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Any tax advisors/accountants who can help me with USA tax rules?
Posted by Martin C on 09/16/2009 - 13:48
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Question from UK based accountant.
In the UK, the tax computation is not adjusted to disallow foreign exchange movement and hence the gain or loss is included to arrive at the taxable profit or loss.
Is it different in the USA? I.e. FX movements are disallowed for tax purposes.
We act for a UK Ltd company, which also has a presence in the USA. In the USA the UK resident director/shareholder operates as a sole proprietor with the UK company supplying goods to the US company for resale.
We have a situation where there is a big exchange loss in the USA accounts for the inter company trading and the US Accountant has said it is not tax deductible for USA tax purposes. This I find very puzzling and means the loss per the accounts is now a big profit for tax purposes in the USA. Further we are informed it will only be deductible when realised, which I don’t know what it means for this purposes as the UK company will continue to supply goods for the US operation for sale and there will always be an inter company account.
Comments would be greatly appreciated and thankyou in advance
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Foreign Exchange Adjustments
Martin -
I would say the best answer is to ensure unrealized gains and losses are properly disallowed in each annual return. In the event an unrealized gain was not disallowed, then income was overstated - the IRS is unlikely to argue this point. In the event an unrealized loss was not disallowed, then income was understated - the IRS will be more inclined to argue this point as there is the potential for underpayment of tax which may also lead to the imposition of penalties and interest. However, if the amounts are immaterial, it may not be worth your time or that of the IRS to make the change. So, if you feel the amounts are immaterial and that you have not benefitted from a material deferral of US income tax by understated income in the past, you may consider making a cumulative adjustment in the current year. You will need to make the judgement call based on any underpaid tax in the past, the risk of audit, and the risk the IRS will prevail with adjustments related to the past missed adjustments. If the cumulative adjustment is within your risk tolerance, then you must decide how transparent to make the adjustment on the current return (e.g. identify it as a prior period adjustment or just lump it in with a current year adjustment) - again what is your risk tolerance should the IRS inquire about the current year adjustment - will they allow it or cause you to amend prior years which may lead to penalty and interest assessments. Hope this gives some guidance around the issues and decisions that must be made. James W. Guthrie, Jr. - CPA, International Tax Advisor - jw_guthrie_jr69@q.com
James W Gutherie
Thankyou for your response and it is very helpful.
We will go back and review the accounting records and try to establish the realised fx movemnet. I haven other question leading on from this. Where the exchnage loss and gain has not been determined for a number of years , say 5. Is it ok to make one FX adjustment in the current accountiung period ( reperesenting the accumulated fx movemnet) ?. Or is it necerssary to book the FX realised loss or gain in the respective accounting period?
In the UK, we can show a situation like this, as an exceptional item in the current year without having to go back and revise pervious accounting period and hence tax returns. This obvioulsy save a lot of administrative time.
USA Tax Rules - Foreign Exchange
In the US we only allow deductions for "realized" foreign exchange losses, and we only tax "realized" foreign exchange gains. An example follows:
Say a US company borrows GBP100 from a UK person on day one when the exchange rate is 1:1 . US CO takes a US dollar basis in the liability at $100. Say the loan is due in full with interest after 60 months. On the date of payoff, say the exchange rate is now 2:1 (US$2 = GBP 1). US CO must pay $200 to settle the GBP 100 note (plus interest, which for sake of presentation I will ignore). Thus, US CO "realizes" a $100 foreign exchange loss on repayment of the note.
In terms of trade balances, you must analyze the aging and determine the foreign exchange gain or loss on each supply of goods (e.g. on a shipment by shipment basis, or product by product basis, whichever is applicable). So US CO receives goods on account in months 1, 2 and 3. US CO takes a US dollar basis in the goods on date of title passage and sets up account payable for the same amount. If the payable is denominated in GBP, then you must compute the amount of exchange gain or loss when each payable is settled (i.e. calculate for payoff of month 1 balance, month 2 balance and month 3 balance - each separately). There is a bit of tracking that must take place to compute these gains and losses.
Hope this helps.
James W. Guthrie, Jr. - CPA, International Tax Advisor