Reporting Requirements for Parts II and III

Except for mixed group consolidation, the number of Parts II must equal the number of Parts III filed by the corporation. Mixed groups should see Schedule M-3 Consolidation for Mixed Groups (1120/L/PC) , earlier.

General Reporting Requirements If an amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b), the amount must be reported in Part II, line 12, columns (a), (b), (c), and (d), as applicable, regardless of whether the amount would otherwise be reported on Schedule M-3, Part II or Part III. Thus, if a taxpayer files Form 8886, Reportable Transaction Disclosure Statement, the amounts attributable to that reportable transaction must be reported in Part II, line 12.

A life insurance company is required to report in Parts II and III, column (a) the amount of any item specifically listed on Schedule M-3 that is in any manner included in the life insurance company’s current year annual statement net income (loss) or in an income or expense account maintained in the life insurance company’s books and records, even if there is no difference between that amount and the amount included in taxable income unless (a) otherwise provided in these instructions, or (b) the amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b) and is, therefore, reported in Part II, line 12. For example, with the exception of interest income reflected on a Schedule K-1 received by a life insurance company as a result of the life insurance company’s investment in a partnership or other pass-through entity, all interest income, whether from unconsolidated affiliated companies, third parties, banks, or other entities; whether from foreign or domestic sources; whether taxable or exempt from tax; and regardless of how or where the income is classified in the life insurance company’s annual statement, must be included in Part II, line 13, column (a). Likewise, all fines and penalties paid to a government or other authority for the violation of any law for which fines or penalties are assessed must be included in Part III, line 12, column (a), regardless of the government authority that imposed the fines or penalties; regardless of whether the fines or penalties are civil or criminal; regardless of the classification, nomenclature, or terminology attached to 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 life insurance company’s summary of operations or the income and expense accounts maintained in the life insurance company’s books and records.

If a life insurance company would be required to report in Parts II and III, column (a), the amount of any item specifically listed on Schedule M-3 in accordance with the preceding paragraph, except that the life insurance company has capitalized the item of income or expense and reports the amount in its annual statement or in asset and liability accounts maintained in the life insurance company’s books and records, the life insurance company must report the proper tax treatment of the item in columns (b), (c), and (d), as applicable.

14 Instructions for Schedule M-3 (Form 1120-L) (12-2025)

Furthermore, in applying the two preceding paragraphs, a life insurance company is required to report in Parts II and III, column (a), the amount of any item specifically listed on Schedule M-3 that is included in the life insurance company’s annual statement or exists in the life insurance company’s books and records, regardless of the nomenclature associated with that item in the annual statement or books and records. Accurate completion of Schedule M-3 requires reporting amounts according to the substantive nature of the specific line items included on Schedule M-3 and consistent reporting of all transactions of like substantive nature that occurred during the tax year. For example, all expense amounts that are included in the annual statement or exist in the books and records that represent some form of “Bad debt expense” must be reported in Part III, line 33, column (a), regardless of whether the amounts are recorded or stated under different nomenclature in the annual statement or the books and records, such as “Provision for doubtful accounts”; “Expense for uncollectible notes receivable”; or “Impairment of trade accounts receivable.” Likewise, as stated in the preceding paragraph, all fines and penalties must be included in Part III, line 12, column (a), regardless of the terminology or nomenclature attached to them by the life insurance company in its books and records or annual statement.

With limited exceptions, Part II includes lines for specific items of income, gain, or loss (income items). (See Part II, lines 1 through 24.) If an income item is described in Part II, lines 1 through 24, report the amount of the item on the applicable line, regardless of whether there is a difference for the item. If there is a difference for the income item, or only a portion of the income item has a difference and a portion of the item does not have a difference, and the item is not described in Part II, lines 1 through 24, report and describe the entire amount of the item in Part II, line 25.

With limited exceptions, Part III includes lines for specific items of expense or deduction (expense items). (See Part III, lines 1 through 38.) If an expense item is described in Part III, lines 1 through 38, report the amount of the item on the applicable line, regardless of whether there is a difference for the item. If there is a difference for the expense item, or only a portion of the expense item has a difference and a portion of the item does not have a difference and the item is not described in Part III, lines 1 through 38, report and describe the entire amount of the item in Part III, line 39.

If there is no difference between the annual statement amount and the taxable amount of an entire item of income, loss, expense, or deduction and the item is not described or included in Part II, lines 1 through 24, or Part III, lines 1 through 38, report the entire amount of the item in Part II, line 28 columns (a) and (d).

Special instructions for Part II, lines 25 and 28, and Part III, line 39. Whether an income (loss) item is reported in Part II, line 25, or in Part II, line 28, or a given expense/deduction item in Part III, line 39, or in Part II, line 28, is determined separately by each member of the U.S. consolidated tax group and not at the U.S. consolidated tax group level. For example, U.S. corporation P has two subsidiaries, A and B, that are

included in P’s consolidated financial statements and in P’s consolidated U.S. income tax return. For financial statement purposes, P, A, and B recognize real estate tax expense when accrued. For U.S. income tax purposes, P and A recognize such expense consistent with the method used for financial statement purposes, whereas B recognizes such deduction based on a method different from that used for financial statement purposes. P and A must report this expense/deduction in columns (a) and (d) in Part II, line 28. B must report the following in Part III, line 39, in column (a), B’s expense recognized in the financial statements when accrued; in column (d), B’s real estate tax expense recognized for U.S. income tax purposes; and in column (b) or (c), as applicable, the difference between B’s real estate tax expense in its financial statements and its real estate tax deduction recognized for U.S. taxable income purposes.

Separately stated and adequately disclosed. Each difference reported in Parts II and III must be separately stated and adequately disclosed. In general, a difference is adequately disclosed if the difference is labeled in a manner that clearly identifies the item or transaction from which the difference arises. For further guidance about adequate disclosure, see Regulations section 1.6662-4(f). If a specific item of income, gain, loss, expense, or deduction is described in Part II, lines 9 through 24, or Part III, lines 1 through 38, and the line does not indicate to “attach statement” and the specific instructions for the line do not call for an attachment of a statement, then the item is considered separately stated and adequately disclosed if the item is reported on the applicable line and the amount(s) of the item(s) are reported in the applicable columns of the applicable line. See the instructions for Part II, lines 1 through 8, later, for specific additional information to be provided for these particular lines.

Note: A statement or explanation may be attached to any line even if none is required.

Except as otherwise provided, differences for the same item must be combined or netted together and reported as one amount on the applicable line of Schedule M-3. However, differences for separate items must not be combined or netted together. Each item (and corresponding amount attributable to that item) must be separately stated and adequately disclosed on the applicable line of Schedule M-3, or any statement required to be attached, even if the amounts are below a certain dollar amount.

Required statements for Part II, line 25, and Part III, line 39. A separate statement must be attached to Schedule M-3 (Form 1120-L) that includes a detailed description of each item and adjustment entered in Part II, line 25, and Part III, line 39.

The description for each amount entered in column (a) must be readily identifiable to the name of the account in the financial statements or books and records of the taxpayer, under which the amount in column (a) was recorded in the accounting records. Also, the description for each amount entered in column (a) must include detailed information supporting each adjustment reported in columns (b) and (c), including how the adjustment is identified in the accounting records. The entire description

Instructions for Schedule M-3 (Form 1120-L) (12-2025) 15

is considered the tax description for the amount reported in column (d) for each item reported in Part II, line 25, or Part III, line 39.

Each description should adequately describe all four columns of Part II, line 25, or Part III, line 39. If additional information is required to provide an acceptable description, attach a supporting statement.

Example 8. Life insurance company C is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. C placed in service 10 depreciable fixed assets in previous years. C’s total depreciation expense for its current tax year for five of the assets is $50,000 for summary of operations purposes and $70,000 for U.S. income tax purposes. C’s total annual depreciation expense for its current tax year for the other five assets is $40,000 for summary of operations purposes and $30,000 for U.S. income tax purposes. In its annual statement, C treats the differences between annual statement and U.S. income tax depreciation expense as giving rise to temporary differences that will reverse in future years. C must combine all of its depreciation adjustments. Accordingly, C must report in Part III, line 32, for its current tax year income statement depreciation expense of $90,000 in column (a), a temporary difference of $10,000 in column (b), and U.S. income tax depreciation expense of $100,000 in column (d).

Example 9. Life insurance company D is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. On December 31 of the current year, D establishes two reserve accounts in the amount of $100,000 for each account. One reserve account is an allowance for agency balances that are estimated to be uncollectible. The second reserve is an estimate of future office closure expenses. In its annual statement, D treats the two reserve accounts as giving rise to temporary differences that will reverse in future years. The two reserves are expenses in D’s current annual statement but are not deductions for U.S. income tax purposes in the current year. D must not combine the Schedule M-3 differences for the two reserve accounts. D must report the amounts attributable to the allowance for bad debts in Part III, line 33, Bad debt expense/agency balances written off, and must separately state and adequately disclose the amount attributable to the other reserve, office closure costs, on a required, attached statement that supports the amounts in Part III, line 39.

D must also provide a description for each reserve that meets the requirements for Part III, line 39, discussed earlier under Required statements for Part II, line 25, and Part III, line 39. In this example, an acceptable description would be “Future Office Closure Expense Reserve.”

Note: There is no need to add the title of the reserve account to the description if the account name for the amount in column (a) is already part of the adjustment description.

Example 10. Life insurance company F had $100 of meal expenses and $100 of entertainment expenses. Therefore, F deducted $200 on its income statement. For federal income tax purposes, the entire $100 of meal expenses are subject to the 50% limitation under section 274(n). The $100 of entertainment expenses are

nondeductible under section 274(a). F must report in Part III, line 11, $200 in column (a), $150 in column (c), and $50 in column (d). F must report all its meal and entertainment expenses only on this line whether there is a difference or not because meal and entertainment expenses are specifically described.