Treasury releases final regulations on currency gains and losses of qualified business units

In brief

What happened?

Treasury and the IRS on December 10 released final regulations (2024 final 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 2024 final regulations include an election to treat all items of a QBU as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a QBU on an annual basis, and a new transition rule. The final regulations are effective December 10, 2024, and generally apply to tax years beginning after December 31, 2024. 

Treasury and the IRS also released proposed regulations (REG-117213-24) relating to the determination of taxable income or loss and foreign currency gain or loss with respect to a QBU. The proposed regulations include an election that is intended to reduce the compliance burden of accounting for certain disregarded transactions between a QBU and its owner. The proposed regulations request comments relating to the treatment of partnerships and controlled foreign corporations. 

Why is it relevant? 

The final regulations retain the basic approach and structure of proposed regulations published in November 2023 (2023 proposed regulations), with revisions.  

Actions to consider 

As the final regulations generally apply to tax years beginning after December 31, 2024, companies should model the overall impact of the final regulations on their QBUs with and without the new elections, as the elections would affect both the quantitative results of the regulations and the data required to be tracked. Companies should evaluate the potential financial reporting impact of the final regulations as the tax effect resulting from the change in tax law must be accounted for in the period the regulations were released under ASC 740. 

With respect to the proposed regulations, companies will need to consider the regulations and whether or not there is an impact on the financial statements if they intend to rely on the proposed regulations. Companies should consider providing comments on the proposed regulations. Comments are due 90 days after the proposed regulations are published in the Federal Register.