What do international business owners( American Expatriates) need to know about IRS and yearly average currency rates. What impacts yearly average currency rates? How often do the rates vary?
Your US tax return is denominated in US dollars. So everything you include on your US tax return must be converted to US dollars. Technically, you should exchange the foreign items to US dollars on the date of transaction. Practically, we use the average exchange rates for the entire year.
The only big foreign exchange issue revolves around the "Foreign Mortgage Gain" which only occurs on the "substantial buy down" of a foreign mortgage - i.e. on the sale of a foreign asset (usually a home.)
Chuck Heyde, CPA, CGMA
Tax Professional Answers
I hope this is helpful.
Expats owning a a foreign business can trigger a plenty of compliance issues that need to be addressed.
First you would have to determine if the owner ship by the US person(s) exceed 50% of the foreign business entity. If the ownership by US persons exceeds 50% then you have what is technically referred to as CFC (Controlled Foreign Corporation) if the ownership is less than 50% then you would have a PFIC (passive foreign Income Corporation) in both cases you would have to file additional tax forms to show the amount of income in US dollars. And I am guessing that is where your issue arises.
In filling form 5471 and related schedule you will have to present the foreign entity's activities in home currency and in US Dollars. Also you have to present the financial statements (Income and Balance Sheet according to US GAAP).
For the Balance sheet amount you have to use the historical exchange rate (typically for big purchases date of purchase).
For Income statement you can use a yearly average unless that would result in distortion then use the actual(which can be cumbersome for small businesses)
The Treasury follows the federal reserve bank exchange rate, other professionals use OANDA (for versatility and ease of use) Which ever exchange rate source you use you have to be consistent. If the home currency is inflationary or hyper inflationary there are other specific treatments.
You have to keep in mind that there are other "relatively new" filling requirement of the FATCA and the FBAR that you personally need to comply with.
I hope this is helpful, If I can be of any further help please let me know.
Abraham Itani, CPA
Please let me know if you'd like a free consultation - www.onlinetaxman.com
Treasury Reporting Rates of Exchange as of December 31, 2012
Daniel N. Erasmus
Int'l Tax Attorney & Counsel, EA & US Tax Court Practitioner
Tax Questions By Topic:
Meet Leading Tax Advisors
Lakeland, Florida, USA
New York, New York, USA
Federal Tax Credits & Incentives Practice Leader
Denver, Colorado, USA
Fullerton, California, USA
Sanford, Florida, USA
Topanga, California, USA
Tyrone , Pennsylvania, USA
Greenville, South Carolina, USA
Rancho Santa Fe, California, USA
CEO/Certified Financial Advisor
Santa Clara, California, USA
Tax Principal - President
Chattanooga, Tennessee, USA
Stellenbosch, South Africa
Exchange Control & Master Tax Practitioner (SA)
Boston, Massachusetts, USA
Tax Partner, International Tax
Toronto Mississauga Oakville Burlington Hamilton, Canada
La Jolla, California, USA