IRS News Releases  
Dec. 20, 2005

IRS Releases Schedule M-3 for Partnerships

WASHINGTON - The Internal Revenue Service today released draft Schedule M-3 and instructions for certain partnerships that file Form 1065. When finalized, the Form1065 Schedule M-3 will be used by affected partnerships starting with tax years ending on or after December 31, 2006.

Schedule M-3 increases transparency in income tax return filings by requiring affected taxpayers to provide a more detailed reconciliation between financial accounting net income and taxable income than in the past.

Partnerships that meet any of four different criteria will be required to file Schedule M-3. The criteria include two asset threshold tests, a total receipts test, or an ownership test.

�Schedule M-3 for partnerships is particularly important,� said Deborah M. Nolan, IRS Large and Mid-Size Business Division Commissioner. �Complex enterprises composed of large and mid-size corporations and partnerships are evolving rapidly. The multiple criteria developed to determine which partnerships will be required to file Schedule M-3 ensure uniform tax accounting disclosures by entities similar to or related to LMSB taxpayers.�

Like the Schedules M-3 previously introduced for corporate taxpayers filing Forms 1120, 1120-PC, 1120-L or 1120-S, a partnership will be required to file Schedule M-3 if it has $10 million or more total assets at the end of the tax year.
A partnership will also be required to file Schedule M-3 if it has $10 million or more in adjusted total assets at the end of the year, $35 million or more in total receipts, or is 50 percent or more owned by an LMSB or other taxpayer required to file Schedule M-3.

In coming months IRS and Treasury plan to meet with affected stakeholder groups to discuss the new Schedule M-3 and instructions. It is expected that the schedules and instructions will be finalized this coming summer.

The new draft Schedule M-3 and instructions can be found on IRS.gov. The drafts are located on the �corporations� page, which can be accessed from the Web site section that provides information for businesses. The Web site also offers interested taxpayers a subscription to the Schedule M-3 email news service so they can automatically receive future information about Schedule M-3.

During the first year that partnerships are required to file Schedule M-3, certain portions will be optional, as was the case with previously introduced Schedules M-3 for corporations filing Forms 1120, 1120-PC, 1120-L, and 1120-S.

The draft instructions for the Form 1065 Schedule M-3 released today were modeled after the 2005 Form 1120 M-3 instructions released for comment on June 23, 2005. Final changes to the 2005 Form 1120 M-3 instructions are expected later in December 2005 and will be incorporated into the new Schedules M-3 released today following the comment period.

IRS is seeking comments regarding the new draft Schedule M-3 for Form 1065. Comments should be submitted by Tuesday, February 21, 2006 to:

Judy McNamara
Internal Revenue Service
860 E. Algonquin Road
Schaumburg, IL 60173
Email address [email protected] (Preferred)
Telephone number: 312-566-2001, Ext. 9380

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