section 987 methodology

Profile Management

Global Locations

RECENT SEARCHES

RECOMMENDED

SURVEY REPORT Energy Survey
INSIGHTS Industry Intersections

IRS issues new version of foreign currency regulations

New proposed regulations, expansion of scope, the feep method, elections to simplify application of the feep method, suspended loss rules, partnership rules, transition rules, applicability dates.

The IRS on Nov. 9 released the latest iteration of proposed rules for calculating foreign currency gains or losses under Section 987 in what has become a decades-long saga to rewrite the regulations.

The newly proposed regulations ( REG-132422-17 ) largely adhere to the general framework established by the suspended 2016 final regulations, maintaining the utilization of the Foreign Exchange Exposure Pool (FEEP) approach. However, notable enhancements have been incorporated, specifically targeting simplification measures. Beyond this, the proposed regulations would expand the scope of covered taxpayers and address ancillary issues such as partnerships and consolidated group treatment.

The newly proposed regulations represent the latest in a string of attempts to rewrite the rules dating back to 1991. The IRS originally proposed regulations in 1991 ( 56 FR 48457 ) only to withdraw and repropose a new version in 2006 ( 71 FR 52876 ). The 2006 regulations were finalized ( 56 FR 48457 ) along with new temporary and proposed (REG-128276-12) in 2016, but these regulations were quickly suspended by executive order and then by a series of notices. The IRS in 2019 issued new final regulations ( TD 9857 ) that have also been partially suspended.

The 2023 proposed regulations provide a few modifications to the FEEP method, which has been criticized for being overly complex as compared to other previously accepted methods for complying with Section 987, such as the rules contained in the 1991 proposed regulations or the so called “earnings-only” method. However, the regulations provide two elections that were developed in response to taxpayer request for a simplified approach in determining the Section 987 gain or loss for each Section 987 Qualified Business Unit (QBU):

Current-rate election, which treats all items on the balance sheet as marked items and requires taxpayers to translate all items of income, gain, deduction, and loss at the annual average exchange rate for the current year.
Annual-recognition election, which can be made in conjunction with the current-rate election and would recognize all items of income, gain, deduction, and loss of a QBU annually.

These simplifying elections are combined with a series to rules to prevent abuses and the acceleration of losses, including the suspension of Section 987 loss until a taxable year in which the owner recognizes Section 987 gain that has the same source and character as the suspended Section 987 loss, referred to as the “loss-to-the-extent-of-gain rule” in the preamble.

If finalized, the regulations would generally be effective for taxpayers with tax years beginning on or after Jan. 1, 2025, which would end a decades-long administrative delay in the implementation of new rules. Affected taxpayers should assess their existing Section 987 methods and the potential impact of adopting the proposed regulations early.

The Section 987 regulations originally date back to 1991, when the first draft of proposed regulations ( 56 FR 48457 ) was released. The 1991 proposed regulations would have required that tax owners maintain equity and basis pools in the QBU’s functional currency (FC) and the tax owner’s FC, respectively. The Section 987 gain or loss was the difference between the equity and basis pools on the spot date of any Section 987 triggering event. Triggering events include a remittance from the QBU or termination of the QBU.

In 2000, the IRS issued Notice 2000-20 , which expressed concern over abusive transactions that involved a circular flow of funds between a QBU and its tax owner. The notice requested comments and introduced several concepts the IRS was considering, including netting property transferred in and out of the QBU during the course of the year.

In 2006, the IRS withdrew the 1991 proposed regulations over concerns that taxpayers were able to strategically manage Section 987 gains and losses by timing remittances and termination of QBUs when rate fluctuations created favorable paper losses. The IRS instead proposed a new version that introduced the FEEP method.

In 2016, the IRS released final regulations that adopted the FEEP method from the 2006 proposed regulations with a few modifications, and also released proposed and temporary regulations addressing a variety of issues. These regulations included a new annual deemed termination election, rules addressing Section 988 transactions of a Section 987 QBU, and rules addressing partnerships.

In 2017, President Donald Trump signed an executive order ( E.O. 13789 ) that instructed the Treasury Secretary to review all regulations issued on or after Jan. 1, 2016, that imposed an undue financial burden to U.S. taxpayers or added undue complexity to federal laws. The executive order, in conjunction with a series of deferral notices (most recently, Notice 2022-34 , also covered in our Aug. 2022 Tax Hot Topics) have effectively delayed the implementation of the 2016 final and temporary regulations.

The newly proposed regulations cover various aspects of Section 987, including rules for determining taxable income or loss and foreign currency gain or loss with respect to a QBU. They also introduce new options, including elections to treat all items of a QBU as marked items (subject to a loss suspension rule) and recognize all foreign currency gain or loss related to a QBU on an annual basis. They also offer a transition rule.

The 2016 final regulations generally did not apply to banks, insurance companies, leasing companies, finance coordination centers, regulated investment companies, or certain real estate investment trusts. Additionally, the 2016 final regulations did not apply to trusts, estates, S corporations, or partnerships other than Section 987 aggregate partnerships. The preamble to the proposed regulations noted that applying a consistent set of rules to all taxpayers facilitates the fair and effective administration of tax law and it eliminated subjectivity and uncertainty. Accordingly, the newly proposed regulations remove the exclusions, making the rules apply to the entities mentioned above. However, the proposed regulations continue to exclude certain other foreign persons, including foreign individuals, foreign non-grantor trusts, and foreign corporations that are not CFCs.

The proposed regulations preserve the FEEP method that was introduced in the 2006 proposed regulations and subsequently modified by the 2016 final regulations. The FEEP method is the default rule for a taxpayer to determine their Section 987 gain or loss for a taxable year.

The FEEP method uses a balance sheet approach to determine exchange gain or loss. Such gain or loss is not recognized until the Section 987 QBU makes a remittance. Under the FEEP method, exchange gain or loss with respect to “marked items” is determined annually but is pooled and deferred until a remittance is made or certain other event triggers a recognition. A marked item generally includes an asset or liability that would otherwise generate Section 988 gain or loss if such asset or liability were held or entered into directly by the owner of the Section 987 QBU. The balance sheet approach also uses historic rates for “historic items” (generally defined as assets or liabilities that are not marked items). This approach allows taxpayers to distinguish between items whose value is subject to fluctuations in currency (i.e., foreign exchange exposure) and those that are not. Additionally, all items of income, gain, deduction, and loss by a QBU are translated into the tax owner’s FC at the average exchange rate for the taxable year.

The overall approach and steps related to the FEEP method remain largely consistent with the 2016 final regulations, with only minor adjustments made.

To ease the administrative and compliance burdens, two elections are available under the proposed regulations.

The “current-rate election” allows a taxpayer to treat all items properly reflected on a Section 987 QBU’s balance sheet as marked items. All marked items are translated using the year-end spot rate. Additionally, all income statement items with respect to a Section 987 QBU would be translated at an annual average foreign exchange rate for the current taxable year. According to the IRS, the current-rate election is expected to produce an outcome that is similar to that determined under the 1991 proposed regulations.

Grant Thornton insight

Although the current-rate election may result in a larger pool of potential losses, those losses are subject to a set of new rules, which typically suspend losses recognized until a corresponding gain is also recognized. Further details on this are discussed below. Taxpayers will need to weigh the administrative ease provided by the election against the inability to claim losses, which in some cases may be permanent.

The “annual-recognition election” is available to QBU owners regardless whether they make a current-rate election. This election is effectively a modified version of the deemed termination election included in the 2016 regulations. The annual recognition election requires that the tax owner recognize the full amount of its net unrealized Section 987 gain or loss each taxable year. Absent a current-rate election, the annual recognition election would only include marked items and items of income, gain, deduction, and loss computed under the FEEP method. When paired with a current-rate election, the annual election would allow the entire amount of gain or loss determined under the current-rate election to be recognized on an annual basis.

The proposed regulations include detailed rules for electing and revoking the current rate and annual recognition elections. Absent consent from the IRS Commissioner, neither election may be revoked for five years, and once revoked, cannot be made for another five years. Taxpayers that choose to revoke their current-rate election must convert any net accumulated unrecognized Section 987 loss to a suspended Section 987 loss.

Elections and revocations of both the current rate election and the annual recognition election are subject to consistency rules. For partnerships with Section 987 QBUs, both the current-rate election and the annual recognition election are made by the partnership.

In a taxable year in which a current-rate election applies, any Section 987 loss that would otherwise be recognized as a result of a remittance is treated as suspended Section 987 loss. The IRS is concerned that, absent special rules, taxpayers could use the current-rate election to selectively recognize losses. In an attempt to mitigate loss-planning strategies, a complex set of loss limitation rules are included in the proposed regulations.

Under the loss suspension rules, an owner of a Section 987 QBU would recognize suspended Section 987 loss in a taxable year in which the owner recognizes Section 987 gain that has the same source and character as the suspended Section 987 loss (the “loss-to-the-extent-of-gain rule”). The loss-to-the-extent-of-gain rule applies at the owner level and not at the QBU level. Under the rule, an owner does not recognize suspended Section 987 loss until it recognizes Section 987 gain in the same “recognition grouping” as the suspended Section 987 loss. Section 987 gain and suspended Section 987 loss are in the same recognition grouping if they are both initially assigned to U.S. source income or to foreign source income in the same Section 904 category.

If a taxpayer only makes an annual recognition election, generally the full amount of net unrecognized Section 987 gain or loss that is added to the pool will be recognized each year. However, if an annual recognition election is made and the tax owner has more than $5 million of net Section 987 losses in the first year of the annual recognition election, or if the current-rate election was in effect in the previous year before making the annual recognition election, then the loss would be suspended and subject to the loss-to-the-extent-of-gain rule.

If both a current-rate election and an annual-recognition election are in effect, the proposed regulations provide that the loss-to-the-extent-of-gain rule would apply by reference to the net cumulative amount of Section 987 gain in each recognition grouping that is recognized by the taxpayer during the relevant testing period (rather than the gross amount recognized each taxable year). The testing period generally is the period in which Section 987 loss is suspended and both a current-rate election and an annual recognition election are in effect.

Taxpayers effectively have four options under the proposed regulations: 1) apply the FEEP method, 2) apply the current-rate election, 3) apply the FEEP method with the annual recognition election, or 4) apply both the current rate and annual recognition elections. Each option comes with potential benefits and downsides. Taxpayers should evaluate which option makes the most sense to them, considering items such as ease of compliance, volatility, ability to recognize losses and other factors.

The proposed regulations maintain the aggregate approach to Section 987 aggregate partnerships (partnerships wholly owned by related persons) in the final regulations. However, for all other partnerships in scope of the proposed regulations, they apply a “hybrid approach to entity theory.” This approach is intended to prevent a partner from transferring its share of net unrecognized Section 987 gain or loss to another partner. A partnership that owns a Section 987 QBU would determine its unrecognized Section 987 gain or loss at the partnership level and then allocate to each partner their share of the unrecognized Section 987 gain or loss for the year. At the partner level, each partner would translate its share of the unrecognized Section 987 gain or loss into its functional currency at the yearly average exchange rate and calculate its net unrecognized Section 987 gain or loss with respect to each Section 987 QBU of the partnership based on this share. In effect, the Section 987 pools, as applicable, are maintained as the partner level.

Recognized Section 987 gains or losses follow a similar approach to unrecognized Section 987 gains or losses. Each partner would recognize (or suspend) Section 987 gain or loss based on the proportionate size of the remittance to the partnership. For example, if a Section 987 QBU remits 50% of its gross assets to the partnership, each partner with net unrecognized Section 987 gain or loss would recognize (or suspend) 50% of the net unrecognized Section 987 gain or loss. In general, the loss-to-the-extent-of-gain rule is also applied at the partner level.

The proposed regulations provide a framework for adjusting a partner’s basis in its partnership interest based on the principles of Section 705 when a partner recognizes Section 987 gain or loss, defers Section 987 gain or loss, or suspends section 987 loss attributable to a partnership.

The proposed regulations would also provide that an upper-tier partnership (UTP) adjusts its basis in a lower-tier partnership (LTP) solely with respect to a partner of UTP that either recognizes Section 987 gain or loss, defers Section 987 gain or loss, or suspects Section 987 loss attributable to the LTP.

The IRS requested comments on the coordination of the partner capital account maintenance rules in the Section 704(b) regulations with these proposed regulations, as well as the appropriate currency in which Section 743(b) basis adjustments allocated to assets in a Section 987 QBU should be maintained. Additionally, the IRS continues to study the application of entity theory and aggregate theory to partnerships in the Section 987 context, including whether it would be appropriate to apply a hybrid approach to entity theory to all partnerships, regardless of whether the partners are related parties.

The proposed regulations would treat S corporations in the same manner as partnerships.

The proposed regulations provide a new transition rule that would replace the “fresh start” transition method in the 2016 final regulations. The new transition rule would account for unrecognized Section 987 gain or loss accrued before the transition date. In addition, the new transition rule would not require taxpayers to retrospectively determine historic rates for items acquired before the transition date. Under the new rule, an owner of a Section 987 QBU would determine the amount of Section 987 gain or loss that has accrued before the transition date, referred to as the “pretransition gain or loss.” In the first taxable year in which the regulations apply, pretransition gain is treated as net unrecognized Section 987 gain, and pretransition loss is treated as suspended Section 987 loss.

Once finalized, the regulations (and the parts of the 2016 final regulations that are not replaced or modified by the proposed regulations) would apply to taxable years beginning after Dec. 31, 2024. The proposed regulations allow a taxpayer to early adopt these finalized regulations in their entirety (subject to consistency requirements) for taxable years ending after Nov. 9, 2023. The proposed regulations also contain earlier applicability dates for certain transactions to prevent taxpayers from avoiding the rules.

Share with your network

Taxpayers should immediately assess the impact of the proposed regulations, including its impact on financial statement positions. Although elections are available to ease the administrative burden, taxpayers with asset-heavy QBUs will need to inventory their historical asset data and begin to model the potential impacts of the each election. Additionally, taxpayers should evaluate whether they should adopt the final regulations early.

For more information, contact:

David E. Sites

National Managing Principal, International Tax Services Grant Thornton Advisors LLC

David leads the firm's International Tax practice, which focuses on global tax planning, cross border merger and acquisition structuring, and working with global organizations in a variety of other international tax areas.

Washington DC, Washington DC

Manufacturing, Transportation & Distribution
Technology, media & telecommunications
Retail & consumer brands

Service Experience

International Tax

Partner, Washington National Tax Office

Private equity

Tax - Exp Manager

San Francisco, California

Will Johnson

Manager Washington National Tax Office

Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “§,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.

No Results Found. Please search again using different keywords and/or filters.

The New Equation

Executive leadership hub - What’s important to the C-suite?

Tech Effect

Shared success benefits

Loading Results

No Match Found

Key issues under the new proposed foreign currency regulations

November 2023

Treasury and the IRS on November 9 released proposed regulations (2023 proposed regulations) under Section 987 on the taxation of foreign currency translation gains or losses arising from qualified business units (QBUs) that operate in a currency other than the currency of their owner. The 2023 proposed regulations largely retain the methodology of the 2016 final but not yet effective Section 987 regulations. The proposed regulations offer an election to utilize a methodology similar to the Section 987 regulations proposed in 1991—by treating all items of a QBU as marked items, subject to a loss suspension rule—and an election to recognize all Section 987 gain or loss with respect to a QBU on an annual basis.

The new regulations generally are proposed to be effective for tax years beginning on or after December 31, 2024. Certain provisions primarily related to the deferral of Section 987 gains and losses are proposed to be effective for branch terminations (or certain check-the-box elections) occurring on or after November 9, 2023. Transition rules are provided to offer guidance on the future recognition of pre-transition unrealized Section 987 gains and losses. Comments are due by February 12, 2024 on both the 2023 proposed regulations and the previously issued 2016 proposed regulations.

The takeaway: Companies should analyze the impact of the new proposed regulations on any current planning that involves terminating a QBU, as realized Section 987 losses may be deferred or disallowed if the regulations are finalized as proposed. Further, they should model the overall impact of the 2023 proposed regulations on their QBUs with and without the newly proposed elections, as the elections would affect both the quantitative results of the regulations and the data required to be tracked. Companies should also consider providing comments during the comment period. Finally, companies should evaluate the potential financial reporting impact of the 2023 proposed regulations and their impact if finalized as proposed.

The 2023 proposed regulations would retain the foreign exchange exposure pool (FEEP) method of the 2016 final regulations with modifications as the default rule for determining Section 987 taxable income or loss and net unrecognized Section 987 gain and loss. The core feature of the FEEP method is that monetary assets are revalued each year for determining unrealized Section 987 gain or loss, but other assets are held with a basis equal to their historic foreign current rate basis. For further discussion of the FEEP method per the 2016 final regulations, see our prior PwC Insight .

New elections and loss limitation rules

Current rate election.

To address comments on the FEEP method, the 2023 proposed regulations would provide an election (1) to treat all assets and liabilities that are properly reflected on the books and records of a Section 987 QBU as marked items (translated at the year-end spot rate) and (2) to translate all items of income, gain, deduction, or loss with respect to a Section 987 QBU at the average exchange rate for the current tax year (the 'current rate election'). Making such an election would be expected to produce a result close to that reached by applying the method in the 1991 proposed regulations and more closely aligned with financial reporting, except that the 2023 proposed regulations exclude most stock and partnership interests (and the liabilities, if any, to acquire them) from the Section 987 pools.

Observation: Under the 2016 final regulations and the 2023 proposed regulations, most stock and liabilities to acquire such stock are not treated as assets and liabilities of the Section 987 QBU and thus are excluded from Section 987 gain or loss calculations. Accordingly, even after making a current rate election, the result reached might differ significantly from that reached under the 1991 proposed regulations.

Annual recognition election

The 2023 proposed regulations contain an election (the ‘annual recognition election’) under which a Section 987 QBU owner would recognize all net unrecognized Section 987 gain or loss at the end of each year. The Section 987 QBU also must translate all items of income, gain, deduction, or loss with respect to a Section 987 QBU at the average exchange rate for the current tax year but continue to translate marked items at the year-end spot rate and historic items at their historic rates. This election would replace the annual deemed termination election in the 2016 final regulations.

Observation: The annual recognition election, when made without making the current rate election, could result in the conversion of a portion of the owner’s taxable income from a Section 987 QBU into Section 987 gain or loss. Companies should consider modeling the consequences of these elections, particularly in light of the loss deferral rules discussed below, in seeking to make informed decisions on post-effective date elections.

Suspension of Section 987 loss

There are multiple Section 987 loss deferral rules in the 2023 proposed regulations.

Loss-to-the-extent-of-gain rule . Because the current rate election is expected to increase the magnitude of a Section 987 QBU’s net unrealized Section 987 gain or loss, the 2023 proposed regulations include a rule that suspends the recognition of the Section 987 loss of a Section 987 QBU that has made the current rate election. Suspended Section 987 loss could only be recognized to the extent that, for the tax year in question, the owner of the Section 987 QBU recognizes Section 987 gain that has the same character, source, Section 904 treatment, and/or subpart F characterization as the Section 987 loss realized (the 'loss-to-the-extent-of-gain' rule). The loss-to-the-extent-of-gain rule applies at the owner level (rather than the QBU level); as a result, gain from one Section 987 QBU could offset loss from another (in the same recognition grouping). Suspended Section 987 loss that is not recognized is carried over to the owner’s next tax year, but prior Section 987 gains recognized do not permit the recognition of losses on a look-back basis.

Observation: For purposes of applying the loss-to-the-extent-of-gain rule, all members of a consolidated group would be treated as a single owner. As a result, a consolidated group may recognize more or less suspended Section 987 loss in a particular year than the members of that group would individually recognize in such year in the aggregate if they did not file as a consolidated group.

Deferral events and outbound loss events . The 2023 proposed regulations generally would retain the principles of the 2019 final regulations for deferral events and outbound loss events with certain modifications. For a discussion of the 2019 final regulations, see our prior PwC Insight . The de minimis threshold of $5 million (which previously applied on a QBU-by-QBU basis) would apply to the total deferred Section 987 gain or loss of the owner with respect to all of its Section 987 QBUs that otherwise would be deferred by the owner in a single tax year.

Other loss suspension rules . Section 987 losses can be suspended in other ways besides making a current rate election. Section 987 losses arising from certain outbound transfers (e.g., a Section 351 contribution of a Section 987 QBU’s assets) also would be suspended (and thus recognized only pursuant to the loss-to-the-extent-of-gain rule (or termination rules). Further, losses realized as a result of transitioning onto the 2023 proposed regulations’ methodology are considered suspended Section 987 losses.

Outbound Section 987 loss would be treated as suspended Section 987 loss, instead of being added to the basis of stock or recognized solely when the owner of the Section 987 QBU and the related foreign person cease to be related.

If a Section 987 loss is recognized in a QBU termination in which there is a successor QBU, the Section 987 loss is deferred and generally becomes attributable to the successor QBU. This loss is recognized under the loss-to-the-extent-of-gain rule above. A successor QBU need not be a Section 987 QBU, let alone one that earns Section 987 gain of the same recognition grouping, making a deferral an effective disallowance in some cases.

If the owner of a Section 987 QBU or the original owner of a successor Section 987 QBU ceases to be a member of the same controlled group as its successor Section 987 QBU or ceases to exist including as a result of a Section 331 liquidation or inbound Section 332 liquidation or reorganization, all of the owner’s suspended Section 987 loss would be eliminated and never would be recognized.

Observation: Under the 2023 proposed regulations, certain business transactions, such as taxable liquidations and inbound liquidations and reorganizations, could result in the permanent disallowance of a gross economic Section 987 loss notwithstanding that gross Section 987 gains, if any, would be recognized in such transactions. Companies with Section 987 losses should proceed cautiously in undertaking such transactions.

Source and character of Section 987 gain or loss

Under the 2023 proposed regulations, the character and source of Section 987 gain or loss generally would be determined for all purposes of the Code (including for purposes of foreign tax credits and subpart F) by assigning the Section 987 gain or loss to the statutory and residual groupings using the asset method of Reg. 1.861-9(g) and 1.861-9T(g) and using only the tax book value method (i.e., not the fair market value method) to determine the value of the Section 987 QBU’s assets. The 2023 proposed regulations also provide various rules to coordinate this assignment of Section 987 gain or loss to a statutory and residual grouping with the rules for foreign tax credits, GILTI, and subpart F.

Observation: The 2023 proposed regulations would require an initial assignment of Section 987 gain or loss to statutory and residual groupings. Also, to the extent that the Section 987 gain or loss is not recognized in the tax year of the initial assignment, the 2023 proposed regulations may require a subsequent reassignment in the tax year that the Section 987 gain or loss is recognized.

Special rules

Consolidated groups.

To implement single entity treatment under the intercompany transaction regulations in Reg. 1.1502-13, the 2023 proposed regulations would treat a transaction between the Section 987 QBU of one member and any other member of the same group (including a Section 987 QBU of that other member) as a combination of (1) an intercompany transaction between the members and (2) a transfer between each Section 987 QBU and its owner as necessary to take into account the effect of the transaction on the assets and liabilities of each Section 987 QBU. For example, if a Euro-functional Section 987 QBU borrows Euros from a member of the US consolidated group other than its owner, the transaction is recharacterized as (1) a Euro-denominated loan between the US consolidated group members and (2) a contribution to the Euro Section 987 QBU.

Observation: This characterization would create a difference between the economic and financial statement foreign currency gain or loss and the tax gain or loss. The recast could impact a company’s hedging strategy as well as creating downstream consequences for corporate alternative minimum tax computations.

Observation: The 2023 proposed regulations would 'match' the consequences (e.g. timing, amount, and character) of the deemed transaction between the members of the consolidated group (thereby resulting in no effect on consolidated taxable income) and would subject the deemed transactions between the relevant consolidated group member and its Section 987 QBU to the rules otherwise applicable to transactions between a Section 987 QBU and its owner. Treasury has requested comments on how rules similar to the separate return limitation year loss rules under Reg. 1.1502-21(c) should apply when a corporation owning a Section 987 QBU with suspended or deferred Section 987 losses joins a consolidated group.

Partnerships

The 2023 proposed regulations would retain an aggregate approach to partnerships between related parties, meaning that each partner computes Section 987 gain or loss on its own QBU comprised of its portion of the partnership’s assets.

The 2023 proposed regulations propose to apply a hybrid approach to partnerships that are not wholly owned by related parties. With respect to a partnership that uses a different functional currency than its partners, the partners must compute Section 987 gain or loss on a QBU comprised of their portions of the assets. The partnership, however, is treated as the owner of any Section 987 QBUs it owns (i.e., an eligible QBU with a functional currency that is different from the functional currency of the partnership). The partnership would allocate each partner a share of the unrecognized Section 987 gain or loss for the tax year with respect to each Section 987 QBU owned by the partnership on an annual basis. Section 987 gain or loss attributable to a Section 987 QBU owned by a partnership would be recognized and taken into account at the partner level. The proposed regulations would treat S corporations in the same manner as partnerships.

Observation: Treasury anticipates publishing a subsequent notice of proposed rulemaking that more thoroughly would address the application of Section 987 to partnerships. The 2023 proposed regulations reserve on the treatment of transfers and redemptions of a partner’s partnership interest.

Expansion of entities covered

The 2023 proposed regulations would apply to certain entities previously excluded from the 2016 final regulations, such as an S corporation, bank, insurance company, leasing company, finance coordination center, regulated investment company (RIC), or real estate investment trust (REIT). The 2023 proposed regulations generally continue to exclude foreign non-grantor trusts and foreign estates if the aggregate interests of beneficiaries that are US persons is less than 10%, and foreign partnerships if the aggregate interests of the partners that are US persons is less than 10% of the capital and profits interests. Foreign individuals, foreign corporations that are not CFCs, and foreign corporations that are CFCs but which have no US shareholders (which are not excluded under the 2016 final regulations) also would continue generally to be excluded.

Observation : Treasury requests comments on whether any additional rules are needed to facilitate the application of the 2023 proposed regulations to the entities that were excluded from the 2016 final regulations, and comments on the application of the 2023 proposed regulations to partnerships and S corporations.

Applicability dates

The 2023 proposed regulations and the parts of the 2016 and 2019 final regulations that are not replaced or modified by the 2023 proposed regulations are proposed generally to apply, once finalized, to tax years beginning after December 31, 2024. A taxpayer may adopt the final version of the 2023 proposed regulations and the parts of the 2016 and 2019 final regulations that are not replaced or modified by the 2023 proposed regulation in their entirety for all QBUs for tax years ending after November 9, 2023.

The 2023 proposed regulations are proposed, once finalized, to apply retroactively to a terminating QBU on the day the Section 987 QBU terminates. A terminating QBU is a Section 987 QBU if both (1) the Section 987 QBU terminates on or after November 9, 2023, or as a result of an entity classification election filed on or after November 9, 2023 and effective before November 9, 2023, and (2) neither the new final regulations nor the 2016 and 2019 Section 987 regulations would apply to the Section 987 QBU when it terminates but for this accelerated applicability date.

Taxpayers would continue to apply Reg. 1.987-12 until the first tax year to which they apply the final version of the 2023 proposed regulations and the parts of the 2016 and 2019 final regulations that are not replaced or modified by the 2023 proposed regulations.

Observation: The preamble to the 2023 proposed regulations implies that the 2016 final regulations are deferred (to the extent not modified) to the effective date of the 2023 proposed regulations. Explicit published guidance on the deferral would be helpful to address this issue.

Tax Insight: Treasury defers applicability dates for foreign currency guidance (August 2022)
Tax Insight: Treasury and the IRS finalize and withdraw parts of the temporary Section 987 regulations (May 2019)
CBTT podcast: Branch FX: Were those Section 987 regulations final? (July 2019)

Download PDF

Get started with PwC's preference center

Our insights. Your choices.

2024 Tax Policy Outlook: Defining the choices ahead

The stakes rarely have been higher as business leaders seek to manage operations and plan investments in an environment of uncertain tax policy and tax changes....

Policy on Demand

Policy on Demand is a news platform that provides in-depth insights and analysis on tax policy, legislative and regulatory developments that impact your...

Krishnan Chandrasekhar

US Tax Leader, PwC US

© 2017 - 2024 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Data Privacy Framework
Cookie info
Terms and conditions
Site provider
Your Privacy Choices

Navigating the New Section 987 Regulations: Foreign Currency Gain and Loss for Foreign Branches and Branch-like Entities
GHJ Insights

The U.S. Treasury Department and the IRS released proposed regulations under Internal Revenue Code (IRC) section 987. The proposed rules provide long-sought guidance for taxpayers on how to calculate foreign exchange gains and losses of foreign branches and certain non-U.S. entities treated as disregarded entities for U.S. federal income tax purposes, which are referred to as qualified business units (QBUs).

BACKGROUND AND HISTORY OF SECTION 987

As previously discussed , U.S. taxpayers may operate QBUs with different functional currencies than those of their owners. Under IRC section 987, such QBUs must consider and track foreign exchange gains or losses with respect to the QBU’s assets and liabilities. QBU owners then recognize exchange gains or losses when the QBU makes a remittance to its owner.

IRC section 987 was originally enacted in 1986 and outlines general requirements for the determination of taxable income of QBUs. However, IRC section 987 does not provide detailed rules on how to calculate it. Instead, Congress authorized the U.S. Treasury Department to issue the comprehensive regulations needed to calculate and track realized and unrealized foreign exchange gains or losses of QBUs.

The first set of proposed regulations was issued in 1991, outlining a reasonably good, albeit imperfect, approach to deal with the matter. However, the 1991 proposed regulations were never finalized.

While taxpayers were allowed to rely on them as a “reasonable method” until such time when final regulations were released, the U.S. Treasury Department continued, over the following three decades, to issue various notices and revised proposed, temporary and final regulations, introducing new calculation and tracking methods of increasing complexity.

In 2017, then-President Trump issued Executive Order 13789 under which the 2016 proposed section 987 regulations were identified as one of the significant regulations that posed an undue burden on taxpayers. As a result, the 2016 proposed section 987 regulations were suspended until the issuance of a revised set of rules.

New final regulations were then released in 2019, but they introduced further complexities and did not substantially deviate from the 2016 regulations. The IRS later issued a notice deferring the applicability of these final regulations.

On Nov. 9, 2023, the U.S. Treasury Department issued a new set of proposed regulations that are expected to take effect in taxable years beginning after Dec. 31, 2024. These new regulations introduce certain elections intended to alleviate some of the complexities introduced in the 2006, 2016 and 2019 proposed, temporary and final regulations.

SECTION 987: THE 1991 PROPOSED RULES

As the 2016 regulations were suspended, most taxpayers could still rely on the 1991 proposed regulations when computing their foreign exchange gains and losses with respect to their QBUs.

Under those rules, U.S. taxpayers had to maintain an equity pool in the QBU’s functional currency and a basis pool in the QBU owner’s functional currency. These pools were increased by the QBU’s earnings and by capital contributions into the QBU, and were reduced by remittances, losses and other transfers from the QBU.

IRC section 987 gain or loss was recognized at the time of a remittance (for example, a distribution from the QBU to the U.S. owner) or upon termination of the QBU.

The amount of the IRC section 987 gain or loss was the difference between the value of the remittance in the taxpayer’s functional currency (translated at the spot rate) and the portion of the basis pool attributable to the remittance.

SECTION 987: THE 2023 PROPOSED RULES

The latest proposed regulations are built on the basic structure of the 2016 and 2019 regulations but add certain modifications. The proposed regulations apply to individuals, corporations, partnerships, S corporations, non-grantor trusts and estates. The 2016 and 2019 regulations introduced a new approach called the foreign exchange exposure pool (FEEP) method.

At a high level, the FEEP method requires that the balance sheet of a QBU be translated to the QBU owner’s functional currency at the end of every year. When doing so, assets and liabilities are broken out into two different asset types:

Historic Items: These are assets and liabilities that must be translated at the historic currency exchange rates at the acquisition date of the asset or liability. Common examples are non-financial assets such as land, fixed assets, PP&E and related depreciation or amortization.
Marked Items: These are typically financial assets that must be translated at the current spot rate at the end of each year.

Next, the QBU owner must determine the pool of unrecognized IRC section 987 gain or loss based on the annual increase or decrease to the QBU’s balance sheet that is attributable to foreign exchange rate fluctuations.

Since Historic Items are translated at the historic rate, while Marked Items are converted at the applicable spot rate for the year, foreign currency exchange gain or loss on Historic Items is only recognized upon a realization event and will not affect other remittances, while currency fluctuations related to Marked Items do affect those remittances.

In contrast to the 1991 regulations, the FEEP method essentially creates recognition of section 987 foreign exchange gain or loss only with respect to assets and liabilities that are economically exposed to currency fluctuations and prevents taxpayers from recognizing large section 987 losses on items for which foreign exchange fluctuations have a remote effect on value.

Tracking Historic Items creates significant complexity, which was the reason the 2017 Executive Order suspended the 2016 section 987 Regulations. In an effort to remedy this complexity to some extent, the U.S. Treasury Department introduced the following two elections.

NEW ELECTIONS UNDER THE FEEP METHOD

To simplify the FEEP method for taxpayers, the proposed regulations include a Current Rate Election and an Annual Recognition Election. Once these elections are made, they cannot be revoked for five years without the IRS Commissioner’s consent. Similarly, once revoked, they cannot be made again for five years without consent.

Current Rate Election

The Current Rate Election is designed to alleviate the compliance burden arising from tracking the historic rate for each Historic Item. With this election, for purposes of computing the taxable income or loss for the U.S. owner, all items of income, gain, deduction and loss with respect to a section 987 QBU would be translated at the yearly average exchange rate for the current tax year. For purposes of computing section 987 gain or loss, all items of the QBU would be translated at the year-end spot rate.

While this election makes the FEEP method simpler to execute, a section 987 loss would be suspended until a tax year in which an equal or greater amount of section 987 gain is recognized or until the occurrence of certain recognition events. In other words, a taxpayer who made the Current Rate Election would only keep track of the accrued net unrecognized section 987 loss and use it to offset future section 987 gains in the same foreign tax credit limitation category.

Annual Realization Election

The Annual Realization Election allows the QBU owner to recognize the full amount of its net unrecognized section 987 gain or loss on an annual basis even if there is no remittance or QBU termination. If a taxpayer makes both the Current Rate Election and the Annual Realization Election, the loss suspension rule under the Current Rate Election does not apply. Since the Annual Recognition Election has the effect of converting some of the QBU owner’s income into section 987 gain or loss, it may change the source and character of such income.

TRANSITION RULES

To facilitate the transition to the rules under the proposed regulations, a QBU owner would convert the assets and liabilities on its QBU’s balance sheet using the spot rate on the day before the transition date, which is Jan. 1, 2025 for calendar year taxpayers. This will in effect avoid requiring taxpayers to retrospectively determine historic exchange rates for items acquired before that date.

This pre-transition gain or loss can be computed using any reasonable method (defined as any eligible pretransition method) of applying IRC section 987 before the transition date that fully accounts for foreign currency gain or loss attributable to a QBU’s assets and liabilities. For this purpose, the widely used “earnings and capital” method described in the 1991 proposed regulations would be considered an eligible pretransition method.

Foreign currency is one of the most difficult and often confusing topics in international tax given the complexity of the rules. Taxpayers with foreign branches and disregarded entities must review their business structure and ensure that they are prepared to apply the new IRC section 987 rules correctly. Although the proposed regulations apply to taxable years after Dec. 31, 2024, a significant amount of planning is needed in the interim period to be ready to implement these rules:

Determine what method, if any, was applied in prior years for foreign currency in QBUs
Consider the effect of termination of QBUs after Nov. 9, 2023
Consider non-terminating remittances
Consider if the default method (FEEP) or elections should be used

It is now a great time to perform this review and reach out to U.S. international tax experts to model the effects of the rules and plan for the transition.

Please contact GHJ’s International Tax Services Team to discuss how these new proposed regulations might impact a specific business’ U.S. federal tax position and to prepare for the transition to the new regime.

Andreas Koller

Andreas Koller, CPA, is a leader in GHJ’s International Tax Practice. He has over 20 years of international tax experience in both public accounting and corporate accounting. Throughout his career, Andreas has worked in three countries and served multinational companies in a variety of industries …Learn More

Jacinta Lam

Jacinta Lam, CPA, has nine years of public accounting experience providing international tax consulting and compliance services to businesses and individuals in the U.S. Jacinta started her career at GHJ in 2015. She worked at two other firms, a top-10 firm and a Big Four firm, before rejoining GHJ …Learn More

The marketplace is changing fast, are you keeping up?

Subscribe to our bi-weekly Digital Digest to stay up-to-date on current trends and marketplace updates! Want to learn more about a specific industry? (Choose one below)

To protect your privacy, GHJ uses a double-opt in sign up for our mailing lists. After you complete this form, you will receive an email to confirm your signup. Please click the link on the email to complete the registration and be added to GHJ’s email lists.

Global (EN)
Albania (en)
Algeria (fr)
Argentina (es)
Armenia (en)
Australia (en)
Austria (de)
Austria (en)
Azerbaijan (en)
Bahamas (en)
Bahrain (en)
Bangladesh (en)
Barbados (en)
Belgium (en)
Belgium (nl)
Bermuda (en)
Bosnia and Herzegovina (en)
Brasil (pt)
Brazil (en)
British Virgin Islands (en)
Bulgaria (en)
Cambodia (en)
Cameroon (fr)
Canada (en)
Canada (fr)
Cayman Islands (en)
Channel Islands (en)
Colombia (es)
Costa Rica (es)
Croatia (en)
Cyprus (en)
Czech Republic (cs)
Czech Republic (en)
DR Congo (fr)
Denmark (da)
Denmark (en)
Ecuador (es)
Estonia (en)
Estonia (et)
Finland (fi)
France (fr)
Georgia (en)
Germany (de)
Germany (en)
Gibraltar (en)
Greece (el)
Greece (en)
Hong Kong SAR (en)
Hungary (en)
Hungary (hu)
Iceland (is)
Indonesia (en)
Ireland (en)
Isle of Man (en)
Israel (en)
Ivory Coast (fr)
Jamaica (en)
Jordan (en)
Kazakhstan (en)
Kazakhstan (kk)
Kazakhstan (ru)
Kuwait (en)
Latvia (en)
Latvia (lv)
Lebanon (en)
Lithuania (en)
Lithuania (lt)
Luxembourg (en)
Macau SAR (en)
Malaysia (en)
Mauritius (en)
Mexico (es)
Moldova (en)
Monaco (en)
Monaco (fr)
Mongolia (en)
Montenegro (en)
Mozambique (en)
Myanmar (en)
Namibia (en)
Netherlands (en)
Netherlands (nl)
New Zealand (en)
Nigeria (en)
North Macedonia (en)
Norway (nb)
Pakistan (en)
Panama (es)
Philippines (en)
Poland (en)
Poland (pl)
Portugal (en)
Portugal (pt)
Romania (en)
Romania (ro)
Saudi Arabia (en)
Serbia (en)
Singapore (en)
Slovakia (en)
Slovakia (sk)
Slovenia (en)
South Africa (en)
Sri Lanka (en)
Sweden (sv)
Switzerland (de)
Switzerland (en)
Switzerland (fr)
Taiwan (en)
Taiwan (zh)
Thailand (en)
Trinidad and Tobago (en)
Tunisia (en)
Tunisia (fr)
Turkey (en)
Turkey (tr)
Ukraine (en)
Ukraine (ru)
Ukraine (uk)
United Arab Emirates (en)
United Kingdom (en)
United States (en)
Uruguay (es)
Uzbekistan (en)
Uzbekistan (ru)
Venezuela (es)
Vietnam (en)
Vietnam (vi)
Zambia (en)
Zimbabwe (en)
Financial Reporting View
Women's Leadership
Corporate Finance
Board Leadership
Executive Education

Fresh thinking and actionable insights that address critical issues your organization faces.

Insights by Industry
Insights by Topic

KPMG's multi-disciplinary approach and deep, practical industry knowledge help clients meet challenges and respond to opportunities.

Advisory Services
Audit Services
Tax Services

Services to meet your business goals

Technology Alliances

KPMG has market-leading alliances with many of the world's leading software and services vendors.

Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. That’s why KPMG LLP established its industry-driven structure. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

Our Industries

How We Work

We bring together passionate problem-solvers, innovative technologies, and full-service capabilities to create opportunity with every insight.

What sets us apart

Careers & Culture

What is culture? Culture is how we do things around here. It is the combination of a predominant mindset, actions (both big and small) that we all commit to every day, and the underlying processes, programs and systems supporting how work gets done.

Relevant Results

Sorry, there are no results matching your search., reviewing the proposed section 987 regulations.

Webcast overview

Taxpayers have faced uncertainty as to how to properly account for their foreign branch operations since Congress first enacted section 987 due to the lack of currently applicable Treasury Regulations.

On November 14, 2023, IRS and Treasury published proposed regulations under section 987. Largely consistent with the regulations proposed in 2006 and 2016, these regulations require taxpayers to employ a complex methodology, especially in comparison with the profit-and-loss methodologies commonly employed by taxpayers today.

This one-hour TaxWatch webcast featuring professionals from our International Tax practice, focuses on the following areas:

Overview of the new proposed section 987 regulations
Significant changes from prior regulations
The new transition rules
Various elections available to taxpayers and related loss limitations
Looking ahead to expected applicability date

Meet our webcast team

Explore more

International Tax

Helping multinational organizations succeed in today’s complex international tax environment

Washington National Tax

The technical a core of the U.S. Tax practice

Modeling a World of Tax

The far-reaching power of KPMG tax models

Thank you for contacting KPMG. We will respond to you as soon as possible.

Contact KPMG

By submitting, you agree that KPMG LLP may process any personal information you provide pursuant to KPMG LLP's Privacy Statement .

Job seekers

Visit our careers section or search our jobs database.

Use the RFP submission form to detail the services KPMG can help assist you with.

Office locations

International hotline

You can confidentially report concerns to the KPMG International hotline

Press contacts

Do you need to speak with our Press Office? Here's how to get in touch.

3 Corporate Tax Management Cost Saving Strategies to Consider

Growing multinational companies juggle many tax responsibilities. Here are some tips for keeping all the balls in the air.

5 Things to Look for When Hiring a Corporate Tax Services Firm

Tax Co-Sourcing Re-Defined

Internal resources may not be enough to cover all your tax needs. GTM’s co-sourcing solution is the strategic and cost-effective alternative for your tax department.

Tax Insights

Join Our Team

Looking to make a difference and grow professionally? GTM is 100% employee owned and actively looking for tax talent at all levels to grow with us. Interested?

FAQs: Proposed Regulations for Section 987

March 27, 2024
Reading Time: 8 mins

30 Second Summary

In a recent webinar, GTM’s Raymond Wynman and Andrew McKinley shared insights regarding the new set of proposed regulations for Section 987.
If the 2023 proposed regulations are finalized, transitioning to a new Section 987 methodology will create substantial work for tax departments.
In this article, GTM’s International Tax Services team addresses additional questions regarding the proposed regulations for Section 987.

In GTM’s recent webinar , “Proposed Regulations for Section 987: Is This It?” we examined the newest set of Section 987 proposed regulations released in November 2023. Participants asked several questions during the session, including some that we could not address live due to time constraints.

In this article, we address all questions in more detail, arranged by topic. Unless otherwise noted, all references below to “Prop. Reg. §” refer to the 2023 Section 987 Proposed Regulations.

Application to CFCs

Q: does section 987 apply to a foreign tax owner (controlled foreign corporation (“cfc”)) having a qbu.

A: Section 987 does apply in any situation where the tax owner (e.g., CFC) has a different functional currency than the branch.

Note that special rules apply to Qualified Business Units (“QBUs”) owned by CFCs, including coordination rules with the Subpart F and (Global Intangible Low-Taxed Income (“GILTI”) high-tax exceptions [1] and non-carryover of suspended Sec. 987 losses on inbound liquidations and reorganizations under. [2]

987 Gain/Loss Mechanics

Q: under the 1991 proposed regulations, [3] is cash movement from a qbu to the qbu owner to settle an intercompany payable (i.e., inventory purchase or services) treated as a remittance.

A: Yes, under the 1991 proposed regulations, movements of cash or other property between a QBU and the QBU owner in disregarded transactions are generally treated as transfers of property that may constitute Section 987 remittances. For example, if a QBU repays a loan to the QBU owner in an otherwise disregarded, intra-taxpayer transaction, the transferred cash or property is a transfer that may be treated as a remittance. Similarly, if the QBU purchases property from the QBU owner in a disregarded transaction, the transfer of property is treated as a contribution of property to the QBU, and the payment by the QBU is treated as a transfer to the QBU owner. Each transaction must be analyzed under Section 987.

For this reason, accounting for all remittances under the 1991 proposed regulations can be very complicated in practice. Taxpayers who have been applying the 1991 proposed regulations as their Section 987 method should assess whether their application of the 1991 proposed regulations qualifies as a reasonable method.

Q: At what rate are contributions and remittances translated under the 2023 proposed regulations?

A: Under the default Foreign Exchange Exposure Pool (“FEEP”) method, marked assets are translated using the spot rate applicable to the date of transfer, and historic assets are translated at the historic rate for the asset. [4] If a current rate election is in effect, all QBU assets are treated as marked items. [5]

Q: Do the new regulations impact distributions between two QBUs with different functional currencies?

A: Beginning from the 2006 proposed regulations, [6] a QBU could not be considered an owner of another QBU. Under this “flat” approach, tiered QBUs are each treated as held directly by the owner, and transactions between tiered QBUs are treated as transactions between brother-sister QBUs (i.e., as transfers from one QBU to the owner, followed by transfers by the owner to the other QBU). This approach has been retained in the 2023 proposed regulations. [7]

Q: Can losses be carried forward indefinitely?

A: Yes, unrecognized or suspended Section losses can be carried forward indefinitely. However, note that Section 987 losses do not carry over in certain transactions (e.g., inbound liquidations/reorganizations, Section 331 liquidations of QBU owners, etc.).

Election Consistency Rules

Q: are the elections in the 2023 proposed regulations at the qbu level or owner’s level can taxpayers pick and choose different elections for each owner or qbu.

A: Elections are at the level of the QBU owner. A consistency rule requires elections to be made or revoked consistently for all members of the same consolidated group and all CFCs, partnerships, nongrantor trusts, and estates in which the ownership interests or beneficiary interests of the U.S. shareholder (or members of its consolidated group) exceed 50 percent. [8]

Transition Rules and Applicability Dates

Q: what about the unrealized section 987 losses derived before the 2023 regulations.

A: By default, pre-transition loss becomes a suspended 987 loss in the transition year, [9] and is available, subject to the Loss-to-the-Extent-of-Gain Rule, [10] to offset 987 gains of the QBU owner in the same recognition group (i.e., from the same source and category of income). Alternatively, taxpayers can elect to recognize pretransition gain or loss ratably over 10 years. [11]

Q: Is early adoption of the 2023 proposed regulations made on a QBU basis or by the entire consolidated group?

A: Voluntary early adoption of the 2023 proposed regulations applies to the entire consolidated group. A taxpayer may choose to apply the 2023 proposed regulations to a taxable year beginning on or before December 31, 2024, and ending after November 9, 2023, provided the taxpayer and each member of its consolidated group and Section 987 electing group: (1) consistently apply the Section 987 regulations in their entirety to the taxable year and all subsequent taxable years beginning on or before December 31, 2024; and (2) apply the Section 987 regulations on their original timely filed (including extensions) returns in the first taxable year in which the Sec. 987 regulations apply. [12]

Q: Can taxpayers have a different 987 method for QBUs that did not terminate during the transition period, or would a taxpayer be required to early adopt for ALL QBUs if it have a QBU that terminated on or after November 9, 2023?

A: The special applicability date for QBUs terminating on or after November 9, 2023, applies only with respect to the terminating QBU, any successor deferral QBUs or successor suspended loss QBUs (in their capacity as such), and any net unrecognized Section 987 gain or loss, deferred Section 987 gain or loss, or suspended Section 987 loss with respect thereto. [13] Therefore, a terminating QBU would not force the rest of the group to early adopt the 2023 proposed regulations.

Note that the 10-year amortization election only applies to pretransition gain/loss and cannot be made with respect to a terminating QBU. If a taxpayer has unrealized 987 losses in a terminating QBU which would become suspended 987 losses, and the taxpayer does not expect to be able to recognize this suspended loss under the Loss-to-the-Extent-of-Gain Rule (i.e., no future 987 gains in the same recognition group), the taxpayer may consider voluntarily early-adopting the 2023 proposed regulations in order to make the amortization election and allow the loss to be recognized.

Tax Accounting Considerations for Section 987

Q: is anything needed from a tax accounting/financial reporting perspective if the regulations are finalized.

A: Assuming the taxpayer has not previously adopted the 2016 final regulations and does not intend to early-adopt the 2023 proposed regulations, the taxpayer should continue to compute current tax balances and related expense/benefit under its current 987 method prior to finalization. When the 2023 proposed regulations are finalized, the taxpayer will need to adjust its current and deferred tax balances for US GAAP in the reporting period when the regulations are finalized, taking into account pretransition unrecognized Sec. 987 gains/losses. Note that the ultimate tax accounting impact will depend on each taxpayer’s historic position(s) for recording deferred taxes on basis differences (both inside and outside basis) related to unrealized foreign exchange. Factors such as whether ultimate realization would generate GILTI or Subpart F income and the taxpayer’s indefinite reinvestment assertion for outside basis differences under US GAAP may dictate the deferred tax treatment. Taxpayers should consult with their financial statement auditors given the various interpretations and complexities around this topic.

GTM’s International Tax Services team can assist you with all aspects of Sec.987. Contact us below to explore how we can help.

[1] Prop. Reg. § 1.987-6(b)(2).

[2] Prop. Reg. §1.987-13(g).

[3] INTL-965-86, 56 Fed. Reg. 48,457 (September 25, 1991).

[4] Prop. Reg. §1.987-2(d).

[5] Prop. Reg. §1.987-1(d)(2)

[6] REG-208270-86, 71 Fed. Reg. 52,876, 52,890 (September 7, 2006).

[7] Prop. Reg. §1.987-1(b)(5).

[8] Prop. Reg. §1.987-1(g).

[9] Prop. Reg. §1.987-10(e)(5)(i)(B).

[10] Prop. Reg. §1.987-11(e). Prop. Reg. §1.987-10(e)(5)(i)(B).

[11] Prop. Reg. §1.987-10(e)(5)(ii).

[12] Prop. Reg. §1.987-14(b).

[13] Prop. Reg. §1.987-14(a)(2).

About The Author(s)

Other articles by raymond wynman, pillar two: q1 2024 checklist for us mnes, webinar: proposed regulations for section 987: is this it, webinar: navigating pillar two: an update and guide to transitional safe harbour rules, other articles by ross mckinney, tax technology and pillar two: orbitax’s gmt software and a client’s story, webinar: international tax traps and opportunities in 2023, other articles by andrew mckinley, understanding section 905(c) and the foreign tax credit, other articles by andrew wai, common pitfalls: gilti high-tax exception and interest expense apportionment, new proposed ftc regulations: relaxing the cost recovery and attribution requirements, speak with us.

Have a pressing tax matter? We can help unpack it. Let’s set up a time to discuss your current situation, tax needs, and how GTM’s corporate tax management can add value to your tax department.

View Tax Insights

Discover fresh thinking, how-tos, and practical approaches to help you keep pace with the changing landscape of corporate tax. Read our tax insights now.

Explore Job Openings

Looking to make an impact? Join us! We’re always looking for talented tax professionals to grow with us. See what’s available right now.

Singapore Issues 7th Edition of Its Transfer Pricing Guidelines August 19, 2024 Read More »

Tax Liability Insurance for Tax Certainty August 4, 2024 Read More »

GTM Ranked in Top 100 Firms by INSIDE Public Accounting for Second Consecutive Year August 6, 2024 Read More »

Privacy Overview
Strictly Necessary Cookies

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.

Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.

If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.

Client Login
Services Learn About Our Services
Industries Learn About Our Industries
About Learn About KSM
Careers Learn About Careers

Section 987 Regulations: Calculation and Elections

As a follow up to “ Section 987 Regulations: Key Considerations ” and “Section 987 Regulations: Terminology Explained,” this third and final post in this series will focus on the calculation under the final regulations along with some of the potential elections that can be made related to Section 987 branch remittances. As a reminder, final regulations for Section 987 were issued at the end of 2016 regarding how to calculate foreign exchange gain or loss on remittances from a branch to its tax owner. The final regulations measure gain or loss on certain branch assets and liabilities annually, but the gain or loss is not recognized until there is a net remittance or termination of the branch.

In order to calculate Section 987 foreign exchange gain or loss, a Foreign Exchange Exposure Pool (FEEP) needs to be established. The pool is increased or decreased each year by the net unrecognized Section 987 gain or loss on a Section 987 Qualified Business Unit (QBU). The income statement and balance sheet need to be translated appropriately into the owner’s functional currency. For the income statement, most items are translated at the average rate for the year, with cost of goods sold, depreciation, and amortization being an exception. Each asset and liability on the balance sheet must be categorized as a marked or historic item.

As defined in “Section 987 Regulations: Terminology Explained,” marked items include cash, debt, payables, receivables, and foreign currency derivatives. They are generally translated at the current spot rate as of the end of the tax year. Historic items include everything else, such as land, buildings, plant, equipment, and inventory. These items are generally translated at the historic rate, which is the spot rate for the year in which the asset was transferred, acquired, or created.

The most widely applicable exceptions that were indicated above are:

Cost of Goods Sold – A tax filer can elect either the simplified method (average rate with adjustments) or the historic method (average rate for the year the inventory was acquired).
Depreciation/Amortization – This is for noninventory goods only, and the tax filer must use the average rate from the year that the underlying asset being depreciated or amortized was transferred, acquired, or created.
Inventory – A tax filer can elect to use the simplified last in first out (LIFO) method (average rate for the year the LIFO layer arose), otherwise use the average rate for the year in which the inventory itself was transferred, acquired, or created.
Tangible/Intangible Assets – A tax filer must use the average rate for the year in which the assets were transferred, acquired, or created.

The basic equation for recognized Section 987 gain or loss is relatively straightforward, and is measured in the tax owner’s functional currency.

Section 987 Gain or Loss = Net Unrecognized Gain or Loss x (Remittance / (QBU’s Gross Assets at End of Year + Remittance))

In order to calculate the net unrecognized gain or loss for the year, an eight-step process must be followed:

Calculate the change in the balance sheet net worth in the tax owner’s functional currency
Add transfers from the QBU to the tax owner
Subtract transfers from the tax owner to the QBU
Add owner liabilities assumed by the QBU
Subtract QBU liabilities assumed by the owner
Add current year loss and subtract current year income
Add nondeductible expenses
Subtract tax exempt income

In addition to the calculation itself, there are several elections and transition methods available to the taxpayer. One of the most important transition methods is the fresh start method. Unless the taxpayer has been following the 2006 Proposed Regulations, they must use the fresh start transition method to move from an old method (or no method) to a new method. This will result in the taxpayer losing any unrecognized gain or loss established to date.

There are also anti-abuse limitations in place that prevent many planning strategies available to taxpayers if they wanted to recognize any unrecognized Section 987 gain or loss that had been tracked under a different method. Under the fresh start method, the Section 987 QBU is deemed to terminate. No gain or loss is recognized and the tax owner is treated as transferring all assets and liabilities of the QBU to a new Section 987 QBU. The assets and liabilities are translated utilizing the exchange rates on the day the assets were acquired or liabilities were entered into by the QBU. This will result in built-in gain or loss on marked items as reflected on the balance sheet.

One election available to taxpayers to help ease some of the calculation burden is the annual deemed termination election. Under this election, the QBU is deemed to terminate every year and any Section 987 gain or loss will be recognized annually. This is a binding election. It eases some of the tracking requirements related to calculating the cumulative unrecognized Section 987 gain or loss pool; however, it takes away the ability to control the timing of when those gains or losses are recognized. Additionally, this election allows the taxpayer to translate all items at the average exchange rate, instead of having to track historic rates.

Finally, taxpayers need to consider making a grouping election for QBUs. This election is made on an owner-by-owner basis and allows Section 987 QBUs that have the same functional currency to be grouped together. It can help ease some of the tracking and administrative complexity inherent in the calculation.

As indicated throughout this series, Section 987 is a complex topic with quite a bit of terminology and administrative burden. The Trump administration has asked the U.S. Department of Treasury to review these regulations to determine if they are overly complex or burdensome. Treasury should have a response to the request by the end of September 2017. However, even if these regulations are changed or modified, it is important to remember that Section 987 itself has been in existence for a long time and continuing to do nothing regarding branch remittances is risky. Please reach out to your KSM advisors with any questions or concerns regarding Section 987, specifically in regards to branch remittances.

Case studies

Energy and resources

How data analytics can strengthen supply chain performance

13 Jul 2023 Ben Williams

How Takeda harnessed the power of the metaverse for positive human impact

26 Jun 2023 Edwina Fitzmaurice

Banking and Capital Markets

How cutting back infused higher quality in transaction monitoring

11 Jul 2023 Ron V. Giammarco

At EY, our purpose is building a better working world. The insights and services we provide help to create long-term value for clients, people and society, and to build trust in the capital markets.

New EY research finds AI investment is surging, with senior leaders seeing more positive ROI as hype continues to become reality

15 Jul 2024 Lizzie McWilliams

New EY Consumer Products and Retail Executive Pulse reveals perception vs. reality gap for AI maturity

09 Jul 2024 EY Americas

EY Announces Winners for the Entrepreneur Of The Year® 2024 Mid-Atlantic Award

21 Jun 2024 Victoria Kasper

No results have been found

Recent Searches

CIO Survey: will you set the GenAI agenda or follow the leaders?

Get insights on how CIOs will address the challenges and capture the full benefits of GenAI in the 2024 EY CIO Sentiment Survey.

How a flexible supply chain raised the bar for the beverage industry

The client’s goal: better accommodate future growth, predict customer demands, and add agility to inventory and production lines. Learn how we did it.

How can your business go from competitive to cutting edge?

Learn how the EY-Microsoft Alliance delivers AI driven strategies and smart business solutions using cloud technology.

Select your location

Proposed regulations under IRC Section 987

Please join our panelists for an in-depth discussion of the recently released proposed IRC Section 987 regulations, which provide new guidance on determining income and currency gain or loss with respect to a qualified business unit (QBU) that uses a different functional currency than its tax owner. While the proposed regulations retain some of the framework from the 2016 and 2019 final regulations, numerous important changes have been made that will require significant analysis, data gathering and computations in advance of transitioning to the new rules.

The following topics will be discussed:

Important transition considerations, including a new transition rule, the difference between being on an “eligible” pre-transition method or not, and the detailed “Section 987 Transition Information” that must be provided for each IRC Section 987 QBU
Potential alternative approaches available under the proposed regulations, including the default foreign exchange exposure pool (FEEP) method, the Current Rate Election and the Annual Recognition Election
Provisions that apply prior to transition, including special rules with respect to IRC Section 987 QBU terminations
Characterization of IRC Section 987 gain or loss as subpart F income or global intangible low-taxed income (GILTI)
Colleen Zeller, Partner, National Tax – International Tax and Transaction Services, Ernst & Young LLP
Tim Kerr, Partner, National Tax – International Tax and Transaction Services, Ernst & Young LLP
Ray Stahl, Principal, National Tax – International Tax and Transaction Services, Ernst & Young LLP
Lee Holt, Partner, National Tax – International Tax and Transaction Services, Ernst & Young LLP

EY webcast managed and produced by Ernst & Young LLP’s Tax Technical Knowledge Services Group, Washington, DC: Lynn Fairfax

ondemand_video Webcast

CPE credits: 1.2

schedule Time

your local time

Link Copied

Stay up to date in today's complex and rapidly changing corporate tax environment.

Connect with us
Our locations
Do Not Sell or Share My Personal Information
Legal and privacy
Accessibility
Open Facebook profile
Open X profile
Open LinkedIn profile
Open Youtube profile

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

August 11, 2021

Section 987 practice unit reflects a permissive attitude towards different methods of branch currency translation.

A few weeks ago, the IRS released a new “practice unit” providing training for its examiners on translation of foreign currency gains and losses of branches (so-called qualified business units, or QBU) under §987. 1 Interestingly, despite the hundreds of pages of proposed and final regulations that have been issued on this subject since 2006, the practice unit boils down §987 to a few key takeaways reflected on approximately 10 slides. Noticeably absent from the practice unit is any detailed training on the complex calculations required under the final 2016 regulations (that are currently and temporarily suspended).

After describing the concept of a branch, or QBU, that operates in a different functional currency, the practice unit notes that taxpayers commonly employ several methods of computing §987 consequences of operating through a QBU:

The profit and loss method, as set out in the now-withdrawn 1991 proposed regulations
The “earnings only” variation of the profit and loss method
The original Foreign Exchange Exposure Pool (“FEEP”) method set out in the 2006 proposed regulations
The modified FEEP method that was incorporated in the final regulations issued in 2016, which are currently suspended until at least 2022 for calendar-year taxpayers -- see IRS Notice 2020-73

The actual operation of these methods is summarized in a single slide with a brief conceptual description of the method. There is no detailed walk-through of the method currently reflected in the 2016 final regulations, which the practice unit treats as just one of several commonly employed methods for applying a statute in need of practical interpretation. Perhaps this is a tacit acknowledgment by the IRS that the profit and loss method (or earnings only variation) remains an equally viable method under the statute and legislative history. 2

Gain and Loss Deferral Rules

Importantly, the practice unit reminds IRS examiners that the final regulations include immediately operative gain and loss deferral rules. Regardless of the method chosen to apply §987, these deferral rules apply to prevent certain intragroup transfers of QBUs from triggering §987 gains, and more importantly from the IRS and Treasury’s perspective, losses. Since the original 2000 guidance project reconsidering the 1991 proposed regulations, preventing the selective recognition of §987 losses has long been a major goal of the IRS and Treasury in implementing §987.

The deferral rules are found in Treas. Reg. §1.987-12. As explained by the practice unit, the concept of the “[deferral] rules were established to defer §987 losses when there was a continuity of ownership of the QBU within a single controlled group.” The deferral rules contain two parts: one set of rules which defers both gains and losses on what might be termed technical terminations of a QBU and a separate set of “outbound loss events” that prevents the outbound transfer of a QBU from the U.S. parent to a controlled foreign corporation (CFC) in a transaction governed by §367 from triggering §987 loss.

Under the first set of rules, neither §987 gain nor loss is currently recognized on certain terminations of a QBU. Specifically, deferral events include the termination of a QBU arising from events other than those due to cessation of the QBU’s business (i.e., a winding up of a QBU), a foreign corporation owner of the QBU ceasing to be a CFC, or certain mergers or liquidations involving CFCs in which the QBU is transferred to a CFC with the same functional currency as the QBU. (The events excepted from the deferral rule all represent situations in which the controlled group’s owning economic exposure to the branch’s functional currency investment is effectively terminated.)

In addition, for gain or loss to be deferred, the QBU’s trade or business must be conducted by a valid “successor QBU.” The successor QBU is defined as a QBU in the same controlled group and which QBU, if the original QBU was held by a U.S. person, is also owned by a U.S. person.

The rationale of these rules is to prevent internal transactions within the U.S. or CFC groups from triggering §987 gain or loss where another member of the group retains the exposure to the QBU’s gains or losses. The deferral of gains and losses, however, is limited under a “water’s edge” principle: gains are deferred only on transfers of a QBU between members of the U.S. group or between different CFCs (none of which has the same functional currency as the QBU). If the QBU crosses a border from the U.S. to foreign ownership, however, §987 gains would currently be recognized.

A separate rule of which the practice unit reminds examiners defers recognition of §987 loss on an “outbound loss deferral” event. On such a transfer, which would include an outbound transfer of a QBU to a foreign corporation, the §987 loss is deferred and added to the transferor’s basis in the transferee’s stock.

What Can we Glean from the Practice Unit?

The practice unit first serves as a reminder that, no matter what method a taxpayer may be using for purposes of applying §987, the IRS remains leery of taxpayers’ recognition of §987 loss particularly on internal restructuring transactions. The outbound loss deferral events and other more general deferral rules are currently in effect and the practice unit reminds examiners to apply those rules where it is appropriate to do so.

Second, the practice unit shows that the IRS’s own training materials do not, as of yet, include a detailed walk-through of the mechanics of the modified and detailed §987 method set out in the current final (yet temporarily suspended) 2016 regulations. This may foretell that the 2016 final regulations will continue to be suspended for the near future and/or that the IRS acknowledges that the 2016 final regulations are overly complex to be administered by its own compliance team. For now, at least, it would appear that the IRS acknowledges that any of the several “commonly employed” methods described in the slides is permissible. The statement from the U.S. Tax Court 70 years ago on this subject would still seem to be true today—that “a consistent method of accounting in a regularized and continuous business operation will succeed in reflecting income to a sufficiently accurate degree for Federal income tax purposes.” 3

1. Overview of IRC 987 and Branch Operations in a Foreign Currency (irs.gov) . ↩ 2. See §987(1) and (2) and 1986 Blue Book, p. 1109. See also House Report No. 99-426, 1986-3 C.B. Vol. 2 at 479; Senate Report No. 99-313, 1986-3 C.B. Vol. 3 at 470. ↩ 3. American Pad & Textile Co. v. Commissioner , 16 T.C. 1304, 1311 (1951) ↩

Related Insights

August 19, 2024

August 08, 2024

August 05, 2024

July 29, 2024

July 26, 2024

July 22, 2024

July 18, 2024

This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

FOREIGN INCOME & TAXPAYERS

Sec. 987 foreign currency regulations applicability date extended again

C Corporation Income Taxation
Tax Computation
Individual Income Taxation
International Tax
Income & Exclusions

Editor: Susan Minasian Grais, CPA, J.D., LL.M.

On Aug. 15, 2022, the IRS announced ( Notice 2022-34 ) that it intends to defer by one more year the applicability date of certain foreign currency regulations under Sec. 987. The affected regulations will be amended to apply to tax years beginning after Dec. 7, 2023 (e.g., to 2024 for calendar-year taxpayers).

2016 final, temporary, and proposed regulations: On Dec. 8, 2016, Treasury and the IRS published final (T.D. 9794), temporary (T.D. 9795), and proposed (REG-128276-12) regulations under Sec. 987. The 2016 final regulations provide guidance to corporations and individuals on determining taxable income or loss of a qualified business unit (QBU) whose functional currency differs from that of its owner (a Sec. 987 QBU). They also provide guidance on the timing, amount, character, and source of any Sec. 987 gain or loss arising from such a QBU. The temporary regulations, some of which were finalized in T.D. 9857, provided rules for deferring Sec. 987 gain or loss in connection with certain Sec. 987 QBU terminations and transactions involving partnerships, as well as other related elections and special rules. The proposed regulations cross-referenced the temporary regulations.

The 2016 final regulations’ prescribed approach for computing taxable income or loss and Sec. 987 gain or loss of a Sec. 987 QBU differs entirely from that used by most taxpayers for more than 30 years. The regulations also impose substantial recordkeeping and compliance requirements.

2019 final regulations: In T.D. 9857, effective May 13, 2019, Treasury and the IRS finalized certain provisions of the 2016 temporary regulations. Specifically, Temp. Regs. Secs. 1.987-2T and -4T (on combinations and separations of Sec. 987 QBUs) and Temp. Regs. Sec. 1.987-12T (addressing recognition and deferral of Sec. 987 gain and loss upon certain Sec. 987 QBU terminations and certain other transactions involving partnerships) were finalized with certain clarifications. In addition, Treasury and the IRS withdrew Temp. Regs. Sec. 1.987-7T (regarding the allocation of assets and liabilities of certain partnerships for purposes of Sec. 987).

Previous deferrals of the applicability date: The 2016 final regulations originally applied to tax years beginning on or after one year after the first day of the first tax year beginning after Dec. 7, 2016 (e.g., to 2018 for calendar-year taxpayers). The applicability date of the 2016 final regulations, however, has been deferred every year since they were released.

Notice 2022-34

Notice 2022-34 announces intended amendments to further delay the applicability date of the 2016 final regulations and certain related provisions of the 2019 final regulations by one additional year. Consequently, these regulations will now apply to tax years beginning after Dec. 7, 2023 (e.g., to 2024 for calendar-year taxpayers). The applicability date of Regs. Sec. 1.987-12 was not changed, so the deferral-event and outbound-loss-event rules of Regs. Sec. 1.987-12 generally apply to events occurring on or after Jan. 6, 2017.

Taxpayers may rely on the provisions of Notice 2022-34 before amendments to the final regulations are issued. Taxpayers may also choose to apply the 2016 final regulations, the related temporary regulations (until they were revoked on May 13, 2019, or expired on Dec. 6, 2019, as applicable), and the related 2019 final regulations (beginning on May 13, 2019) to tax years beginning after Dec. 7, 2016, and before Dec. 7, 2023, provided the taxpayer and its related parties consistently apply those regulations to those tax years.

Although the temporary regulations have expired, the notice indicates that taxpayers can rely on certain provisions of the proposed regulations, which cross-reference the temporary regulations, provided the taxpayer and its related parties consistently follow the proposed regulations in their entirety and apply the 2016 final regulations and the related 2019 final regulations for the same tax year. A taxpayer may rely on the annual deemed termination election provisions of the proposed regulations, provided that the taxpayer and its related parties consistently follow those proposed regulations in their entirety. Additionally, taxpayers may rely on Prop. Regs. Secs. 1.987-7 (Sec. 987 aggregate partnerships) and 1.988-2(b)(16) (deferral of loss on certain related-party debt instruments), provided that the taxpayer (and its related parties) consistently follow each section of those proposed regulations on which it relies.

Implications

The deferral was expected and is helpful because it gives taxpayers time to create and implement the complex systems and processes necessary to transition to the 2016 final regulations. Notice 2022-34 does not mention that the IRS is considering changes to these regulations to simplify the rules (although it has been mentioned in prior deferral notices).

Until the final regulations are effective, taxpayers must compute Sec. 987 gain or loss under a reasonable method and must also apply the deferral-event and outbound-loss-event rules of Regs. Sec. 1.987-12. Practitioners generally view a reasonable method as including (1) the methodology provided in the 1991 proposed regulations, (2) the “earnings only” methodology, or (3) early adoption of the 2016 final regulations. Such Sec. 987 gain or loss can affect taxable income or global intangible low-taxed income under Sec. 951A, each of which in turn may affect many other current income tax provisions.

Editor Notes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. Contributors are members of or associated with Ernst & Young LLP. For additional information about these items, contact Ms. Grais at 202-327-8788 or [email protected] .

A trust is not always a trust for federal income tax purposes

Advances between affiliated entities: an uphill but winnable battle for loan characterization, foreign partnership reporting requirements, sec. 163(j) planning considerations, bitcoin etfs: the known and unknown.

TAX PRACTICE MANAGEMENT

To get through the rigors of tax season, CPAs depend on their tax preparation software. Here's how they rate the leading professional products.

EMPLOYEE BENEFITS & PENSIONS

The 2022 act affected a wide array of retirement fund and pension plan provisions. This article highlights many of the most noteworthy ones, along with relevant IRS guidance and congressional plans for technical corrections.

26 CFR § 1.987-1 - Scope, definitions, and special rules.

(a) In general. These regulations under section 987 ( §§ 1.987-1 through 1.987-11) provide rules for determining the taxable income or loss of a taxpayer with respect to a section 987 QBU (as defined in paragraph (b)(2) of this section). Further, these regulations provide rules for determining the timing , amount , character , and source of section 987 gain or loss recognized with respect to a section 987 QBU. This section addresses the scope of these regulations and provides certain definitions , special rules , and the procedures for making the elections provided for in the regulations. Section 1.987-2 provides rules for attributing assets and liabilities and items of income , gain, deduction, and loss to an eligible QBU. It also provides rules regarding the translation of items transferred to a section 987 QBU. Section 1.987-3 provides rules for determining and translating the taxable income or loss of a taxpayer with respect to a section 987 QBU. Section 1.987-4 provides rules for determining net unrecognized section 987 gain or loss . Section 1.987-5 provides rules regarding the recognition of section 987 gain or loss . It also provides rules for determining an owner 's basis in assets transferred from a section 987 QBU. Section 1.987-6 provides rules regarding the character and source of section 987 gain or loss . Section 1.987-7 provides rules with respect to section 987 aggregate partnerships . Section 1.987-8 provides rules regarding the termination of a section 987 QBU. Section 1.987-9 provides rules regarding the recordkeeping required under section 987. Section 1.987-10 provides transition rules . Section 1.987-11 provides the effective/applicability date of these regulations.

(b) Scope of section 987 and definitions —(1) Taxpayers subject to section 987 —(i) In general. Except as provided in paragraphs (b)(1)(ii) and (b)(6) of this section, an individual or corporation is subject to these regulations under section 987 if such person is an owner (as defined in paragraph (b)(4) of this section) of an eligible QBU (as defined in paragraph (b)(3) of this section) that is a section 987 QBU (as defined in paragraph (b)(2) of this section).

(ii) Inapplicability to certain entities. Except as otherwise provided in paragraph (b)(1)(iii) of this section, these regulations under section 987 do not apply to specified entities described in this paragraph (b)(1)(ii), other than specified entities that engage in transactions primarily with related persons within the meaning of section 267(b) or section 707(b) that are not themselves specified entities. For this purpose, specified entities means banks, insurance companies , leasing companies, finance coordination centers, regulated investment companies , or real estate investment trusts . Further, except as otherwise provided in paragraph (b)(1)(iii) of this section, these regulations do not apply to trusts , estates, S corporations , and partnerships other than section 987 aggregate partnerships (as defined in paragraph (b)(5) of this section).

(iii) [Reserved] For further guidance, see § 1.987-1T(b)(1)(iii) .

(2) Definition of a section 987 QBU —(i) In general. A section 987 QBU is an eligible QBU (as defined in paragraph (b)(3) of this section) that has a functional currency different from its direct owner . A section 987 QBU also includes the assets and liabilities of an eligible QBU that are considered under paragraph (b)(5)(ii) of this section to be a section 987 QBU of a partner in a section 987 aggregate partnership (as defined in paragraph (b)(5) of this section). A section 987 QBU will continue to be treated as a section 987 QBU of the owner until a sale or other termination of the section 987 QBU as described in § 1.987-8(b). Except as provided in paragraph (b)(2)(ii) of this section, the functional currency of an eligible QBU shall be determined under § 1.985-1.

(ii) Section 987 QBU grouping election —(A) In general. Except as provided in paragraph (b)(2)(ii)(B) of this section, an owner may elect to treat, solely for purposes of section 987, all section 987 QBUs with the same functional currency that it directly owns as a single section 987 QBU.

(B) Special grouping rules for section 987 QBUs owned indirectly through a section 987 aggregate partnership. An owner may elect to treat all section 987 QBUs with the same functional currency owned indirectly through a single section 987 aggregate partnership (as defined in paragraph (b)(5) of this section) as a single section 987 QBU. An owner may not treat section 987 QBUs as a single section 987 QBU if such QBUs are owned indirectly through different section 987 aggregate partnerships . Additionally, an owner may not treat section 987 QBUs that are owned both directly and indirectly through a section 987 aggregate partnership as a single section 987 QBU.

(3) Definition of an eligible QBU —(i) In general. Eligible QBU means a qualified business unit, as defined in § 1.989(a)-1 , that is not subject to the Dollar Approximate Separate Transactions Method rules of § 1.985-3 .

(ii) Exclusion of certain entities. A corporation , partnership , trust , estate, or entity disregarded as an entity separate from its owner for Federal income tax purposes as described in § 301.7701-2(c)(2) (hereafter referred to as a “DE”) is not an eligible QBU (even though such an entity may have activities that qualify as an eligible QBU).

(4) Definition of owner. For purposes of these regulations under section 987, an owner is any person having direct or indirect ownership in an eligible QBU. Only an individual or corporation may be an owner of an eligible QBU. The term owner for section 987 purposes does not include an eligible QBU. For example , a section 987 QBU (QBU1) is not an owner of another section 987 QBU (QBU2) even if QBU1 owns the stock of QBU2.

(i) Direct ownership. An individual or a corporation is a direct owner of an eligible QBU if the individual or corporation is the owner for Federal income tax purposes of the assets and liabilities of the eligible QBU.

(ii) Indirect ownership. An individual or corporation that is a partner in a section 987 aggregate partnership (as defined in paragraph (b)(5) of this section) and is allocated, under § 1.987-7, all or a portion of the assets and liabilities of an eligible QBU of such partnership is an indirect owner of the eligible QBU.

(5) Section 987 aggregate partnership —(i) In general. A partnership is a section 987 aggregate partnership if:

(A) All of the interests in partnership capital and profits are owned, directly or indirectly, by persons related to each other within the meaning of sections 267(b) or 707(b). For purposes of this paragraph (b)(5), ownership of an interest in partnership capital or profits is determined in accordance with the rules for constructive ownership provided in section 267(c), other than section 267(c)(3); and

(B) The partnership has one or more eligible QBUs, at least one of which would be a section 987 QBU with respect to a partner if the partner owned the eligible QBU directly.

(ii) Section 987 QBU of a partner. The assets and liabilities of an eligible QBU owned through a section 987 aggregate partnership and allocated to a partner under the principles of § 1.987-7(b) are considered to be a section 987 QBU of such partner if the partner has a functional currency different from that of the eligible QBU.

(iii) Certain unrelated partners disregarded. In determining whether a partnership is a section 987 aggregate partnership , the interest of an unrelated partner shall be disregarded if the acquisition of such interest has as a principal purpose the avoidance of this paragraph (b)(5).

(6) [Reserved] For further guidance, see § 1.987-1T(b)(6) .

(7) Examples illustrating paragraph (b) of this section. The following examples illustrate the principles of paragraph (b) of this section. U.S. Corp is a domestic corporation , has the U.S. dollar as its functional currency, and uses the calendar year as its taxable year . Except as otherwise provided, (i) Business A and Business B are eligible QBUs and have the euro and the Japanese yen, respectively, as their functional currencies and (ii) DE1 and DE2 are DEs, have no assets or liabilities, and conduct no activities .

(ii) Analysis.

(A) Pursuant to paragraph (b)(4)(i) of this section, U.S. Corp is the direct owner of Business A because it is the owner of the assets and liabilities of Business A. Because Business A is an eligible QBU with a functional currency that is different from the functional currency of its owner , U.S. Corp, Business A is a section 987 QBU (as defined in paragraph (b)(2) of this section). As a result , U.S. Corp and its section 987 QBU, Business A, are subject to section 987.

(B) Holding the stock of FC and pounds and servicing a liability does not constitute a trade or business within the meaning of § 1.989(a)-1 (c). Because the activities of DE1 do not constitute a trade or business within the meaning of § 1.989(a)-1 (c), such activities are not an eligible QBU. In addition, pursuant to paragraph (b)(3)(ii) of this section, DE1 itself is not an eligible QBU. As a result , neither DE1 nor its activities qualify as a section 987 QBU of U.S. Corp. Therefore, neither the activities of DE1 nor DE1 itself is subject to section 987. For the foreign currency treatment of payments on DE1's pound-denominated liability , see § 1.988-2(b).

(A) Pursuant to paragraph (b)(3)(ii) of this section, DE1 and DE2 are not eligible QBUs. Pursuant to paragraph (b)(3)(i) of this section, the Business B and Business C activities of DE2, and the Business A activities of DE1, are eligible QBUs. Moreover, pursuant to paragraph (b)(4) of this section, DE1 is not the owner of the Business A, Business B, or Business C eligible QBUs, and DE2 is not the owner of the Business B or Business C eligible QBUs. Instead, pursuant to paragraph (b)(4)(i) of this section, U.S. Corp is the direct owner of the Business A, Business B, and Business C eligible QBUs.

(B) Because Business A and Business B are eligible QBUs with functional currencies that are different than the functional currency of U.S. Corp, Business A and Business B are section 987 QBUs (as defined in paragraph (b)(2) of this section).

(C) The Business C eligible QBU has the same functional currency as U.S. Corp. Therefore, the Business C eligible QBU is not a section 987 QBU.

(A) Pursuant to paragraph (b)(3)(ii) of this section, DE1 is not an eligible QBU. Moreover, pursuant to paragraph (b)(4) of this section, DE1 is not the owner of the Business A or Business B eligible QBUs. Instead, pursuant to paragraph (b)(4)(i) of this section, U.S. Corp is the direct owner of the Business A and Business B eligible QBUs.

(B) Business A and Business B constitute two separate eligible QBUs, each with the euro as its functional currency. Accordingly, Business A and Business B are section 987 QBUs of U.S. Corp. U.S. Corp may elect to treat Business A and Business B as a single section 987 QBU pursuant to paragraph (b)(2)(ii)(A) of this section. If such election is made, pursuant to paragraph (b)(4)(i) of this section, U.S. Corp would be the direct owner of the Business AB section 987 QBU that would include the activities of both the Business A section 987 QBU and the Business B section 987 QBU. In addition, pursuant to paragraph (b)(4) of this section, DE1 would not be treated as the owner of the Business AB section 987 QBU.

(A) Under paragraph (b)(5)(i) of this section, P is a section 987 aggregate partnership because Y and CFC own all the interests in partnership capital and profits, Y and CFC are related within the meaning of section 267(b), and the requirements of § 1.987-1(b)(5)(i)(B) are satisfied. Pursuant to paragraph (b)(3)(ii) of this section, P and DE1 are not eligible QBUs. Moreover, pursuant to paragraph (b)(4) of this section, for purposes of section 987, neither P nor DE1 is the owner of the Business B eligible QBU, and P is not the owner of the Business A eligible QBU. Instead, pursuant to paragraph (b)(4)(ii) of this section, Y and CFC are indirect owners of the Business A eligible QBU and the Business B eligible QBU to the extent they are allocated the assets and liabilities of such businesses under § 1.987-7.

(B) Because Business A and Business B are eligible QBUs with different functional currencies than Y, the portions of Business A and Business B allocated to Y under § 1.987-7 are section 987 QBUs of Y.

(C) Because the Business A eligible QBU has a different functional currency than CFC, the portion of Business A that is allocated to CFC under § 1.987-7 is a section 987 QBU, and CFC and its section 987 QBU are subject to section 987. Because the Business B eligible QBU has the same functional currency as CFC, the portion of Business B that is allocated to CFC under § 1.987-7 is not a section 987 QBU of CFC.

(ii) Analysis. Pursuant to paragraph (b)(3)(ii) of this section, DE1, DE2, and DE3 are not eligible QBUs, and the Business A, Business B, and Business C activities are eligible QBUs. Pursuant to paragraph (b)(4) of this section, an eligible QBU is not an owner of another eligible QBU. Accordingly, the Business A eligible QBU is not the owner of the Business B eligible QBU, and the Business B eligible QBU is not the owner of the Business C eligible QBU. Instead, pursuant to paragraph (b)(4) of this section, U.S. Corp is the direct owner of the Business A, Business B, and Business C eligible QBUs. Because each of the Business A, Business B, and Business C eligible QBUs has a different functional currency than U.S. Corp, such eligible QBUs are section 987 QBUs of U.S. Corp.

(1) Spot rate —(i) In general. Except as otherwise provided in this section, the spot rate means the rate determined under the principles of § 1.988-1(d)(1) , (2), and (4) on the relevant date.

(ii) Election to use a spot rate convention —(A) In general—spot rate convention. An owner may elect to use a spot rate convention that reasonably approximates the spot rate determined in paragraph (c)(1)(i) of this section in lieu of such spot rate . A spot rate convention may be determined with respect to a spot rate at the beginning of a reasonable period, the end of a reasonable period, as an average of spot rates for a reasonable period, or by reference to spot and forward rates for a reasonable period. For this purpose, a reasonable period shall not exceed three months. For example , in lieu of the spot rate determined in paragraph (c)(1)(i) of this section, the spot rate for all transactions during a monthly period can be determined pursuant to one of the following conventions: The spot rate at the beginning of the current month or at the end of the preceding month; the monthly average of daily spot rates for the current or preceding month; or an average of the beginning and ending spot rates for the current or preceding month. Similarly, in lieu of the spot rate determined in paragraph (c)(1)(i) of this section, the spot rate can be determined pursuant to an average of the spot rate and the 30-day forward rate on a day of the preceding month. Use of a spot rate convention that is consistent with the convention used for financial accounting purposes is presumed to reasonably approximate the rate in paragraph (c)(1)(i) of this section. The Commissioner can rebut this presumption if the Commissioner determines that the use of the convention would not clearly reflect income based on the facts and circumstances available at the time of the election .

(B) [Reserved] For further guidance, see § 1.987-1T(c)(1)(ii)(B) .

(iii) Election to use spot rates in lieu of yearly average exchange rates. A taxpayer may elect under this paragraph (c)(1)(iii) to use spot rates in lieu of yearly average exchange rates (as defined in paragraph (c)(2) of this section) for certain purposes. In particular, a taxpayer that makes this election must use the spot rate for purposes of determining the historic rate , as provided in paragraph (c)(3)(ii) of this section, and for purposes of translating items of income , gain, deduction, or loss of a section 987 QBU into the owner 's functional currency, as described in § 1.987-3(c)(1). Additionally, a taxpayer that makes this election will be deemed also to elect to use the historic inventory method described in § 1.987-3(c)(2)(iv)(B).

(2) Yearly average exchange rate. For purposes of section 987, the yearly average exchange rate is a rate that represents an average exchange rate for the taxable year (or, if the relevant period is less than a full taxable year , such portion of the taxable year) computed under any reasonable method . For example , an owner may determine the yearly average exchange rate based on a daily, monthly or quarterly averaging convention, whether weighted or unweighted, and may take into account forward rates for a period not to exceed three months. Use of an averaging convention that is consistent with the convention used for financial accounting purposes is presumed to be a reasonable method . The Commissioner can rebut this presumption if the Commissioner determines that the use of the convention would not have been expected to clearly reflect income based on the facts and circumstances available at the time of the election .

(3) Historic rate —(i) In general. Except as otherwise provided in these regulations, the historic rate is determined as described in paragraphs (c)(3)(i)(A) through (E) of this section.

(A) Assets generally. In the case of an asset other than inventory that is acquired by a section 987 QBU (including through a transfer), the historic rate is the yearly average exchange rate applicable to the year of acquisition .

(B) Inventory under the simplified inventory method. In the case of inventory with respect to which a taxpayer uses the simplified inventory method described in § 1.987-3(c)(2)(iv)(A) , the historic rate for inventory accounted for under the last-in, first-out (LIFO) method of accounting is the yearly average exchange rate applicable to the year in which the inventory's LIFO layer arose. The historic rate for all other inventory of such a taxpayer is the yearly average exchange rate for the taxable year for which the determination of the historic rate for such inventory is relevant.

(C) Inventory under the historic inventory method. In the case of inventory with respect to which a taxpayer has elected under § 1.987- 3(c)(2)(iv)(B) to use the historic inventory method, each inventoriable cost with respect to such inventory may have a different historic rate . The historic rate for each inventoriable cost is the exchange rate at which such item would be translated under § 1.987-3 if it were not an inventoriable cost .

(D) Liabilities generally. In the case of a liability that is incurred or assumed by a section 987 QBU, the historic rate is the yearly average exchange rate applicable to the year the liability is incurred or assumed.

(E) [Reserved] For further guidance, see § 1.987-1T(c)(3)(i)(E) .

(ii) Historic rate when an election to use spot rates in lieu of yearly average exchange rates is in effect. A taxpayer that has elected under paragraph (c)(1)(iii) of this section to use spot rates in lieu of yearly average exchange rates must determine historic rates under paragraphs (c)(3)(i)(A) and (c)(3)(i)(D) of this section using the spot rate (as defined in paragraph (c)(1) of this section) for the date an asset is acquired by a section 987 QBU or a liability is assumed or incurred by a section 987 QBU in lieu of using the yearly average exchange rate .

(iii) Date placed in service for depreciable or amortizable property. In the case of depreciable or amortizable property , an owner may determine the historic rate (whether a yearly average exchange rate or a spot rate , as applicable) by reference to the date such property is placed in service by the section 987 QBU rather than the date the property was acquired, provided that this convention is consistently applied for all such property attributable to that section 987 QBU.

(iv) Changed functional currency. In the case of a section 987 QBU or an owner of a section 987 QBU that previously changed its functional currency, § 1.985-5(d)(1)(ii)(A) and § 1.985-5(e)(4)(i)(A) , respectively, shall be taken into account in determining the historic rate for an item reflected on the balance sheet of the section 987 QBU immediately prior to the year of change.

(d) Marked item. A marked item is an asset (marked asset) or liability (marked liability) that is properly reflected on the books and records of a section 987 QBU under § 1.987-2(b) and that—

(1) Is denominated in, or determined by reference to, the functional currency of the section 987 QBU, is not a section 988 transaction of the section 987 QBU, and would be a section 988 transaction if such item were held or entered into directly by the owner of the section 987 QBU;

(2) Is a prepaid expense or a liability for an advance payment of unearned income , in either case having an original term of one year or less on the date the prepaid expense or liability for an advance payment of unearned income arises; or

(3) [Reserved] For further guidance, see § 1.987-1T(d)(3) .

(e) Historic item. A historic item is an asset (historic asset) or liability (historic liability) that is properly reflected on the books and records of a section 987 QBU under § 1.987-2(b) and that is not a marked item (as defined in paragraph (d) of this section).

(f) [Reserved] For further guidance, see § 1.987-1T(f) .

(g) Elections —(1) In general. This paragraph (g) provides rules for making elections under section 987. Except as otherwise provided in paragraph (g)(2) of this section, such elections—

(i) May be made separately for each section 987 QBU;

(ii) Are made by the owner of the section 987 QBU (as defined in paragraph (b)(4) of this section); and

(iii) Must be made for the first taxable year in which the election is relevant in determining the section 987 taxable income or loss , or section 987 gain or loss , of the section 987 QBU and in which the regulations implementing the election are applicable with respect to the section 987 QBU.

(2) Exceptions to the general rules —(i) Consistency and timeliness requirements for certain elections. Notwithstanding paragraph (g)(1)(i) of this section, the following consistency and timeliness requirements apply:

(A) Section 987 grouping election. Elections made pursuant to paragraph (b)(2)(ii) of this section (regarding the grouping of section 987 QBUs) are binding on all section 987 QBUs that are eligible to be grouped under the particular election (for example , election to group all euro QBUs owned by the same aggregate partnership), regardless of whether the section 987 QBU is established or acquired after the election is made and regardless of whether the section 987 QBU is identified on the election as required in paragraph (g)(3)(i)(A) of this section.

(B) through (C) [Reserved] For further guidance, see § 1.987-1T(g)(2)(i)(B) through (C) .

(ii) Persons making elections for QBUs owned by foreign corporations. Notwithstanding paragraph (g)(1)(ii) of this section, if a section 987 QBU is owned by a foreign corporation , elections shall be made in accordance with § 1.964-1(c) by the foreign corporation 's controlling domestic shareholders , as defined under § 1.964-1(c)(5)(i) (dealing with controlled foreign corporations) and § 1.964-1(c)(5)(ii) (dealing with noncontrolled section 902 corporations).

(3) Manner of making elections —(i) Election made by attaching statement to a return. Except as provided in paragraph (g)(3)(ii) of this section, elections shall be made under section 987 for each section 987 QBU by attaching a statement with the information required in this paragraph (g)(3)(i) to the timely filed tax return of the owner or, in the case of a foreign corporation , other applicable person for the first taxable year in which the election is required to be made under paragraph (g)(1)(iii) of this section.

(A) Section 987 grouping election. The election provided in paragraph (b)(2)(ii) of this section must be titled “Section 987 Grouping Election Under § 1.987-1(b)(2)(ii)” and provide the following information:

(1) The name , address, and functional currency of each section 987 QBU that the taxpayer is grouping together; and

(2) The owner 's name and address.

(B) Election to use a spot rate convention. An election under paragraph (c)(1)(ii) of this section to use a spot rate convention must be titled “Section 987 Election to Use a Spot Rate Convention Under § 1.987-1(c)(1)(ii)” and provide the following information:

(1) A description of the convention; and

(2) The name and address of each section 987 QBU for which the election is being made.

(C) Election to use spot rates in lieu of yearly average exchange rates. An election under paragraph (c)(1)(iii) of this section to use spot rates in lieu of yearly average exchange rates must be titled “Section 987 Election to Use Spot Rates in Lieu of Yearly Average Exchange Rates Under § 1.987-1(c)(1)(iii)” and provide the following information:

(D) Election to use the historic inventory method. An election under § 1.987-3(c)(2)(iv)(B) to use the historic inventory method shall be titled “Section 987 Election to Use the Historic Inventory Method Under § 1.987-3(c)(2)(iv)(B) ” and must provide the name and address of each section 987 QBU for which the election is being made.

(E) through (H) [Reserved] For further guidance, see § 1.987-1T(g)(3)(i)(E) through (H) .

(ii) Election made by filing a dedicated section 987 form. If the Commissioner publishes a form that provides the manner in which elections are made under section 987, the form shall govern the manner in which elections are made under section 987.

(4) No change in method of accounting. An election under section 987 is not governed by the general rules concerning changes in methods of accounting. See also paragraph (g)(5) of this section.

(5) Revocation of an election. Elections under section 987 may not be revoked without the consent of the Commissioner or his delegate. The Commissioner or his delegate will consider allowing a revocation of an election if the taxpayer can demonstrate significantly changed circumstances or such other circumstances that clearly demonstrate a substantial non-tax business reason for revoking the election .

Asia Visit global site

Select a local version of the site

August 30, 2024

providing welcome relief to taxpayers with short tax years seeking to file automatic accounting method changes related to their Section 174 specified research and experimental (SRE) expenditures. Procedural guidance related to the treatment of Section 174 SRE expenditures that was released earlier this year had waived the five-year limitation on successive automatic accounting method changes for the same item for accounting method changes made within the first or second tax years following December 31, 2021, but such waiver did not take into consideration taxpayers seeking to file a successive change related to their treatment of Section 174 SRE expenditures that experienced one or more short tax years during that time. Such taxpayers would have in fact been precluded from filing a change on their third or even later short tax year return if they had previously filed an accounting method change related to their treatment of Section 174 SRE expenditures because of the limited waiver of the five-year limitation to just the “first or second taxable year following December 31, 2021.” Rev. Proc. 2024-34 resolves this issue for these taxpayers by modifying the waiver of the five-year limitation to “any taxable year beginning in 2022 or 2023,” providing the same flexibility to file successive automatic accounting method changes related to Section 174 SRE expenditures that was previously provided to taxpayers that had not experienced short tax years.

Background

Historically, Section 174 provided taxpayers with a choice between an election to deduct R&E expenditures currently, to capitalize and amortize R&E expenditures over a period of not less than five years, or to charge R&E expenditures to a capital account. The Tax Cuts and Jobs Act (TCJA) amended Section 174 to require taxpayers to charge SRE expenditures to a capital account, eliminating the ability to recover such expense with an immediate deduction. The TCJA amendments applied to amounts paid or incurred in connection with a taxpayer’s trade or business in any taxable year beginning after December 31, 2021, i.e., 2022 for calendar year taxpayers.

To provide taxpayers with procedural guidance to implement the TCJA’s changes to Section 174 that took effect in 2022, the IRS issued Rev. Proc. 2023-8 on December 12, 2022, providing taxpayers with an automatic accounting method change to comply with the amended statute. It was imperative that the IRS and Treasury issue procedural guidance by year-end to ensure taxpayers were informed of whether a contemplated change in method of accounting was available under the automatic consent procedures of Rev. Proc. 2015-13 or not, as a non-automatic change in method of accounting for calendar year taxpayers would have been required to be filed no later than December 31, 2022, for the 2022 tax year, while automatic accounting method changes may be filed by a taxpayer with their timely-filed return for the taxable year of change.

Generally, taxpayers are required to file a Form 3115, , to make an accounting method change. Rev. Proc. 2015-13 provides procedural guidance to file an accounting method change, including eligibility for automatic accounting method changes. Specifically, Section 5.01(1)(f) of Rev. Proc. 2015-13 precludes a taxpayer from filing an accounting method change for an item within five years of having made or requested an accounting method change for the same item (five-year limitation). Rev. Proc. 2023-8 provided taxpayers not only with an automatic change in method of accounting to comply with the TCJA’s amendments to Section 174 and change their present methods to the new regime, but also waived the five-year limitation for a Section 174 change for a taxpayer's first taxable year beginning after December 31, 2021, providing relief to taxpayers that may have otherwise filed an accounting method change under Section 174 in the previous five years.

The IRS and Treasury later issued Notice 2023-63 to provide substantive guidance under Section 174 in September 2023. Similar to the need for procedural guidance to understand and implement the statutory changes to Section 174 by the end of 2022, the IRS and Treasury had to release procedural guidance by the end of 2023 for taxpayers to understand how they could implement and comply with Notice 2023-63 for the 2023 tax year. On December 22, 2023, Rev. Proc. 2024-9 was released providing taxpayers with an automatic accounting method change to comply with the interim guidance provided under Notice 2023-63. Like the procedural guidance released at the end of the prior year, 2022, Rev. Proc. 2024-9 provided taxpayers with the certainty needed to determine whether they could comply with Notice 2023-63 with an automatic accounting method change filed with their return, or whether compliance required the filing of a non-automatic accounting method change by December 31, 2023. Rev. Proc. 2024-9 further extended the waiver of the five-year limitation for a taxpayer’s “first or second taxable year beginning after December 31, 2021.” This eliminated concerns many taxpayers faced with restrictions placed on filing a method change to comply with the interim guidance provided in Notice 2023-63 in 2023, if they had already filed a method change to comply with the TCJA’s changes to Section 174 in 2022.

Rev. Proc. 2024-34

While it was helpful in Rev. Proc. 2024-9 that the IRS and Treasury waived the five-year limitation for both a taxpayer’s “first or second taxable year beginning after December 31, 2021,” the language used in the guidance could have been an issue for taxpayers that experienced one or more short tax years in 2022 or 2023, to the extent they filed a Section 174 change in 2022, but then sought to change their Section 174 accounting methods to comply with the guidance provided in Notice 2023-63 on their second short year return for 2023. In that circumstance, the applicable taxpayer would have been precluded from filing a successive accounting method change regarding their Section 174 accounting methods because the waiver provided in Rev. Proc. 2024-9, was limited to “the first or second taxable year beginning after 12/31/21,” and that short tax year return would have fallen subsequent to the waiver period provided in Rev. Proc. 2024-9. Fortunately, Rev. Proc. 2024-34 alleviates this concern by modifying the waiver of the five-year limitation to “any taxable year beginning in 2022 or 2023.” Thus, a taxpayer with one or more short tax years can benefit from the flexibility for its third or even later tax year, as long as the tax period began in 2023.

In addition to amending the period for which the five-year limitation is waived, Rev. Proc. 2024-34 also modifies the limited audit protection rules provided in Rev. Proc. 2024-9 to provide that a taxpayer does not receive audit protection for a change made to their Section 174 methods under the guidance made in any taxable year beginning in 2022 or 2023 (other than the first taxable year beginning after December 31, 2021) with respect to SRE expenditures paid or incurred in the first taxable year beginning after December 31, 2021, if the taxpayer did not change its accounting method in an effort to comply with Section 174 for the first taxable year beginning after December 31, 2021. This limited audit protection position is consistent with prior pieces of procedural guidance, merely conforming the language to apply to taxpayers with short tax years during this period as well.

Rev. Proc. 2024-34 is effective for accounting method changes file on or after August 29, 2024.

For taxpayers that experienced one or more short tax years in 2022 or 2023 and which filed an accounting method change regarding their treatment of Section 174 SRE expenditures in the last five years, Rev. Proc. 2024-34 provides relief to the extent such taxpayers were considering filing another Section 174 accounting method change to comply with the substantive guidance provided in Notice 2023-63 on a 2023 return. Without these revisions, such taxpayers would have been precluded from filing a change on their third or even later short tax year return if they had previously filed an accounting method change related to their treatment of Section 174 SRE expenditures during this period. While it is helpful that Rev. Proc. 2024-34 provides this relief to waive the five-year limitation for accounting method changes to any taxable year beginning in 2022 or 2023, taxpayers should note the corollary revision to the limited audit protection rule that remains available only to the extent a taxpayer changed its Section 174 accounting method to comply with the statutory changes in 2022.

_________ If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work. 1 2024-38 I.R.B. 1 (9/16/2024). 2 2023-3 I.R.B. 407 (12/13/2022). 3 2015-5 I.R.B. 419 (01/16/2015). 4 2023-39 I.R.B. 919 (09/08/2023). 5 2024-5 I.R.B. 628 (01/19/2024), later incorporated into Rev. Proc. 2024-23, 2024-23 I.R.B. 1334 (4/30/2024).

Key contacts

Ellen McElroy

Washington, DC, United States

Michael D. Resnick

Kristen A. Martin

Latest Insights

podcasts and webcasts Tech Imprints: What you need to know about data protection in Saudi Arabia
podcasts and webcasts Tech Imprints: Procurement of advanced technology
podcasts and webcasts Tech Imprints: Saudi Arabia’s adoption of disruptive technologies
legal updates Your Insider’s Guide to the Draft Standards on PIPL Compliance Audits

Latest News

client news Harnessing global aerospace, defence and security sector acumen to deliver key client objectives
firm news Eversheds Sutherland enhances global litigation offering with lateral partner hires
client news Combining cross-practice capabilities and deep sector know-how to deliver strategic results
client news Drawing on multidisciplinary legal capabilities to help our clients to realise their strategic ambitions

Latest Events

virtual | September 10, 2024 Immigration UK Business – sponsor licencing course
in-person | September 17, 2024 Preventing sexual harassment in the workplace
in-person | September 19, 2024 Basic foundations of US employment law
in-person | September 24, 2024 Adjustments - what is reasonable?

podcasts and webcasts

August 29, 2024

Tech Imprints: What you need to know about data protection in Saudi Arabia

August 22, 2024

Tech Imprints: Procurement of advanced technology

August 15, 2024

Tech Imprints: Saudi Arabia’s adoption of disruptive technologies

legal updates

August 14, 2024

Your Insider’s Guide to the Draft Standards on PIPL Compliance Audits

client news

September 03, 2024

Harnessing global aerospace, defence and security sector acumen to deliver ...

September 02, 2024

Eversheds Sutherland enhances global litigation offering with lateral partn...

yellow-apartments-buildings-urban-156864705_m_flipped

August 23, 2024

Combining cross-practice capabilities and deep sector know-how to deliver s...

August 20, 2024

Drawing on multidisciplinary legal capabilities to help our clients to real...

Immigration-Arrivals-and-Departures-Airport

Immigration UK Business – sponsor licencing course

September 10, 2024

9.30am - 11.30am (BST)

Virtual, United Kingdom

stop-adult-harassment-person-dark-M_f3f8DGRg

Preventing sexual harassment in the workplace

September 17, 2024

9.30am - 1.00pm

London, United Kingdom

Basic foundations of US employment law

September 19, 2024

9.30am - 4.30pm (BST)

purple-black-laptop-keyboard-120140452_m

Adjustments - what is reasonable?

September 24, 2024

9.30am - 1.00pm (UK time)

Legal notices
Terms & conditions
Privacy notice
Whistleblowing
List of ES(I) LLP Members
Client login
Staff login
About Eversheds Sutherland
Purpose and values
Responsible business
Client tools
Events and training
Business topics

© Eversheds Sutherland 2024. All rights reserved. Eversheds Sutherland is a provider of legal and other services operating through various separate and distinct legal entities. For further information about these entities and Eversheds Sutherlands' structure please see the Legal Notice page of this website.

Eversheds Sutherland is the name and brand under which the members of Eversheds Sutherland Limited (Eversheds Sutherland (International) LLP and Eversheds Sutherland (US) LLP) and their respective controlled, managed or affiliated firms and the members of Eversheds Sutherland (Europe) Limited and Eversheds Sutherland (Africa) Limited (each an "Eversheds Sutherland Entity" and together the "Eversheds Sutherland Entities") provide legal or other services to clients around the world. Eversheds Sutherland Entities are constituted and regulated in accordance with relevant local regulatory and legal requirements. The use of the name Eversheds Sutherland, is for description purposes only and does not imply that the Eversheds Sutherland Entities are in a partnership or are part of a global entity. The responsibility for the provision of services to the client is defined in the terms of engagement between the instructed firm and the client. For further information about these Eversheds Sutherland Entities and Eversheds Sutherlands’ structure please see the Legal Notices page of this website.

IMAGES

How to Write a Method Section
Fillable Online Section 987 RegulationsAccounting for Income Taxes Fax
How to write a methodology example. How to Write Research Methodology
Recognition and Deferral of Section 987 Gain or Loss (US Internal
Newly Proposed Section 987 Regulations: Balancing Perfection With
New Section 987 Regulations: Key Considerations and Observations

VIDEO

ASIM RIAZ ROAST #shorta #roast #funny #asimriaz
Question 2 (ACT Math 2018-2019 Prep Guide)
රාහුගෙන් පීඩා උහුලන්න බැරිද? Rahu details lagna palapala ලග්න පලාපල
Dj Sarzen Setup
Mold Causes Elderly Woman To Be Hospitalized
Patrick Mahomes praise Travis Kelce's work ethic, process & practice at training camp

COMMENTS

KPMG report: Proposed regulations under section 987, initial
As originally proposed, the FEEP method required taxpayers to calculate unrecognized section 987 gain or loss for the year by computing the change in the net value of the section 987 qualified business unit (QBU) in the taxpayer's functional currency and adjusting for the section 987 QBU's current year taxable income or loss, tax exempt income, and nondeductible expenses. Pursuant to the ...
IRS issues new version of foreign currency regulations
The IRS released the latest iteration of proposed rules for calculating foreign currency gains or losses under Section 987.
PDF US International Tax Alert
US International Tax Alert - 17 November 2023. Deloitte Tax LLP | 17 November 2023. On November 9, 2023, the IRS and Treasury released proposed currency regulations under section 987 and related rules (the "2023 Proposed Regulations"). Section 987 applies to taxpayers with a qualified business unit (QBU) in the form of a disregarded entity ...
Key issues under the new proposed foreign currency regulations
In brief Treasury and the IRS on November 9 released proposed regulations (2023 proposed regulations) under Section 987 on the taxation of foreign currency translation gains or losses arising from qualified business units (QBUs) that operate in a currency other than the currency of their owner. The 2023 proposed regulations largely retain the methodology of the 2016 final but not yet effective ...
PDF United States Tax Alert New Section 987 regulations: key considerations
International Tax | 14 December 2016. ates Tax AlertNew Section 987 regulations: key considerations and observationsOverviewOn December 7, 2016, the Internal Revenue Service (IRS) and Department of the Treasury ("Treasury") issued a comprehensive package of regulations that provide long-awaited guidance. nder section 987 and amend related ...
Section 987 explained: Taxation of foreign gains and losses
Part of the Tax News & Views podcast series For businesses operating in international markets and transacting in foreign currencies, the section 987 regulations may bring some much-needed clarity for handling gains and losses transactions. Tune in to hear from Deloitte tax specialists on what taxpayers can expect when these rules go into effect and how best to prepare for the upcoming changes.
Newly Proposed Section 987 Regulations: Balancing Perfection with
The annual amounts of unrecognized section 987 gain or loss would generally be required to be calculated under the FEEP method. Effective Dates - Except for section 1.987-12 (discussed below), the existing final regulations have yet to become effective (except for taxpayers that elected early application).
Navigating the New Section 987 Regulations: Foreign Currency Gain and
GHJ's International Tax Experts explain the IRS's new Section 987 regulations on foreign currency gain or loss for qualified business units (QBUs) and how taxpayers can prepare for the changes.
Reviewing the Proposed Section 987 Regulations
On November 14, 2023, IRS and Treasury published proposed regulations under section 987. Largely consistent with the regulations proposed in 2006 and 2016, these regulations require taxpayers to employ a complex methodology, especially in comparison with the profit-and-loss methodologies commonly employed by taxpayers today.
Proposed Regulations To IRC Section 987: Explained
30 Second Summary In a recent webinar, GTM's Raymond Wynman and Andrew McKinley shared insights regarding the new set of proposed regulations for Section 987. If the 2023 proposed regulations are finalized, transitioning to a new Section 987 methodology will create substantial work for tax departments. In this article, GTM's International Tax Services team addresses additional questions ...
New Proposed Regulations Under Section 987
Background In September 1991, Treasury and the IRS issued proposed regulations under Section 987. The 1991 proposed regulations adopted an equity and basis pool method for the computation of Section 987 gain or loss under which foreign currency gain or loss was imputed to all equity on a Section 987 QBU's balance sheet.
Section 987 Regulations: Calculation and Elections
As a follow up to "Section 987 Regulations: Key Considerations" and "Section 987 Regulations: Terminology Explained," this third and final post in this series will focus on the calculation under the final regulations along with some of the potential elections that can be made related to Section 987 branch remittances.
Proposed regulations under IRC Section 987
Please join our panelists for an in-depth discussion of the recently released proposed IRC Section 987 regulations, which provide new guidance on determining income and currency gain or loss with respect to a qualified business unit (QBU) that uses a different functional currency than its tax owner. While the proposed regulations retain some of the framework from the 2016 and 2019 final ...
Section 987
Section 987. These regulations will have an impact on many taxpayers given the proliferation of check-the-box structures. Learn how companies can prepare for the changes with a thorough understanding of the rules and a well-planned treasury process. IRS, Treasury release proposed regulations under section 987 and related rules.
New Sec. 987 regulations affect partnerships
Partnerships on alert. In short, the 2016 regulations put partners on notice that Sec. 987 principles generally apply to partnership assets and liabilities, whether under an aggregate FEEP method or any other reasonable method. The complexity inherent in the application of Sec. 987 principles is only magnified when partnerships are involved.
Section 987 Practice Unit Reflects a Permissive Attitude ...
Section 987 Practice Unit Reflects a Permissive Attitude Towards Different Methods of Branch Currency Translation. A few weeks ago, the IRS released a new "practice unit" providing training for its examiners on translation of foreign currency gains and losses of branches (so-called qualified business units, or QBU) under §987. 1 ...
Sec. 987 foreign currency regulations applicability date extended again
On Aug. 15, 2022, the IRS announced that it intends to defer by one more year the applicability date of certain foreign currency regulations under Sec. 987.
26 CFR § 1.987-1
Section 1.987-4 provides rules for determining net unrecognized section 987 gain or loss. Section 1.987-5 provides rules regarding the recognition of section 987 gain or loss. It also provides rules for determining an owner 's basis in assets transferred from a section 987 QBU.
Short tax year savior: Rev. Proc. 2024-34
Eversheds Sutherland Observation: For taxpayers that experienced one or more short tax years in 2022 or 2023 and which filed an accounting method change regarding their treatment of Section 174 SRE expenditures in the last five years, Rev. Proc. 2024-34 provides relief to the extent such taxpayers were considering filing another Section 174 accounting method change to comply with the ...
Education Code Chapter 37. Discipline; Law and Order
(4) "Student who is homeless" has the meaning assigned to the term "homeless children and youths" under 42 U.S.C. Section 11434a. (b-1) The methods adopted under Subsection (a)(8) must provide that a student who is enrolled in a special education program under Subchapter A, Chapter 29, may not be disciplined for conduct prohibited in accordance ...