The IRS has issued proposed regs relating to the determination of taxable income or loss and foreign currency gain or loss with respect to a qualified business unit. The proposed regs include an election to treat all items of a qualified business unit as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a qualified business unit on an annual basis, and a new transition rule. (Preamble to Prop Reg REG-132422-17)
The proposed regs relate to Code Sec. 987 and related provisions under Code Sec. 861, Code Sec. 985 through Code Sec. 989, and Code Sec. 1502. Code Sec. 987 applies to any taxpayer that has a qualified business unit (“QBU”) with a functional currency other than the dollar. Code Sec. 987(1) and Code Sec. 987(2) provide rules for determining and translating taxable income or loss (“section 987 taxable income or loss”) with respect to the QBU. In addition, foreign currency gain or loss must be determined under section 987(3) (“section 987 gain or loss”), which requires proper adjustments (as prescribed by the IRS) for transfers of property between QBUs of the taxpayer having different functional currencies.
A taxpayer may also choose to apply the final version of the proposed regs (the “new final regulations”) for tax years ending after the date the regs are published as final. To choose to apply the new final regulations, the taxpayer and each member of its consolidated group and section 987 electing group must consistently apply the new final regulations in their entirety to the tax year and all subsequent tax years beginning on or before December 31, 2024. (Prop Reg §1.987-14(b))
For more information regarding determining the taxable income of a taxpayer from a QBU that uses a non-dollar functional currency, see Checkpoint’s Federal Tax Coordinator ¶G-6978.
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