Key highlights of the final and proposed foreign currency regulations

In brief

What happened?

On December 10, 2024, Treasury and the IRS released 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 different currency from their owner. The final regulations generally retain the rules contained in the proposed regulations published in November 2023 (2023 proposed regulations). The final regulations generally reserve on the treatment of partnerships and S corporations (other than a few specific provisions), add a new mark-to-market election for Section 988 transactions of a QBU, and provide a simplified computation for taxpayers that use the transition method and/or elect to treat all items of a QBU as marked items under the current rate election. 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 (2024 proposed regulations) 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 frequently recurring disregarded transactions between a QBU and its owner. The proposed regulations request comments relating to the treatment of partnerships and controlled foreign corporations (CFCs). 

Why is it relevant?

Impacted companies, including banks, insurance companies, leasing companies, finance coordination centers, regulated investment companies, and real estate investment trusts (specified entities), must assess the impact of the finalized regulations on existing QBUs, including the adoptions of methods and elections under the finalized regulations, and consider the potential financial reporting impact of the final regulations, as under ASC 740 the tax effect resulting from the change in tax law must be accounted for in the period the regulations were released.  

Actions to consider

Companies should review their existing Section 987 calculations and consider modeling the overall impact of the final regulations on their QBUs with and without the elections (including the new election for frequently recurring disregarded transactions), as the elections would affect both the quantitative results of the regulations, and the data required to be tracked. Companies should consider providing comments on the proposed regulations and the application of Section 987 to partnerships and CFCs, which are due by March 11, 2025.  

Join our panel of specialists on a webcast exploring these regulations on January 8, 2025, from 2-3pm Eastern. Register here.