Form 1065, Schedule M-3 (2019)

What Is Schedule M 3 In Form 1065

Schedule M-3 in Form 1065 is a financial statement that plays a crucial role in partnerships and multi-member Limited Liability Companies (LLCs) treated as partnerships for tax purposes. Designed to provide a more detailed view of the entity's financial position, Schedule M-3 complements the standard Form 1065 by offering insight into adjustments and transactions affecting the financial statements but not reflected in the partnership's taxable income. This form is instrumental for the IRS to understand the differences between book and taxable income, thereby curbing tax evasion and ensuring accurate tax reporting.

When to Use IRS Form 1065 Schedule M 3

Partnerships and applicable LLCs must file IRS Form 1065 Schedule M-3 under the following situations:

• If the partnership's total assets at the end of the tax year exceed $10 million, filing Schedule M-3 is mandatory.
• Partnerships subject to the reporting requirements of the Securities and Exchange Commission (SEC) need to file this form regardless of their asset size.
• For partnerships that are part of a consolidated group of corporations, filing Schedule M-3 is required.
• Partnerships not meeting the above criteria but choosing to file Schedule M-3 voluntarily to provide a clearer understanding of their financial position.

How To Fill Out Form 1065 Schedule M-3 Instructions

Filling out Form 1065 Schedule M-3 involves a detailed step-by-step process to ensure accuracy and compliance:

Part I - Financial Statements: 

Begin with disclosing the type of financial statements used for reporting - Generally Accepted Accounting Principles (GAAP), tax basis, or another comprehensive basis of accounting.

Part II - Reconciliation of Net Income (Loss) per Income Statement With Analysis: 

Here, reconcile income or loss reported on financial statements with the income or loss on Schedule K-1. Adjust for any discrepancies due to different accounting practices.

Part III - Analysis of Partner's Capital Accounts: 

This section requires a detailed analysis of changes in the partners' capital accounts from the beginning to the end of the year. Include contributions, distributions, and share of net income or loss.

Further Deductions and Liabilities: 

Highlight and detail any non-deductible expenses, tax-exempt income, and other adjustments affecting partners' distributive shares.

Sign and Date: 

After completing the form, verify the details and have an authorized individual sign and date the form.

When to File Federal Form 1065 Schedule M 3

The Federal Form 1065 Schedule M-3 should be filed alongside the partnership's standard Form 1065. The due date for filing Schedule M-3 aligns with the Form 1065 due date, typically on the 15th day of the third month following the end of the partnership's tax year. For most partnerships operating on a calendar year, this date falls on March 15th. If needed, partnerships can request an extension to file, which also extends the deadline for Schedule M-3.