On December 7, 2016, the IRS released temporary regulations under IRC Sections 987 and 988, which provide guidance on recognizing foreign income or loss as well as currency gain or loss from a qualified business unit (QBU). The original proposed regulations (regs) were issued back in 1991. In 2006, the 1991 proposed regs were replaced with new proposed regs. In response to the numerous responses and comments received on the 2006 regs, the IRS fine-tuned them and published the temporary regs in December 2016.
Code Section 987 provides guidance for taxpayers with a QBU that has a foreign currency and outlines how to determine taxable income from the QBU, translating and making proper adjustments for transfers with the QBU. One of the key points of the temporary regs issued is how and when to recognize foreign currency gain or loss when dealing with a termination and other transactions with a partnership.
Other key points of the temporary regs for IRC Sections 987 and 988 include:
- An annual deemed termination election for a Code Sec. 987 QBU;
- An elective method, available to taxpayers that make the annual deemed termination election, for translating all items of income or loss with respect to a Code Sec. 987 QBU at the yearly average exchange rate;
- Rules regarding the treatment of Code Sec. 988 transactions of a Code Sec. 987 QBU;
- Rules on QBUs with the U.S. dollar as their functional currency;
- Rules on combinations and separations of Code Sec. 987 QBUs;
- Rules on the translation of income used to pay creditable foreign income taxes; and
- Rules on the allocation of assets and liabilities of certain partnerships for purposes of Code Sec. 987. Temporary Code Sec. 988 regs require the deferral of certain Code Sec. 988 loss that arises with respect to related-party loans.
The new regs are generally effective beginning one year after the first tax year following December 7, 2016, but may be effective earlier under certain circumstances. Please be sure to contact your tax advisor for guidance on these issues.
Jill A. Helm, CPA