The Treasury Department and IRS have issued proposed regulations (REG-103844-26) that would simplify the application of Internal Revenue Code Section 987 to controlled foreign corporations (CFCs). The guidance follows Notice 2026-17 and is intended to reduce the administrative burden associated with tracking and recognizing foreign currency gain or loss within CFC-owned foreign branches and disregarded entities.
What Taxpayers Need to Know About the Proposed Section 987 Rules
The proposed regulations introduce a new CFC exemption election, under which electing CFCs generally would no longer be required to compute or recognize §987 gain or loss on remittances from foreign qualified business units (QBUs). However, CFCs would continue to determine §987 taxable income and earnings and profits under existing rules.
Taxpayers making the election generally must continue to account for any previously accumulated §987 gain or loss by amortizing those amounts over a 120-month period. Relief is provided for smaller QBUs, as QBUs with less than $50 million of average assets generally are exempt from calculating pre-election §987 amounts.
The proposed regulations also include safeguards to prevent taxpayers from importing exchange rate driven basis increases into the U.S. through inbound liquidations and reorganizations. In certain income nonrecognition transactions, electing CFCs would be required to recognize §987 gain attributable to foreign currency appreciation.
How Forvis Mazars Can Help
Forvis Mazars can help evaluate whether the CFC exemption election is beneficial, model the impact of pre-election gain or loss amortization, assess inbound transaction implications, and help you prepare for implementation if the regulations are finalized. Contact a professional at Forvis Mazars to learn more.