/202211/a/xml/cycle06/source 11:55 - 30-Nov-2022
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
loss and the $5 million loss will be
adequately disclosed if J attaches a
supporting statement for line 12 that
lists each of the sequentially numbered
forms, Form 8886-X1 and Form
8886-X2, and with respect to each
reportable transaction reports the
appropriate amounts required for Part II,
line 12, columns (a) through (d).
Alternatively, J's disclosures will be
adequate if the description provided for
each loss on the supporting statement
includes the names and tax shelter
registration numbers, if any, disclosed
on the applicable Form 8886, identifies
the type of reportable transaction for the
loss, and reports the appropriate
amounts required for Part II, line 12,
columns (a) through (d). J must report
the losses attributable to the other five
abandonment losses on Part II, line 23e,
regardless of whether a difference
exists for any or all of those
abandonment losses.
Example 16. Corporation K is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. K enters into a
transaction with contractual protection
that is a reportable transaction
described in Regulations section
1.6011-4(b)(4). This reportable
transaction is the only reportable
transaction for K's current tax year and
results in a $7 million capital loss for
both financial accounting purposes and
U.S. income tax purposes. Although the
transaction does not result in a
difference, K is required to report on
Part II, line 12, the following amounts:
($7 million) in column (a), zero in
columns (b) and (c), and ($7 million) in
column (d). The transaction will be
adequately disclosed if K attaches a
supporting statement for line 12 that (a)
sequentially numbers the Form 8886
and refers to the sequentially numbered
Form 8886-X1, and (b) reports the
applicable amounts required for line 12,
columns (a) through (d). Alternatively,
the transaction will be adequately
disclosed if the supporting statement for
line 12 includes a description of the
transaction; the name and tax shelter
registration number, if any; and the type
of reportable transaction disclosed on
Form 8886.
Line 13. Interest Income
Report on Part II, line 13, column (a),
the total amount of interest income
included on Part I, line 11, and report on
Part II, line 13, column (d), the total
amount of interest income included on
Form 1120, page 1, line 28, that is not
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 Part II, line 18, should be
made in columns (b) and (c) of this
line 13.
Complete Part II of Form 8916-A.
Enter the amounts from line 6, columns
(a) through (d) of Form 8916-A, on
Schedule M-3, Part II, line 13, columns
(a) through (d), as applicable. Attach
Form 8916-A.
Do not report on this line 13 or
include on Form 8916-A amounts
reported in accordance with the
instructions for Part II, lines 9, 10, 11,
12, and 22.
Note. Any corporation that files Form
1120 (or Form 1120-C) that (a) is
required to file Schedule M-3 (Form
1120) and has less than $50 million in
total assets at the end of the tax year, or
(b) is not required to file Schedule M-3
and voluntarily files Schedule M-3, is not
required to file Form 8916-A, but may
voluntarily do so.
Line 14. Total Accrual to Cash
Adjustment
This line is completed by a corporation
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 Part II, line 12, the
corporation must report on Part II,
line 14, 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 31).
Example 17. Corporation L is a
calendar year taxpayer that files and
entirely completes Schedule M-3 for its
current tax year. L prepares financial
statements in accordance with GAAP
using an overall accrual method of
accounting. L uses an overall cash
method of accounting for U.S. income
tax purposes. L's financial statements
for the year ending December 31 report
accounts receivable of $35,000, an
allowance for bad debts of $10,000, and
accounts payable of $17,000 related to
current year acquisition and
reorganization legal and accounting
fees. In addition, for L's year ending
December 31, L reported financial
statement depreciation expense of
$15,000 and depreciation for U.S.
income tax purposes of $25,000. For L's
current tax year using an overall cash
method of accounting, L does not
recognize the $35,000 of revenue
attributable to the accounts receivable,
cannot deduct the $10,000 allowance
for bad debt, and cannot deduct the
$17,000 of accounts payable. In its
financial statements, L treats both the
difference in overall accounting
methods used for financial statement
and U.S. income tax purposes and the
difference in depreciation expense as
temporary differences. L must combine
all adjustments attributable to the
differences related to the overall
accounting methods on Part II, line 14.
As a result, L must report on Part II,
line 14, $8,000 in column (a) ($35,000 -
$10,000 - $17,000), ($8,000) in column
(b), and zero in column (d). L must not
report the accrual to cash adjustment
attributable to the legal and accounting
fees on Part III, line 24, Current year
acquisition or reorganization legal and
accounting fees. Because the difference
in depreciation expense does not relate
to the use of the cash or accrual method
of accounting, L must report the
depreciation difference on Part III,
line 31, Depreciation, and report
$15,000 in column (a), $10,000 in
column (b), and $25,000 in column (d).
Line 15. Hedging Transactions
Report on line 15, column (a), the net
gain or loss from hedging transactions
included 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 15.
-18-
Instructions for Schedule M-3 (Form 1120)