Under U.S. tax rules, qualified business units (QBUs) are important for purposes of calculating certain transactions denominated in currencies other than the U.S. dollar. This posting discusses what a QBU is. However, this posting does not discuss the specific U.S. tax rules on how to report non-U.S. dollar denominated transactions for a QBU or a non-QBU.
In general, a QBU is any separate and clearly identified unit of a trade or business of a taxpayer, provided that separate books and records are maintained.
Certain entities can constitute QBUs. For instance, a corporation is a QBU. Further, a partnership, trust, or estate is a QBU of a partner or beneficiary.
Certain activities can also qualify as a QBU. In order for activities to create a QBU:
- The activities must constitute a trade or business, and
- A separate set of books and records must be maintained with respect to those activities.
The definition of a “trade or business” for this purpose is broader than most definitions of “trade or business.” A trade or business for purposes of defining a QBU is:
[A] unified group of activities that constitutes (or could constitute) an independent economic enterprise carried on for profit, the expenses related to which are deductible under section 162 or 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
Deductions for typical trade or business expenses are generally found in Section 162. However, section 212 generally allows deductions for the production or collection of income, regardless of whether an actual trade or business exists. Expenses typically fitting within section 212 include rental property deductions and investment-related expenses.
Thus, investment activities can create a QBU as long as they are a separate and clearly identified unit and separate books and records are maintained. This principle is illustrated in Treas. Reg. § 1.989(a)-1(e), Example 6, which provides:
Taxpayer A, an individual resident of the United States, is engaged in a trade or business wholly unrelated to any type of investment activity. A also maintains a portfolio of foreign currency-denominated investments through a foreign broker. The broker is responsible for all activities necessary to the management of A’s investments and maintains books and records as described in paragraph (d) of this section, with respect to all investment activities of A. A’s investment activities qualify as a QBU under paragraph (b)(2)(ii) of this section to the extent the activities engaged in by A generate expenses that are deductible under section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
In certain circumstances, the existence of a QBU can allow for the deferral of recognition of currency gains and losses.
Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.