Other Form 1120-S Schedules Affected by Schedule M-3 Requirements

Schedule L If a non-tax-basis income statement and related non-tax-basis balance sheet is prepared for any purpose for a period ending with or within the tax year, Schedule L must be prepared showing non-tax-basis amounts. See the instructions for Part I, line 1, for a discussion of non-tax-basis income statements and related non-tax-basis balance sheets prepared for any purpose and the impact on the selection of the income statement used for Schedule M-3 and the related non-tax-basis balance sheet amounts that must be used for Schedule L.

Total assets shown on Schedule L, line 15, column (d), must equal the total assets of the corporation as of the last day of the tax year, and must be the same total assets reported by the corporation in the non-tax-basis financial statements, if any, used for Schedule M-3. If the corporation doesn't prepare non-tax-basis financial statements, Schedule L must be based on the corporation's books and records. The Schedule L balance sheet can show tax-basis balance sheet amounts if the corporation is allowed to use books and records for Schedule M-3 and the corporation's books and records reflect only tax-basis amounts.

Generally, total assets at the beginning of the year (Schedule L, line 15, column (b)) must equal total assets at the close of the prior year (Schedule L, line 15, column (d)). For each Schedule L balance sheet item reported for which there is a difference between the current opening balance sheet amount and the prior closing balance sheet amount, attach a statement that reports the balance sheet item, the prior closing amount, the current opening amount, and a short explanation of the difference. In particular, indicate if the differences occurred because of acquisitions or mergers.

For purposes of measuring total assets at the end of the year, the corporation's assets may not be netted or reduced by the corporation's liabilities. In addition, total assets may not be reported as a negative amount. If Schedule L is prepared on a non-tax-basis method, an investment in a partnership may be shown as appropriate under the corporation's non-tax-basis method of accounting, including, if required by the corporation's reporting methodology, the equity method of accounting for investments. If Schedule L is prepared on a tax-basis method, an investment by the corporation in a partnership must be shown as an asset and measured by the corporation's adjusted basis in its partnership interest. Any liabilities contributing to such adjusted basis must be shown on Schedule L as corporate liabilities. In any event, any investments or other assets reported on Schedule L can never be reported as negative amounts.

Schedule M-1 A corporation that completes Parts II and III of Schedule M-3 isn't required to complete Form 1120-S, Schedule M-1.

-2- Instructions for Schedule M-3 (Form 1120-S)

is deemed to have non-tax-basis income statements and the related non-tax-basis balance sheets for the current tax year for purposes of Schedule M-3 and Schedule L if such non-tax-basis financial statements were prepared for and presented to management, creditors, shareholders, government regulators, or any other third parties for a period ending with or within the tax year.

If a non-tax-basis income statement is prepared that is a certified non-tax-basis income statement for the period ending with or within the tax year, the corporation must check “Yes” for Part I, line 1a, and use that income statement for Schedule M-3. If no certified non-tax-basis income statement is prepared but an unaudited non-tax-basis income statement is prepared for the period ending with or within the tax year, the corporation must check “Yes” for Part I, line 1b, and use that income statement for Schedule M-3.

Order of priority in accounting standards. If two or more non-tax-basis income statements are both certified non-tax-basis income statements for the period, the income statement prepared according to the following order of priority in accounting standards must be used.

1. U.S. Generally Accepted Accounting Principles (GAAP).

2. International Financial Reporting Standards (IFRS).

3. Any other International Accounting Standards (IAS).

4. Other regulatory accrual accounting.

5. Any other accrual accounting standard.

6. Any fair market value standard.

7. Any cash basis standard.

If no non-tax-basis income statement is certified and two or more non-tax-basis income statements are prepared, the income statement prepared according to the first listed of the accounting standards listed above must be used.

If no non-tax-basis financial statements are prepared for a U.S. corporation filing Schedule M-3 (Form 1120-S), the U.S. corporation must check “No” on questions 1a and 1b, skip Part I, lines 2, 3a, and 3b, and enter the net income (loss) per the books and records of the U.S. corporation on Part I, line 4a.

interests owned or deemed to be owned under these instructions by any member of the tax consolidated group;

2. The owner of a disregarded entity is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the disregarded entity;

3. The owner of 50% or more of a corporation by vote on any day of the corporation tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the corporation during the corporation tax year;

4. The owner of 50% or more of partnership income, loss, or capital on any day of the partnership tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the partnership during the partnership tax year; and

5. The beneficial owner of 50% or more of the beneficial interest of a trust or nominee arrangement on any day of the trust or nominee arrangement tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the trust or nominee arrangement.

A reportable entity partner 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, after that 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.

1. Name.

2. Mailing address.

3. Taxpayer identification number (TIN or EIN), if applicable.

4. Entity or organization type.

5. State or country in which it is organized.

6. Date on which it first became a reportable entity partner.

7. Date for which it is reporting a change in its ownership interest in the partnership, if applicable.

8. The interest in the partnership it owns or is deemed to own in the partnership, directly or indirectly (as defined under these instructions) as of the date for which it is reporting.

9. Any change in that interest as of the date for which it is reporting.

The reportable entity partner must keep copies of required reports it makes to partnerships under these instructions. Each partnership must keep copies of the required reports it receives under these instructions from reportable entity partners.

Example 2. A, a limited liability company (LLC) filing a Form 1065 for its current tax year is owned 50% by U.S. corporation Z which files Form 1120-S. A owns 50% of each of B, C, D, and E, each also an LLC filing a Form 1065 for its current tax year. Z was first required to file Schedule M-3 (Form 1120-S) for its prior corporate tax year ended December 31 and filed its Form 1120-S with Schedule M-3 on September 15. As of September 16, Z was a reportable entity partner regarding A and, through A, regarding B, C, D, and E. On October 5, Z reports to A, B, C, D, and E, as it is required to do within 30 days of September 16, that Z is a reportable entity partner directly owning (regarding A) or deemed to own indirectly (regarding B, C, D, and E) a 50% interest. So, because Z was a reportable entity partner for its current tax year, each of A, B, C, D, and E is required to file Schedule M-3 (Form 1065) for its current tax year, regardless of whether they would otherwise be required to file Schedule M-3 for that year.