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Abstract
In 2006, a new Schedule M-3, Net income (Loss) Reconciliation for Certain Partnerships, was required for selected partnerships. Just like its predecessor with Form 1120, this Schedule M-3 brings a new level of complexity and controversy in the reporting of book-tax differences for these entities. The requirements for filing a Schedule M-3 for partnerships are reviewed. Specifically, the focus is on the four alternative tests used to determine if a partnership is required to file Schedule M-3. Special emphasis is given to the new reportable entity requirements, and several examples are provided to illustrate the application of these rules. These new schedules are designed to provide the IRS with a more accurate understanding of the ownership structure of M-3 filers and identify issues that may warrant examination by the IRS.