Part III. Reconciliation of Net Income (Loss) per Income Statement of Includible…

Note: Expense amounts that reduce financial accounting income must be reported on Part III, column (a), as positive amounts. Deduction amounts that reduce taxable income must be reported on Part III, column (d), as positive amounts. Amounts reported on Part II, line 27, must be the negative of the amounts reported on Part III, line 40.

Lines 1 Through 6. Income Tax Expense If the property and casualty insurance company does not distinguish between current and deferred income tax expense in its annual statement (or its books and records, if applicable), report income tax expense as current income tax expense using lines 1, 3, and 5, as applicable.

A U.S. consolidated tax group must complete lines 1 through 6 in accordance with the allocation of tax expense

Instructions for Schedule M-3 (Form 1120-PC) 23

among the members of the U.S. consolidated tax group in the financial statements (or its books and records, if applicable). If the current and deferred U.S., state, and foreign income tax expense for the U.S. consolidated tax group (income tax expense) is allocated among the members of the U.S. consolidated tax group in the group’s financial statements (or its books and records, if applicable), then each member must report its allocated income tax expense on Part III, lines 1 through 6, of that member’s separate Schedule M-3. However, if the income tax expense is not shared or allocated among members of the U.S. consolidated tax group but is retained in the parent corporation’s financial statements (or books and records, if applicable), then amounts are reported only on Part III, lines 1 through 6, of the parent’s separate Schedule M-3.

Line 7. Foreign Withholding Taxes Report in line 7, column (a), the amount of foreign withholding taxes included in financial accounting income on Part I, line 11. If the property and casualty insurance company is deducting foreign tax, use column (b) or (c), as applicable, to correct for any difference between foreign withholding tax included in statutory accounting net income and the amount of foreign withholding taxes being deducted in the return. If the property and casualty insurance company is crediting foreign withholding taxes against the U.S. income tax liability, use column (b) or (c), as applicable, to negate the amount reported in column (a).

Line 8. Stock Option Expense Report in line 8, column (a), amounts expensed on Part I, line 11, that are attributable to all stock options. Report on line 8, column (d), deduction amounts attributable to all stock options.

Line 9. Other Equity-Based Compensation Report on line 9 any amounts for equity-based compensation or consideration that are reflected as expenses for statutory 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 (for example, on Part III, line 8, for stock options expense). Examples of amounts reportable on line 9 include payments attributable to employee stock purchase plans (ESPPs), phantom stock options, phantom stock units, stock warrants, stock appreciation rights, and restricted stock, regardless of whether such payments are made to employees or non-employees, or as payment for property or compensation for services.

Line 10. Meals and Entertainment Report on line 10, column (a), any amounts paid or accrued by the property and casualty insurance company during the tax year for meals, beverages, and entertainment that are accounted for in the company’s statutory income statement or the income and expense accounts maintained in the property and casualty insurance company’s books and records. Report only amounts not otherwise reportable elsewhere on Schedule M-3, Parts II and III.

Line 11. Fines and Penalties Report on line 11 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 statutory accounting income (paid or accrued) must be included on line 11, 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 property and casualty insurance company’s statutory income statement or the income and expense accounts maintained in the property and casualty insurance company’s books and records. Also report on line 11, column (a), the reversal of any overaccrual of any amount described in this paragraph. See section 162(f) for additional guidance.

Report on line 11, column (d), any such amounts as 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.

Do not report on Part III, line 11, amounts required to be reported in accordance with instructions for Part III, line 12.

Do not report on Part III, line 11, amounts recovered from insurers or any other indemnitors for any fines and penalties described above.

Line 12. Judgments, Damages, Awards, and Similar Costs Report on line 12, 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 12, column (a), the reversal of any overaccrual of any amount described in this paragraph.

Report on line 12, column (d), any such amounts as are described in the preceding paragraph that are includible in taxable income, regardless of the statutory accounting period in which such amounts were or are included in statutory accounting net income. Complete columns (b) and (c), as appropriate.

Do not report on Part III, line 12, amounts required to be reported in accordance with instructions for Part III, line 11.

Do not report on Part III, line 12, amounts recovered from insurers or any other indemnitors for any judgments, damages, awards, or similar costs described above.

Line 13. Parachute Payments Report on line 13, column (a), the total expense included in statutory accounting net income on Part I, line 11, that is subject to section 280G. Report in column (b) or (c), as

24 Instructions for Schedule M-3 (Form 1120-PC)

applicable, the amount of nondeductible parachute payments pursuant to section 280G, and report in column (d) the deductible amount of compensation after any excess parachute payment limitations under section 280G. If a payment is subject to limitation under both sections 162(m) and 280G, report the total payment on line 13.

Line 14. Compensation With Section 162(m) Limitation Report on line 14, column (a), the total amount of non-performance-based current compensation expense for the corporate officers to whom section 162 (m) applies. Report in column (b) or (c), as applicable, the nondeductible amount of current compensation in excess of $1 million ($500,000 if the corporation receives or has received financial assistance under the Treasury Asset Relief Program (TARP)). Report the deductible compensation in column (d). If a payment is subject to limitation under both sections 162(m) and 280G, report the total payment on Part III, line 13, Parachute payments. See Regulations section 1.162-27(g) for the interaction between sections 162(m) and 280G.

Line 15. Pension and Profit-Sharing Report on line 15 any amounts attributable to the property and casualty insurance company’s pension plans, profit-sharing plans, and any other retirement plans.

Line 16. Other Post-Retirement Benefits Report on line 16 any amounts attributable to other post-retirement benefits not otherwise includible on Part III, line 15 (for example, retiree health and life insurance coverage, dental coverage, etc.).

Line 17. Deferred Compensation Report on line 17, column (a), any compensation expense included in the net income (loss) amount reported on Part I, line 11, that is not deductible for U.S. income tax purposes in the current tax year and that was not reported elsewhere on Schedule M-3. Report on line 17, column (d), any compensation deductible in the current tax year that was not included in the net income (loss) amount reported on Part I, line 11, for the current tax year and that is not reportable elsewhere on Schedule M-3. For example, report originations and reversals of deferred compensation subject to section 409A on line 17.

Line 20. Charitable Contribution Limitation/ Carryforward Report the excess of contributions paid during the tax year (reported in column (a)) over amounts deducted as charitable contributions as negative amounts on line 20, columns (b) and (c), as applicable, and the excess of amounts deducted as charitable contributions under tax rules over such amounts expensed under financial accounting rules as positive amounts on line 20, columns (b) and (c), as applicable.

If the corporation utilizes a contribution carryforward in the current tax year, report the carryforward utilized as a positive amount in columns (b), (c), and (d), as applicable.

When a consolidated income tax return is being filed, Schedule M-3 adjustments for the amount of charitable contributions in excess of the limitation, or for charitable contribution carryforward utilized, should not be made on the separate consolidating Schedules M-3 of the includible corporations, but on the separate consolidating Schedule M-3 for consolidation eliminations (or on Form 8916 in the case of a mixed group). See Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers , earlier.

Line 21. Write-Off of Premium Receivables Report on line 21 the amount of premium receivables written off rather than on line 32.

Line 22. Guarantee Fund Assessments Report on line 22 all special purpose and guaranty fund assessments accrued or deducted for the tax year.

Line 23. Current-Year Acquisition or Reorganization Investment Banking Fees Report on line 23 any investment banking fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, stock or assets) or a tax-free reorganization. Report on this line any investment banking fees 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. Also, include on line 23 investment banking fees incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or an initial public stock offering.

Line 24. Current-Year Acquisition or Reorganization Legal and Accounting Fees Report on line 24 any legal and accounting fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, stock or assets) or tax-free reorganization. Report on this line any legal and accounting fees 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. Also, include on this line legal and accounting fees incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or an initial public stock offering.

Line 19. Charitable Contribution of Intangible Property Report on line 19 any charitable contribution of intangible property, for example, contributions of:

• Intellectual property, patents (including any amounts of additional contributions allowable by virtue of income earned by donees subsequent to the year of donation), copyrights, and trademarks;

• Securities (including stocks and their derivatives, stock options, and bonds);

• Conservation easements (including scenic easements or air rights);

• Railroad rights of way;

• Mineral rights; and

• Other intangible property.

Instructions for Schedule M-3 (Form 1120-PC) 25

Line 25. Current-Year Acquisition/ Reorganization Other Costs Report on line 25 any other fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, stock or assets) or a tax-free reorganization not otherwise reportable on Schedule M-3 (for example, Part III, line 23 or 24). Report on this line any 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. Also, include on this line 25 other acquisition/reorganization costs incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or an initial public stock offering.

Line 26. Amortization of Acquisition, Reorganization, and Start-Up Costs Report on line 26 amortization of acquisition, reorganization, and start-up costs. For purposes of columns (b), (c), and (d), include amounts amortizable under section 167, 195, or 248.

Line 27. Amortization/ Impairment of Goodwill, Insurance in Force, and Ceding Commissions Report on line 27 amortization of goodwill, insurance in force, and ceding commissions or amounts attributable to the impairment of goodwill, insurance in force, and ceding commissions. Attach a statement separately stating the amounts for each item.

Line 28. Other Amortization or Impairment Write-Offs Report on line 28 any amortization or impairment write-offs not otherwise includible on Schedule M-3.

Line 29. Discounting of Unpaid Losses (Section 846) Report on line 29, column (a), the change in liability for unpaid losses and loss adjustment expense net of reinsurance as included in Part I, line 11. Report in column (d) the amount of change in the same liability valued for tax purposes included in the subtotal on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable). Do not include paid losses on line 29. Indicate amounts in columns (b) and (c), as appropriate. Attach a statement supporting columns (b) and (c) that identifies the beginning and end of the taxable year amounts of discounting, as required by section 846. Include any other differences between columns (a) and (d) by separate title as well as beginning and end of tax year amounts.

Line 30. Reduction of Loss Deduction (Section 832(b)(5)(B)) Report the proration adjustment required by section 832(b)(5)(B) as a negative amount on line 30, column (d). Report amounts in columns (b) and (c), as appropriate. Do not enter an amount on line 30, column (a).

Line 31. Depreciation Report on line 31 any depreciation expense that is not required to be reported elsewhere on Schedule M-3 (for example, on Part II, line 9, 10, or 11).

Line 32. Bad Debt Expense and Agency Balances Written Off Report on line 32, column (a), any amounts attributable to an allowance for uncollectible accounts receivable or actual write-offs of accounts receivable included in Part I, line 11. Also report on this line agency balances written off per the annual statement. Report in column (d) the amount of bad debt expense deductible for federal income tax purposes in accordance with section 166.

Line 33. Reserved for Future Use No entry is made on line 33.

Line 34. Corporate Owned Life Insurance Premiums Report on line 34 all amounts of insurance premiums attributable to any life insurance policy if the insurance company is, directly or indirectly, a beneficiary under the policy or if the policy has a cash value. Report in column (d) the amount of the premiums that are deductible for federal income tax purposes.

Line 35. Purchase Versus Lease (for Purchasers and/or Lessees) Note: Also, see the instructions for sellers and/or lessors in the instructions for Part II, line 17.

Asset transfer transactions with periodic payments characterized for statutory 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 statutory 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 statutory accounting purposes. Report interest expense for such transactions on Part III, line 36, in column (a) or (d), as applicable. Report depreciation expense or deductions for such transactions on Part III, line 31, in column (a) or (d), as applicable. Use columns (b) and (c) of Part III, lines 31, 35, and 36, as applicable, to report the differences between columns (a) and (d) for such recharacterized transactions.

Example 19. U.S. property and casualty insurance company X acquired property in a transaction that, for statutory accounting purposes, X treats as a lease. X is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. Because of its

26 Instructions for Schedule M-3 (Form 1120-PC)

terms, the transaction is treated for U.S. income tax purposes as a purchase and X must treat the periodic payments it makes partially as payment of principal and partially as payment of interest. In its annual statement, X treats the difference between the statutory accounting and U.S. income tax treatment of this transaction as a temporary difference. During its current tax year, X reports in its annual statement $1,000 of gross rental expense that, for U.S. income tax purposes, is recharacterized as a $700 payment of principal and a $300 payment of interest, accompanied by a depreciation deduction of $1,200 (based on other facts). On Schedule M-3, X must report the following on Part III, line 35: column (a), $1,000, its statutory accounting gross rental expense; column (b), ($1,000); and column (d), zero. On Part III, line 36, X reports zero in column (a) and $300 in columns (b) and (d) for the interest deduction. On Part III, line 31, X reports zero in column (a) and $1,200 in columns (b) and (d) for the depreciation deduction.

Line 36. Interest Expense Report on Part III, line 36, column (a), the total amount of interest expense included on Part I, line 11, and report on Part III, line 36, column (d), the total amount of interest expense included on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable), that is not 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 expense that are treated as some other form of expense for statutory accounting purposes, or vice versa. For example, adjustments to interest expense resulting from adjustments made in accordance with the instructions for Part III, line 35, Purchase versus lease (for purchasers and/or lessees), should be made on line 36, columns (b) and (c), as applicable.

Complete Part III of Form 8916-A. Enter the amounts from Form 8916-A, Part III, line 5, columns (a) through (d), on Schedule M-3, Part III, line 36, columns (a) through (d), as applicable. Attach Form 8916-A.

Do not report on Form 8916-A and line 36 amounts reported in accordance with the instructions for Part II, lines 9, 10, 11, and 12.

Line 37. Research and Experimental Expenditures P.L. 119-21 adds new section 174A to the Internal Revenue Code. Section 174A(a) allows taxpayers to deduct amounts paid or incurred for domestic research and experimental expenditures in tax years beginning after December 31, 2024.

For U.S. income tax purposes, you can deduct your domestic research or experimental expenditures as current business expenses when incurred, elect to capitalize and amortize your domestic research or experimental expenditures in equal amounts over a period of 60 months or more (beginning with the month in which you first realize benefits from the expenditures), or elect to amortize your research or experimental expenditures ratably over a 10-year period (beginning with the taxable year in which the expenditure was made). This includes any domestic amounts paid or incurred in connection with the development of software.

You must capitalize and amortize research or experimental expenditures attributable to foreign research conducted outside the United States, Puerto Rico, or any territory of the United States ratably over a 15-year period beginning with the midpoint of the tax year in which the expenditures were paid or incurred. This includes any foreign amounts paid or incurred in connection with the development of software.

For more information, see section 174 and section 174A. For rules prior to P.L. 119-21, see Notice 2023-63, as modified by Notice 2024-12. See Rev. Proc. 2025-28 for procedures to begin applying section 174A to domestic research or experimental expenditures, as well as transition rules provided in P.L. 119-21 that allow taxpayers to recover remaining unamortized amounts attributable to domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2025, that were capitalized under section 174 for such years.

Report in column (a) the amount of research and development expenditures reported as an expense on the corporation's financial statements (or books and records, if applicable). Report in column (d) the amount of amortization deductions of specified research or experimental expenditures (as defined prior to amendment by P.L. 119-21), foreign research or experimental expenditures, and domestic research or experimental expenditures included on Form 4562, Part VI, line 44, or domestic research or experimental expenditures included in total deductions on Form 1120-PC, Schedule A, line 32. Any deductions taken under section 174A(a) and any amortization deductions allowable under sections 174(b), 174A(c), or 59(e) related to such costs are reported in column (b) to the extent they differ from related amounts taken as expenses on the corporation's financial statements (or books and records, if applicable). Report any difference in timing between financial statement research or development costs and tax deductions for research and experimental expenditures in column (b).

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). For example, if the taxpayer’s financial accounting method does not specify otherwise, column (b) adjustments include adjustments for timing differences between financial and tax accounting for:

Example 20. Corporation X is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. During its current tax year, X incurred $100,000 of research or development costs that X recognized as an expense in its financial statements. The $100,000 costs

1. Deferral and amortization of research expenditures,

2. Section 59(e) election,

3. Reduction of sections 174 and 174A expenditures under section 280C or section 482,

4. Costs attributable to obtaining a patent, and

5. Research in social sciences.

Instructions for Schedule M-3 (Form 1120-PC) 27

are domestic research or experimental expenditures, and X first realized benefits from the expenditures in January of the current year. The expenditures result in a process that is marketable but not patentable and which has no determinable useful life. In compliance with section 174A(c), X makes an election to capitalize and amortize its domestic research or experimental expenditures over a period of 60 months. Accordingly, X must report $100,000 in column (a), $80,000 in column (b), and $20,000

[($100,000/60 months) × 12 months] in column (d).

Example 21. Corporation X is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. During its current tax year, X incurred $10,000 of research and development costs related to social sciences that it recognized as an expense in its financial statements. Because such costs are not allowable domestic research or experimental expenditures under section 174A or foreign research or experimental expenditures under section 174, X must report $10,000 in column (a), permanent difference ($10,000) in column (c), and $0 in column (d). If such costs are otherwise deductible for U.S. income tax purposes, X must report this item of expense on Part III, line 39, Other expense/ deduction items with differences.

Example 22. Corporation X is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. During its current tax year, X paid $75,000 to acquire or in-license intangible assets under a collaborative arrangement with another company that X recognized as a research and development expense in its financial statements. Because payments made to acquire rights to a product or technology are excluded from the definition of research and experimental expenditures for purposes of both sections 174 and 174A, X must report $75,000 in column (a), ($75,000) in column (c), and $0 in column (d). X must report any amortization otherwise allowable related to the payments on Part III, line 28, Other amortization or impairment write-offs.

Line 38. Section 118 Exclusion Report on line 38 any inducements received in the current year that are treated as contributions to the capital of a corporation by a non-shareholder. Report in column (a) any income amount as a negative number and any expense amount as a positive number.

Under the general rule, any contribution in aid of construction or any contribution by a government entity to the capital of a corporation is not eligible for exclusion from income under section 118. The following nonshareholder contributions to capital are not eligible for exclusion under section 118.

• Any contribution in aid of construction or any other contribution as a customer or potential customer.

• Any contribution by any civic group.

• Any contribution by any governmental entity, except any contribution made after December 22, 2017, and made pursuant to a master development plan that was approved prior to December 22, 2017, by a governmental entity.

Contributions in aid of construction for regulated wa- ter and sewerage disposal utility companies. Under a special rule, any amount of money or property received after December 31, 2020, as a contribution in aid of

construction or a contribution to the capital of a regulated public utility which provides water or sewerage disposal services is eligible for exclusion from income under section 118. Include amounts treated as contribution in aid of construction under this provision on line 36. For more information, see section 118.

Corporations must identify on an accompanying statement referencing line 38 the fair market value of land or other property (including cash) provided to the corporation by any non-shareholder, including a governmental unit, or civic group, as an inducement, or for any other purpose. Include inducements for the corporation to locate its business in a particular state, municipality, community, or locality for the purpose of enabling the corporation to expand its existing operating facilities including corporate headquarters, distribution center(s), factory(ies), etc. (“inducements”).

On the accompanying statement also identify any inducements that include refundable or transferable tax credits, including transferable credits that were sold.

The statement must separately state, adequately disclose, and identify all of the dollar amounts summarized by this line. An accompanying statement is required even if there are no dollar amounts reported on line 38.

Line 39. Other Expense/Deduction Items With Differences Separately state and adequately disclose on Part III, line 39, all items of expense/deduction that are not otherwise listed on Part III, lines 1 through 38.

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 Schedule M-3 for line 39 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 corporation’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 workpapers 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 is not 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.

28 Instructions for Schedule M-3 (Form 1120-PC)

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. Every item listed on the attached statement for line 39 always must have columns (a) + (b) + (c) = (d). Each item with amounts in columns (a), (b), (c), and (d) will be totaled and included as one line on Part III, line 39.

Comprehensive income. If any “comprehensive income” as defined by SFAS No. 130 is reported on this line, describe the item(s) in detail as, for example, “foreign currency translation adjustments—comprehensive income” and “gains and losses on available-for-sale securities—comprehensive income.”

Reserves and contingent liabilities. Report on line 39 amounts related to the change in each reserve or contingent liability that is not required to be reported elsewhere on Schedule M-3. For example, (1) amounts relating to changes in reserves for litigation must be reported on Part III, line 12, Judgments, damages, awards, and similar costs; and (2) amounts relating to changes in reserves for uncollectible accounts receivable must be reported on Part III, line 32, Bad debt expense and/or agency balances written off. (See Example 9, earlier and Example 23, later.)

Report on Part III, line 39, the amortization of various items of prepaid expense, such as prepaid subscriptions and license fees, prepaid insurance, etc.

Report on line 39, column (a), expenses included in net income reported on Part I, line 11, that are related to

reserves and contingent liabilities. Report on line 39, column (d), amounts related to liabilities for reserves and contingent liabilities that are deductible in the current tax year for U.S. income tax purposes. Examples of items that must be reported on line 39 include restructuring reserves, reserves for discontinued operations, and reserves for acquisitions and dispositions. Only report on line 39 items that are not required to be reported elsewhere on Schedule M-3, Parts II and III.

Example 23. Property and casualty insurance company Q is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. On July 1 of each year, Q has a fixed liability for its annual insurance premiums on its home office building that provides a 12-month coverage period beginning July 1 through June 30. In addition, Q historically prepays 12 months of advertising expense on July 1. On July 1, Q prepays its insurance premium of $500,000 and advertising expenses of $800,000. For statutory accounting purposes, Q capitalizes and amortizes the prepaid insurance and advertising over 12 months. For U.S. income tax purposes, Q deducts the insurance premium when paid and amortizes the advertising over the 12-month period. In its annual statement, Q treats the differences attributable to the financial accounting treatment and U.S. income tax treatment of the prepaid insurance and advertising as temporary differences.

Q also has a legal reserve where $300,000 was expensed for financial accounting purposes and a ($100,000) temporary difference was calculated to arrive at the income tax deduction of $200,000. The statement attached to Q’s return for Part III, line 39, must be separately stated and adequately disclosed as follows:

Line 40. Total Expense/ Deduction Items Report on Part II, line 27, columns (a) through (d), as applicable, the negative of the amounts reported on Part III, line 40, columns (a) through (d), as applicable. Report positive amounts as negative and negative amounts as

positive. For example, if Part III, line 40, column (a), reflects an amount of $1 million, then report on Part II, line 27, column (a), ($1 million). Similarly, if Part III, line 40, column (b), reflects an amount of ($50,000), then report on Part II, line 27, column (b), $50,000.

Instructions for Schedule M-3 (Form 1120-PC) 29