The IRS announced a new one-year extension for applying the IRC §987 final and temporary regulations covering foreign branch transactions of U.S. corporations. The regulations will now apply to tax years beginning three years after the first day of the first tax year after December 7, 2016.
For a calendar year taxpayer, this postpones the application date to January 1, 2020. However, taxpayers may also apply the regulations before that date.
What Do the Regulations Cover ?
The section 987 regulations apply to foreign branches known as section 987 qualified business units (QBUs). A section 987 QBU:
- records its operations in its foreign currency;
- translates its income or loss into U.S. dollars; and
- uses these U.S. dollar amounts to calculate its U.S. tax.
Final and temporary regulations issued at the end of 2016 provided long awaited guidance on the section 987 rules. The final regulations cover:
- the determination of taxable income of a section 987 QBU, and
- the timing, amount, character and source of section 987 gain or loss.
Related temporary regulations address the recognition and deferral of foreign currency gain or loss in connection with QBU terminations, among other rules.
When Do the Regulations Apply?
The final and temporary regulations originally applied to tax years beginning one year after the first day of the taxpayer’s first tax year after December 7, 2016. For a calendar year taxpayer, this was January 1, 2018.
The IRS delayed the applicability date of the regulations by one year in Notice 2017-57. As a result, the regulations applied to tax years beginning two years after the first day of the first tax year following December 7, 2016. For a calendar year taxpayer, this was January 1, 2019.
With this newest one-year extension, the regulations will now apply to tax years beginning three years after the first day of the first tax year after December 7, 2016. For a calendar-year taxpayer, this is January 1, 2020.
However, a taxpayer may choose to apply the regulations to any tax year beginning after December 7, 2016. The taxpayer must apply the regulations consistently to all tax years, and to all section 987 QBUs that are owned directly or indirectly by:
- the taxpayer;
- a member of the taxpayer’s consolidated group; or
- a consolidated group member’s controlled foreign corporation.
Why Were the Regulations Extended?
On April 21, 2017, Executive Order 13789 identified significant regulations for additional review. As part of that review, the IRS is considering changes that would allow taxpayers to elect alternative rules for transitioning to the final regulations and for determining IRC §987 gain or loss. This latest extension may be connected to this review.