This Schedule M-3 Form 1120-S guide explains the IRS Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More. Schedule M-3 for Form 1120-S provides the financial statement reconciliation required for covered S corporations. The reconciliation explains book-to-tax differences and should agree with the entity financial records and tax schedules. It is not interchangeable with the M-3 schedule for a different entity type.
Reviewed October 31, 2026. This is an independent guide. The version and availability information below identifies the IRS documents used for this page.
What Schedule M-3 Form 1120-S does and who prepares it
An S corporation covered by the reporting rules reconciles financial statement and tax return income.
For the connected reporting route, see Form 1120-S. Keep the role of that document separate from the task explained on this page.
| Official form | Form 1120-S (Schedule M-3) |
|---|---|
| IRS title | Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More |
| Guide period | the applicable reporting period |
| Target version | Dec 2019 |
| Availability | Current IRS catalog PDF |
| Last checked | October 31, 2026 |
Get the Schedule M-3 Form 1120-S PDF and check its status
Use the IRS source to confirm the document before completing a real filing. The download link is a reference to the official file; it is not a statement that every copy inside the PDF may be printed and submitted. Follow any instructions about electronic filing, scannable copies, recipient copies or attachments.
Which version of Schedule M-3 Form 1120-S should you use?
This form follows a revision or continuing-use format rather than a new title for every calendar year. Check the revision printed on the document and the period requested inside it. A revision date, transaction date and tax year are different pieces of information. The current document should be read with the instructions that apply to the actual transaction or return.
Records to gather for Schedule M-3 Form 1120-S
- S corporation financial statements.
- Reporting-boundary information.
- Book-to-tax workpapers.
- Income and deduction schedules.
- Prior reconciliation.
Keep a working reconciliation with these records. It should show the source of each reported item, any correction made before filing and the reason a different amount appears on a connected form. This is especially useful when a statement is corrected or a prior-year balance continues into the current calculation.
How to work through Schedule M-3 Form 1120-S
- Confirm applicability. Start with the purpose, filer category and version of the form. Complete any eligibility or applicability question before spending time on the numerical calculation.
- Prepare the source workpapers. Gather the records listed below and reconcile their totals. Keep prior-year balances, current-year transactions and estimated payments separate where they serve different purposes.
- Complete dependent calculations first. When a line refers to another form, schedule or worksheet, finish that supporting calculation first. Preserve any classification, limitation and carryforward information.
- Follow the line sequence. Use the actual line labels and arithmetic in the applicable form. A line number from an older version may refer to something different after a revision.
- Reconcile the filing package. Check names, identifying numbers, tax periods, totals and required attachments. Then use the filing method, signature process and deadline that apply to this filer and form.
Form-specific IRS instructions and reporting details
The following points retain the operative wording of the IRS documents linked above. Read each point with its stated conditions and the applicable form version. References to another form or section describe a connected requirement; they do not mean that every reader must file every referenced document.
If a corporation was required to file Schedule M-3 for the preceding tax year, but reports on Form 1120-S, Schedule L, total assets at the end of the current tax year of less than $10 million, the corporation isn't required to file Schedule M-3 for the current tax year.
For purposes of determining whether the corporation has total assets at the end of the current tax year of $10 million or more, the corporation's total assets must be determined on an overall accrual method of accounting unless both of the following apply: (a) the tax return of the corporation is prepared using an overall cash method of accounting, and (b) no includible entity in the U.S. tax return prepares or is included in financial statements prepared on an accrual basis.
See the instructions for Part I, TIP line 1, for a discussion of non-tax-basis income statements and related non-tax-basis balance sheets to be used in the preparation of Schedule M-3 and of Form 1120-S, 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 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.
Additional reporting conditions
For purposes of Schedule M-3, references to the classification of an entity (for example, as a corporation, a partnership, or a trust) are references to the treatment of the entity for U.S. income tax purposes. An entity that generally is disregarded as separate from its owner for U.S. income tax purposes (disregarded entity) mustn't be separately reported on Schedule M-3 except, if required, on Part I, line 7a, 7b, or 7c.
On Schedule M-3, Parts II and III, any item of income, gain, loss, deduction, or credit of a disregarded entity must be reported as an item of its owner. In particular, the income or loss of a disregarded entity mustn't be reported on Part II, line 7, 8, or 9 as from a separate partnership or other pass-through.
The financial statement income or loss of a disregarded entity other than a qualified subchapter S subsidiary (QSub) is included on Part I, line 7b, if and only if its financial statement income or loss is included on Part I, line 11, but not on Part I, line 4a. The financial statement income or loss of a QSub is included on Part I, line 7c, if and only if its financial statement income or loss is included on Part I, line 11, but not on Part I, line 4a.
Calculations and supporting information
Specific Instructions for Part I Part I. Financial Information and Net Income (Loss) Reconciliation Line 1. Questions Regarding the Type of Income Statement Prepared For Part I, lines 1 through 12, use only the financial statements of the U.S. corporation filing the U.S. income tax return.
Enter the beginning and ending dates on line 2 for the corporation's annual income statement period ending with or within the current tax year. The questions on Part I, lines 3a and 3b, regarding income statement restatements refer to the worldwide consolidated income statement issued by the corporation filing the U.S. income tax return and used to prepare Schedule M-3. Answer “Yes” on lines 3a and/or 3b if the corporation's annual income statement has been restated for any reason.
Attach a short explanation of the reasons for the restatement in net income for each annual income statement period that is restated, including the original amount and restated amount of each annual statement period's net income.
Exceptions and related reporting
In completing Schedule M-3, the corporation must use financial statement amounts from the financial statement type checked “Yes” on Part I, line 1, or from its books and records if Part I, line 1b, is checked “No.” If a corporation prepares non-tax-basis financial statements, the amount on line 4a must equal the financial statement net income (loss) for the income statement period ending with or within the tax year as indicated on Part I, line 2.
If the corporation prepares non-tax-basis financial statements and the income statement period differs from the corporation's tax year, the income statement period indicated on Part I, line 2, applies for purposes of Part I, lines 4 through 8. If the corporation doesn't prepare non-tax-basis financial statements and has checked “No” on Part I, line 1b, enter the net income (loss) per the books and records of the U.S. corporation on Part I, line 4a. Indicate on Part I, line 4b, which of the following accounting standards were used for line 4a. 1. U.S.
Generally Accepted Accounting Principles (GAAP).
Further form details
Line 12 must be completed by all corporations that file Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total amount (not just the corporation's share) of assets and liabilities of entities included or removed on Part I, lines 4, 5, 6, and 7. All assets and liabilities reported on lines 12a through 12d must be reported as positive amounts. On line 12a, enter the worldwide consolidated total assets and total liabilities of all of the entities included in computing Part I, line 4a.
On line 12b, enter the total assets and total liabilities of the entities removed in completing Part I, line 5. On line 12c, enter the total assets and total liabilities removed in completing Part I, line 6. On line 12d, enter total assets and total liabilities included in completing Part I, line 7.
Report on line 8, column (a), any amounts paid or accrued by the corporation during the tax year for meals, beverages, and entertainment that are accounted for in financial accounting income, regardless of the classification, nomenclature, or terminology used for such amounts, and regardless of how or where such amounts are classified in the corporation's financial income statement or the income and expense accounts maintained in the corporation's books and records. Report only amounts not otherwise reportable elsewhere on Schedule M-3, Parts II and III (for example, Part II, line 15).
Reading the lines and boxes
These selected labels come from the linked target PDF. They are a reading aid, not a replacement for the full line instructions or a completed calculation. Match the label and document version before transferring any amount.
| Line or box | Label in the source form | What to check |
|---|---|---|
| 1a | Did the corporation prepare a certified audited non-tax-basis income statement for the period ending with or within this tax | Use the supported tax basis or cost measure requested by the instructions. Book value, original purchase price and adjusted tax basis can differ. |
| 2 | Enter the income statement period: Beginning | Identify the income or transaction category before entering a total. Preserve the distinction between gross amounts, adjustments and the resulting taxable or reportable figure. |
| 3a | Has the corporation’s income statement been restated for the income statement period on line 2? | Identify the income or transaction category before entering a total. Preserve the distinction between gross amounts, adjustments and the resulting taxable or reportable figure. |
| 4a | Worldwide consolidated net income (loss) from income statement source identified in Part I, line 1 | Use the identity of the person or entity requested on this line. Check that the name and identification number agree with the underlying tax records. |
| 5a | Net income from nonincludible foreign entities (attach statement) | Identify the income or transaction category before entering a total. Preserve the distinction between gross amounts, adjustments and the resulting taxable or reportable figure. |
Further selected fields
| Line or box | Label in the source form | What to check |
|---|---|---|
| 6a | Net income from nonincludible U.S. entities (attach statement) | Identify the income or transaction category before entering a total. Preserve the distinction between gross amounts, adjustments and the resulting taxable or reportable figure. |
| 7a | Net income (loss) of other foreign disregarded entities (attach statement) | Identify the income or transaction category before entering a total. Preserve the distinction between gross amounts, adjustments and the resulting taxable or reportable figure. |
| 8 | Adjustment to eliminations of transactions between includible entities and nonincludible entities | Check the applicable line instructions and keep the source workpaper with the return records. Transfer only the information that matches the field and reporting period. |
| 9 | Adjustment to reconcile income statement period to tax year (attach statement) | Use the date or tax period requested by this particular field. A payment date, acquisition date and return year can describe different facts. |
| 10 | Other adjustments to reconcile to amount on line 11 (attach statement) | Check the applicable line instructions and keep the source workpaper with the return records. Transfer only the information that matches the field and reporting period. |
A practical example
An S corporation prepares its financial statements and tax adjustments. The preparer uses the S corporation-specific reconciliation to explain the differences before completing the entity return.
This example illustrates the order of the review. It does not assume an unverified deduction, exemption, treaty rate or final tax amount. The applicable form instructions and the actual records determine the result.
Common mistakes to avoid with Schedule M-3 Form 1120-S
- Check the entity-specific applicability and instructions.
- Reconcile financial statement totals before tax differences.
- Keep temporary and permanent differences traceable.
Questions about Schedule M-3 Form 1120-S
Does receiving or downloading this form mean I must file it?
An S corporation covered by the reporting rules reconciles financial statement and tax return income. The form purpose and the applicable filing or furnishing conditions determine the action. Downloading a blank PDF does not itself create a filing obligation or establish eligibility for a tax benefit.
Is the revision date always the same as the tax year?
No. Some forms show a tax year, while continuing-use forms show a revision date and ask separately for the reporting period. Check the actual document and instructions. Do not relabel a payment or transaction solely because it was reported in a later calendar year.
What should I do if the underlying information is wrong?
Check the entity-specific applicability and instructions. Keep the original record and the correction trail. The issuer correction process, an amended return and an updated certificate can be different procedures. Choose the process that matches the document and the actual error.
Which records should I keep with the completed form?
Retain the source documents, applicable worksheets, submitted version and filing or furnishing confirmations. For this form, the working file should include S corporation financial statements, reporting-boundary information, book-to-tax workpapers. Keep continuing balances and prior-year support for as long as they remain relevant under the applicable recordkeeping rules.
Related forms and next steps
Use these guides when the connected issue applies to your records. Each page has its own purpose, reporting year and availability status.