Overview of final regulations under section 987 and their impact on accounting for income taxes
The U.S. Department of the Treasury and IRS in December 2024 released final regulations and proposed additional regulations under section 987 to determine taxable income or loss and foreign currency gain or loss with respect to a section 987 qualified business unit (QBU). Read TaxNewsFlash
The final regulations generally apply to tax years beginning after December 31, 2024. Therefore, in 2025, most taxpayers will be required to transition to the foreign exchange exposure pool methodology (the FEEP method) for calculating taxable income from a section 987 QBU. The FEEP method is used to determine taxable income or loss and the amount of gain or loss of the QBU that is due to changes in exchange rates. It does this by looking at the value of the QBU's assets and liabilities and how they are affected by currency fluctuations over the year.
Taxpayers may need to assess the changes and recognize certain income taxes effects in the period that includes the issuance of the final regulations and the proposed regulations.
Read a February 2025 report prepared by KPMG LLP that examines the accounting for income taxes considerations of the section 987 final regulations.