Overview of Final Regulations
On December 10th, the IRS released final regulations detailing how qualified business units (QBUs) calculate taxable income or loss and foreign currency gains and losses under Section 987. A qualified business unit (QBU) is defined in §989 and the regulations thereunder as a separate trade or business of a taxpayer maintaining separate books and records.
Prior to enactment of the final regulations, QBUs determined gain or loss under §987 when making a remittance by comparing the remittance converted from the entities’ functional currency at the year-end spot rate to the cumulative pool of income converted at the relevant historic rate (taxable income is converted at year-end using the yearly average exchange rate).
The final regulations enact provisions of the deferred December 2016 final regulation1 and the November 2023 proposed regulations. Under 2024 final regulations, a net unrecognized §987 gain or loss must be computed by taxpayers and such computation must have been used on at least one tax return filed before November 9, 2023.
Additional highlights of the final regulations include:
- An annual rate election
- A current rate election that allows use of certain parts of the earnings and capital method instead of a tax basis balance sheet
- Application of the foreign exchange pool (FEEP) method
- The option to characterize §987 gain or loss using the asset method under §861 regulations
Additionally, the IRS issued proposed regulations to assist taxpayers in calculating taxable income and the foreign currency gain or loss of a QBU, specifically as it relates to the treatment of disregarded transactions.
Action Items and Important Dates
The final regulations are generally effective for taxable year beginning after December 31, 2024. The Treasury and IRS are expected to issue further guidance under §987 regarding the determination foreign gains and losses on subsidiaries of partnerships. Contact a Forvis Mazars professional to discuss application of the 2024 final regulations.
- 1Notice 2019-65, 2019-52 IRB 1507 and Notice 2022-34, 2022-34 IRB 150