Background
The Department of the Treasury and the IRS recently published Notice 2026-17 (the notice) to preview forthcoming proposed regulations related to foreign currency branch transactions. The notice, focused on Internal Revenue Code Section 987 currency gain or loss, provides guidance with the goal to simplify the current framework, reduce the burden of compliance, and limit the impact of certain rules on routine transactions.
The revisions described in the notice include:
- An election to use an equity and basis pool method to determine §987 gain or loss and §987 taxable income or loss
- Proposed modifications to loss suspension rules
- Simplification of consolidated recognition groupings and clarification of successor deferral qualified business unit (QBU) concepts
- Expansion of §987 hedging transactions beyond the U.S. GAAP hedging requirements
While our prior FORsights™ article summarized the notice at a high-level, this follow-up piece focuses on the practical international tax implications and selected regulatory mechanics relevant to taxpayers with cross-border branch and disregarded entity structures.
Why Does This Matter?
For U.S. enterprises with foreign branches and disregarded entities, the process to calculate §987 currency gain or loss is often a data-intensive, systems-heavy constraint. The notice is intended to reduce compliance burden and refine how ordinary course transactions are treated.
If U.S. enterprises have controlled foreign corporations (CFCs), the concepts addressed under §987 often apply to CFC structures. CFC structures may involve multiple layers of QBUs, which can be challenging to track, and report gains or losses accurately due to grouping rules. For example, §987 transition amounts1 may have financial statement implications, with effects recorded as a cumulative foreign currency translation adjustment (CTA) in shareholders’ equity (a component of other comprehensive income) or as a charge to income tax expense, showing taxpayers may need to take a thoughtful and well-documented approach.
Historically, taxpayers navigated the compliance reporting of these transactions under a fragmented framework of “reasonable methods” defined by the IRS. The 2024 final regulations, were issued with the intention of providing comprehensive guidance, and comments received by taxpayers favored methods related to the previously proposed 1991 regulations, due to their existing familiarity. For additional background on the 2024 final §987 regulations, including key elections, the FEEP method framework, and transition considerations, see our FORsights articles: “Final Regs on Foreign Currency Gains and Losses of QBUs” and “A Closer Look at Foreign Currency Gains & Losses of QBUs.”
Forvis Mazars Insight: Section 987 projects often become an internal systems project just as much as a tax compliance project. Early analysis of QBUs, functional currencies, and sources of data can help to further enhance modeling and support a more defensible approach.
What Has Changed?
Context on Section 987
Section 987 applies when a QBU keeps its accounting books in a different currency than that of its owner’s currency. Specifically, there are two rules in §987 that apply to the multinational taxpayer:
- §987(1), (2): The computation of taxable income or loss for each QBU in its functional currency, translated to the owner’s currency at the proper exchange rate.
- §987(3): Apply the proper adjustments for any remittances (i.e., transfer of funds from a QBU to its owner) to decide the §987 currency gain or loss.
Forvis Mazars Insight: §987 currency gain or loss should not be confused with a foreign exchange currency gain or loss, which applies under the tax rules of §988 and accounting rules of ASC 830. A §987 gain or loss is classified as ordinary income or loss for federal income tax purposes.2
Election to Use the Equity and Basis Pool Method
The notice indicates Treasury and the IRS intend to convey an election to use an “equity and basis pool method” to determine §987 gain or loss and §987 taxable income or loss. The notice describes the method as substantially similar to the approach reflected in the proposed 1991 regulations but introduced as an elective alternative for taxpayers subject to the post-2024 final regulations framework.
Under the equity and basis pool method described in the notice, taxpayers would track two pools: an “equity pool” in the QBU’s functional currency and a “basis pool” in the owner’s functional currency. Net unrecognized §987 gain or loss is computed by comparing the equity pool translated into the owner’s functional currency at the year-end spot rate, with the basis pool, maintained in the owner’s functional currency. Recognized, or suspended, §987 gain or loss is computed by multiplying net unrecognized §987 gain or loss by a remittance portion, and if an annual recognition election is in effect, the remittance portion equals one.
Forvis Mazars Insight: Many taxpayers have already begun operational planning and data mapping in anticipation of the 2024 final regulations. The notice’s equity and basis pool method is best evaluated as an “alternative computational track” that may reduce day‑to‑day remittance tracking, but it may still require a data readiness assessment and alignment with the taxpayer’s broader §987 compliance approach.
Simplified Loss Suspension Rules
The notice states forthcoming proposed regulations would narrow the scope of the loss suspension rules and simplify the loss-to-the-extent-of-gain-rule under which §987 loss is recognized.
In general, the proposed regulations are expected to allow taxpayers to recognize §987 loss concurrently with ordinary course remittances and would narrow the scope of recognizing groups solely for the loss-to-the-extent-of-gain-rule. These modifications would serve as added flexibility when recording the related losses and reduce the compliance burden of tracking suspended losses.
The proposed modification to loss suspension rules would apply to a QBU, or successor deferral QBU, when either a remittance is greater than 5%, or the sum of the net unrecognized §987 loss that would become suspended exceeds $5 million. Specifically, modifications apply to both the current rate election (CRE) loss suspension rule and the partnership loss suspension rule.
Forvis Mazars Insight: For taxpayers making routine transfers, the proposed thresholds may decrease the instances when loss suspension rules are triggered. As a result, this may reduce the tasks related to continuously keeping suspended losses in years when transfers have less impact on income.
Clarified Deferral and Successor Rules
As part of the expanded simplifications to the loss suspension rules, the regulations offer guidance on the definition of a successor for purposes of the deferral rules. A successor deferral QBU occurs when a QBU within the same CFC-owned group is terminated, and all gross assets are remitted to another QBU. This transfer results in the recognition of a §987 gain or loss when the successor deferral QBU then makes a remittance to its owner.
In addition, the termination of a QBU can lead to either a deferral or a suspension of §987 loss, depending on the circumstances of the transaction. Importantly, not every QBU that receives assets from the terminated QBU will be treated as a successor deferral QBU, as the rules apply only if certain conditions are met. One of the key conditions is that a significant portion of the assets from the terminated QBU must be recorded on the books of the potential successor deferral QBU at once following the transaction.
Forvis Mazars Insight: Because the loss suspension rules can activate certain thresholds and groupings, taxpayers may want to confirm how transfers are tracked and how entity groupings are decided under their current processes.
Expanded §987 Hedging
Under the proposed rules, hedging transactions that do not qualify for hedge accounting under GAAP could still be treated as §987 hedges if they meet the notice requirements. Specifically, if a hedge is primarily used to manage exchange rate risk related to a QBU, then it may qualify for §987 treatment, even if it does not meet the strict GAAP hedge accounting definition.
To be treated as “timely identified,” the notice provides a timing rule for certain hedges. In general, the notice treats a hedge as timely if the hedge and related QBUs are properly identified by April 26, 2026. Although the §987 hedging transaction definition is intended to reach those hedges that do not meet the GAAP definition, Treasury and the IRS are expected to further explain this meaning in future guidance.
Forvis Mazars Insight: Taxpayers with existing hedges should confirm their hedge identification and documentation supports the intended treatment under the notice, especially where a hedge does not meet the GAAP requirements but still may qualify under the notice’s expanded definition and timing rules.
Proposed Election For Application of §987(3) to CFCs
The notice also described anticipated future guidance allowing CFCs to elect not to compute or recognize foreign currency gain or loss under §987(3) on remittances from their QBUs, while §987(1) and (2) would continue to apply for computing taxable income and earnings and profits. Taxpayers may not currently rely on the rules surrounding the CFC election and Treasury and the IRS expect to permit reliance in future guidance.
What Should Taxpayers Do Now?
Action items to consider:
- Find the §987 footprint. Confirm which branches and/or disregarded entities qualify as QBUs, each QBUs functional currency, and the frequency of remittances.
- Assess transition readiness and timeline. Evaluate the availability of data and time requirement to transition the applicable calculations, necessary elections, and related compliance steps under the 2024 final regulations.
- Model election tradeoffs. Compare and contrast the administrative burden and outcomes under the current framework against the proposed modifications and find which positions are currently available as opposed to future guidance, particularly the CFC election idea.
- Coordinate with financial reporting teams as needed. For taxpayers with foreign branches, consider the transition impacts on CTA or income tax expense and whether other disclosures are needed.
The 2024 final §987 regulations generally apply to taxpayers beginning after December 31, 2024. Alternatively, taxpayers can rely on the rules in this Notice in filing their 2025 tax returns.
How Forvis Mazars Can Help
Our team of international tax professionals can help you better understand and apply this new guidance from the IRS. Contact us at Forvis Mazars to learn more.
- 1Transition amounts refer to one-time computations required to move into the §987 framework addressed in Notice 2026-17, including determining pretransition §987 gain or loss and the opening balances used under the elected method. These items can affect the timing of recognized §987 gain or loss.
- 2Treas. Reg. §1.987‑6(a)