Reporting Requirements for Parts II and III

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 columns (a), (b), (c), and (d), as applicable, of Part II, line 10, regardless of whether the

amount would otherwise be reported on Schedule M, Part II or Part III. So, if a taxpayer is required to file Form 8886, Reportable Transaction Disclosure Statement, the amounts attributable to that reportable transaction must be reported on Part II, line 10.

A corporation is required to report in column (a) of Parts II and III the amount of any item specifically listed on Schedule M-3 that is in any manner included in the corporation's current year financial statement net income (loss) or in an income or expense account maintained in the corporation's books and records, even if there is no difference between that amount and the amount included in total income (loss) 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) so it is reported on Part II, line 10. For example, with the exception of interest income reflected on a Schedule K-1 received by a corporation as a result of the corporation's investment in a partnership or other pass-through entity, all interest income included on Part I, line 11, whether from affiliated companies, third parties, banks, or other entities, whether from foreign or domestic sources, whether taxable or exempt from tax, and whether classified as some other type of income for U.S. income tax purposes (such as dividends), must be included on Part II, line 11, column (a). Likewise, all fines and penalties included in Part I, line 11, paid to a government or other authority for the violation of any law for which fines or penalties are assessed must be included on Part III, line 9, 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.

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

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reserves are expenses in D's current financial statements but aren't deductions for U.S. income tax purposes in its current tax years. D mustn't combine the Schedule M-3 differences for the three reserve accounts. D must report the amounts attributable to the allowance for uncollectible accounts receivable on Part III, line 25, and must separately state and adequately disclose the amounts attributable to each of the other two reserves, coupons outstanding and warranty costs, on a required, attached statement that supports the amounts at Part III, line 31.

D must also provide a description for each reserve that meets the requirements for Part III, line 31, discussed earlier under Required statements for Part II, line 22, and Part III, line 31 . In this example, an acceptable description would be "Coupon Issue Reserves - Rewards Expense" and "Future Warranty Expense Reserve."

There is no need to add the title

TIP 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 9. Corporation E is a calendar year taxpayer that files and entirely completes Schedule M-3 for its current tax year. On January 2 of its current tax year, E establishes an allowance for uncollectible accounts receivable (bad debt reserve) of $100,000. During its current tax year, E increased the reserve by $250,000 for additional accounts receivable that may become uncollectible. Additionally, during its current tax year, E decreases the reserve by $75,000 for accounts receivable that were discharged in bankruptcy during its current tax year. The balance in the reserve account on December 31 of its current tax year is $275,000. The $100,000 amount to establish the reserve account and the $250,000 to increase the reserve account are expenses on E's current tax year financial statements but aren't deductible for U.S. income tax purposes in its current tax year. However, the $75,000 decrease to the reserve is deductible for U.S. income tax purposes in its current tax year. In its financial statements, E treats the reserve account as giving rise to a temporary difference that will reverse in future tax years. E must report on Part III, line 25, for its current tax year income statement bad debt expense of $350,000 in column (a), a temporary difference of

doesn't have a difference and the item isn't described in Part III, lines 1 through 28, report and describe the entire amount of the item on Part III, line 31.

If there is no difference between the financial accounting amount and the taxable amount of an entire item of income, loss, expense, or deduction and the item isn't described or included in Part II, lines 1 through 21, or Part III, lines 1 through 28, report the entire amount of the item in columns (a) and (d) of Part II, line 25.

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 on Part II, lines 7 through 21, or Part III, lines 1 through 28, and the line doesn't indicate to “attach statement,” and the specific instructions for the line don't 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 6, for specific additional information required to be provided for these particular lines.

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 mustn't 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 22, and Part III, line 31. A separate statement must be attached to Schedule M-3 (Form 1120-S) that includes a detailed description of each item and adjustment entered on Part II, line 22, and Part III, line 31.

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 is considered the tax description for the amount reported in column (d) for each item reported on Part II, line 22, or Part III, line 31.

Each description should adequately describe all four columns of Part II, line 22, or Part III, line 31. If additional information is required to provide an acceptable description, provide a supporting statement.

Example 7. Corporation C is a calendar year taxpayer that files and entirely completes Schedule M-3 for its current tax year. C placed in service 10 depreciable fixed assets in a previous year. C's total depreciation expense for its current tax year for five of the assets is $50,000 for income statement 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 income statement purposes and $30,000 for U.S. income tax purposes. In its financial statements, C treats the differences between financial 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 on Part III, line 24, 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 8. Corporation D is a calendar year taxpayer that files and entirely completes Schedule M-3 for its current tax year. On December 31, of its current tax year, D establishes three reserve accounts in the amount of $100,000 for each account. One reserve account is an allowance for accounts receivable that are estimated to be uncollectible. The second reserve is an estimate of coupons outstanding that may have to be paid. The third reserve is an estimate of future warranty expenses. In its financial statements, D treats the three reserve accounts as giving rise to temporary differences that will reverse in future years. The three

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Also include on line 3 passive foreign investment company (PFIC) mark-to-market gains and losses under section 1296. Don't report such gains and losses on Part II, line 14.

Line 4. Gross Foreign Distributions Previously Taxed Report on line 4, column (a), any distributions received from foreign corporations that were included in Part I, line 11, and that were previously taxed for U.S. income tax purposes. For example, include in column (a) amounts that are excluded from income under sections 959 and 1293(c). Remove such amount in column (b) or (c), as applicable. Report the full amount of the distribution before any withholding tax. Report withholding taxes on Part III, line 31, or Part II, line 25, as applicable. Since previously taxed foreign distributions aren't currently taxable, line 4, column (d), is shaded. Also, see the instructions above for Part II, line 2.

Line 5. Income (Loss) From Equity Method U.S. Corporations Report on line 5, column (a), the financial income (loss) included in Part I, line 11, for any U.S. corporation accounted for on the equity method and remove such amount in column (b) or (c), as applicable. Report on Part II, line 6, dividends received from any U.S. corporation accounted for on the equity method.

Line 6. U.S. Dividends Not Eliminated in Tax Consolidation Report on line 6, column (a), the amount of dividends included in Part I, line 11, that were received from any U.S. corporation. Report on line 6, column (d), the amount of any U.S. dividends included in total income (loss) on Form 1120-S, Schedule K, line 18.

For any dividends included on Part II, line 6, that are received on classes of voting stock in which the corporation directly or indirectly owned 10% or more of the outstanding shares of that class at any time during the tax year, report on an attached supporting statement for Part II, line 6: (1) the name of the dividend payer, (2) the payer's EIN (if applicable), (3) the class of voting stock on which the dividend was paid, (4) the percentage of the class directly or indirectly owned, and (5) the item amounts for columns (a) through (d).

($275,000) in column (b), and U.S. income tax bad debt expense of $75,000 in column (d).

Example 10. Corporation F is a calendar year taxpayer that files and entirely completes Schedule M-3 for its current tax year. During its current tax year, F incurs $200 in meal expenses and $100 in entertainment expenses that F deducts in computing net income per the income statement. All of the $200 meal expense is subject to the 50% limitation under section 274(n). The $100 of entertainment expenses is disallowed as a deduction under section 274(a). In its financial statements, F treats the limitation on deductions for meals and entertainment as a permanent difference. Because meal and entertainment expenses are specifically described in Part III, line 8, F must report all of its meal and entertainment expenses on this line, regardless of whether there is a difference. Accordingly, F must report $300 in column (a), $200 in column (c), and $100 in column (d). F must report all meal and entertainment expenses, whether allowed fully or subject to limitations, on Part III, line 8. No amount should be reflected on Part II, line 25.