Expanded reconciliation: IRS expects new form to be used for 2004.

• Author: Josephs, Stuart R.
• Position: FederalTax; corporate taxes

The U.S. Treasury and IRS released a draft Jan. 28 of a three-page Schedule M-3 (Form 1120), titled "Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More." The Treasury and IRS expect the final version of this form to be used for tax years ending on or after Dec. 31, 2004.

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Schedule M-3 is a separate form to be attached to the regular corporate income tax return, Form 1120. It has been released to increase the transparency of these corporate income tax returns.

Corporations required to complete Schedule M-3 will not have to complete Schedule M-1, "Reconciliation of Income (Loss) per Books With Income per Return." Other corporations will continue to complete only Schedule M-1, which consists of just 10 lines and occupies less than half of Page 4, Form 1120. However, Schedule M-1 has not been updated in several decades.

According to Jan. 28 Treasury Department News Release JS-1121 and Internal Revenue News Release IR-2004-14, "Other federal tax returns that also require the completion of Schedule M-1 (e.g., Form 1065, U.S. Partnership Return of Income, and Form 1120S, U.S. Income Tax Return for an S Corporation) may incorporate Schedule M-3 in the future."

Schedule M-3's Contents

This new form has four parts:

Part I has five questions regarding the corporation's financial statements and its publicly traded common stock.

Part II is an eight-line "Reconciliation of Net Income (Loss) per Income Statement With Net Income (Loss) of Includible Corporations." The net income (loss) per the income statement is entered on Line 1 and is reconciled to the net income (loss) per income statement of includible corporations reported on Line 8.

Part III is a 37-line "Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return--Income (Loss) Items" and has the following four columns:

(A) Income (loss) per income statement;

(B) Temporary difference;

(C) Permanent difference; and

(D) Income (loss) per tax return.

Part IV is a 38-line "Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return--Expense/Deduction Items" and has the following four columns:

(A) Expense per income statement;

(B) Temporary difference;

(C) Permanent difference; and

(D) Deduction per tax return.

There is a specific item of expense/deduction printed on each of the first 34 lines of this part, such as:

* State current...