United States

Accounting method procedures and pitfalls when determining E&P


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Because a foreign corporation is not required to adopt an accounting method for purposes of determining earnings and profits (E&P) until its E&P becomes significant for U.S. tax purposes, it is critical that controlling domestic shareholders of foreign corporations have a clear understanding of when the foreign corporation's E&P becomes significant.

In this article previously published in The Tax Adviser, authors Kate Abdoo and Ramon Camacho discuss the general rules applicable to all taxpayers for establishing and changing a method of accounting and when a foreign corporation, specifically, will be in a position to adopt a method of accounting for purposes of determining earnings and profits (E&P). Also discussed are the steps necessary for foreign corporations to request consent to change their methods of accounting once it is determined that present methods are unfavorable or even impermissible. Finally, this article discusses special limitations that may apply to prevent a foreign corporation from requesting a change in method of accounting. Taxpayers that understand when a foreign corporation will be in a position to adopt methods of accounting can take steps to plan for the adoption of favorable methods, and even taxpayers that determine that unfavorable or impermissible methods of accounting for purposes of determining E&P have already been established may be able to limit exposure and adopt proper methods through the filing of one or more Forms 3115.