Any foreign corporation required to fill out IRS Form 1120-F, Section II -- a U.S. tax return for a foreign corporation -- and which reports total assets of $25,000 or more on Schedule L has to fill out Schedules M-1 and M-2. The two schedules appear on the same form. The M-2 part of the form analyzes the corporation's unappropriated retained earnings.

Unappropriated Retained Earnings

Retained earnings are earnings that haven't been distributed as dividends. It's a cumulative account on the books, as retained earnings can pile up year after year. Appropriated retained earnings are reserved for specific purposes in the account books, a sign the corporation doesn't intend to include them in dividends. The remaining, unreserved retained earnings are unappropriated.

Schedule M-2

On the first line of Schedule M-2, you report the balance of unappropriated net earnings as recorded in the account books at the start of the tax year. To that, add the firm's net income or loss for the year. Then add any increases to unappropriated earnings, such as appropriated earnings that the company has shifted back to the unappropriated account. From that amount, you subtract any decreases to the account, such as distributions to shareholders. What's left is the unappropriated retained earnings at the end of the year.