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10115: 1065/1120/1120S - Schedule M-3


1065 Partnership

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:

Form 1065

  • 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.

Software Notes:

  • 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. 


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