IRS Releases Draft Form 1120-F and Schedule M-3 and Instructions

By Eileen Sherr, CPA, MT, AICPA Technical Manager—Taxation, Washington, DC

The IRS recently released draft versions of revised Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, for 2007 and related schedules, including a new Schedule M-3, Net Income (Loss) Reconciliation for Foreign Corporations with Reportable Assets of $10 Million or More. The new Form 1120-F, Schedule M-3, will be required for taxpayers with $10 million or more in total reportable assets filing that form for tax years ending after December 30, 2007.

Three other new schedules for Form 1120-F include:

  • Schedule H, Deductions Allocated to Effectively Connected Income Under Regulations Section 1.861-8;
  • Schedule I, Interest Expense Allocation Under Regulations Section 1.882-5; and
  • Schedule P, List of Foreign Partner Interest in Partnerships.

The new form and schedules will provide increased disclosure of large corporations’ income and expense deductions and information on such items as allocable interest expense and home office deductions, as well as effectively and noneffectively connected income that is included in Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., reported by a partnership to a foreign corporate partner and that is reportable by the partner on Form 1120-F.

In addition, Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return (used by corporations with assets under $10 million), and Schedule M-2, Analysis of Unappropriated Retained Earnings per Books per Return, previously included in Form 1120-F, are now separate forms. Schedule M-2 is used by all corporations with assets of $25,000 or more.

For more information on this issue, contact Eileen Sherr at (202) 434-9256 or esherr@aicpa.org.

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