Why am I getting an M-3 instead of an M-1 on my 1065 (or 1120, 1120S) return?
Schedule M-3 is required when any of the following is true:
- total assets on the balance sheet (Schedule L) at the end of the year equal or exceed $10 million,
- the amount of adjusted total assets for the tax year is equal to $10 million or more, or
- the amount of total receipts for the tax year is equal to $35 million or more, or
- a reportable entity partner is deemed to own, directly or indirectly, a 50% or more interest in partnership capital, profit, or loss on any day during the tax year.
- Beginning in Drake 14, Worksheet WK_M1P explains the adjustments flowing to Schedules M-1 and M-3.
Form 1120 or 1120S
- when total assets on the balance sheet (Schedule L) at the end of the year equal or exceed $10 million.
- Certain income and deduction amounts and adjustments flow to Schedule M-3, but all other M-3 data must be entered manually. If Schedule M-3 is present in a return, no Schedule M-1 is generated.
- If the return does not meet the criteria to file an M-3, check for entries made on any of the Schedule M-3 screens which should not be there.
- Worksheet Wks M1C explains the adjustments flowing to Schedules M-1 and M-3 for the 1120.
- Worksheet Wks M1S explains the adjustments flowing to Schedules M-1 and M-3 for the 1120S.
In a 1065, 1120 or 1120S return, the rules for filing Schedule M-3 have been relaxed (effective for tax years ending December 31, 2014 and later).
Partnerships, S corporations, or Corporation returns,
- When an M-3 is required but total assets at tax-year-end are less than $50 million, then
- The taxpayer must either
- Complete Schedule M-3 entirely.
- Or complete Schedule M-3 through Part I and complete Schedule M-1 instead of completing Parts II and III of Schedule M-3 (in which case, line 1 of Schedule M-1 must equal line 11 of Schedule M-3).
- The taxpayer is not required to file Schedule C (Form 1065), Schedule B (Form 1120) or Form 8916-A.
- When an M-3 is not required, the taxpayer can voluntarily file Schedule M-3 instead of Schedule M-1. A voluntarily filed M-3 must comply with the rules stated above. In Drake, to voluntarily file Schedule M-3, make the appropriate selection from the Voluntarily file M-3 drop list at the top of the M3 screen.
See Schedule M-3 for Large Business & International (LB&I) for the specific instructions for Schedules M-1 and M-3 for Large Business & International.