The US Treasury Department and IRS have announced plans to issue proposed regulations under Section 987, aimed at simplifying foreign currency rules for businesses operating through qualified business units with different functional currencies. The forthcoming rules would reduce compliance burdens by offering a simplified calculation method for taxable income and foreign currency gain or loss, narrowing the scope of loss suspension rules, and introducing an election for controlled foreign corporations to limit their Section 987 exposure.
The US Internal Revenue Service (IRS) has released Notice 2026-17, addressing revisions to the rules for calculating taxable income or loss and foreign currency gain or loss related to a qualified business unit under Section 987.
Notice 2026-17: Modifications to Rules for Computing Taxable Income or Loss and Foreign Currency Gain or Loss Under Section 987
This notice announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to issue proposed regulations (forthcoming proposed regulations) under section 987.
The Treasury Department and IRS expect the forthcoming proposed regulations to include proposed rules that are consistent with the rules described in sections 3 through 5 of this notice. These rules are intended to simplify the operation of the regulations under section 987, reduce compliance burdens, and refine the scope of certain rules under section 987 to limit their effect on ordinary course transactions.
In particular, the rules described in section 3 of this notice would permit taxpayers to determine taxable income or loss and foreign currency gain or loss with respect to a qualified business unit (QBU) using a method that is substantially similar to the method provided in regulations proposed in 1991.
In addition, the rules described in section 4 of this notice would (i) narrow the scope of the loss suspension rules; (ii) simplify the lossto-the-extent-of-gain rule under which suspended section 987 loss is recognized; (iii) clarify the definition of a successor for purposes of the deferral rules; and (iv) expand the definition of a section 987 hedging transaction.
Additionally, the rules described in section 5 of this notice would provide an election under which controlled foreign corporations (within the meaning of section 957(a)) (CFCs) would not compute or recognise foreign currency gain or loss under section 987(3), except in connection with certain inbound transactions. The rules relating to this election will be described more fully in future guidance. The Treasury Department and the IRS also intend to issue additional guidance relating to the treatment of frequently recurring disregarded transactions and net investment hedges for purposes of section 987.
Section 987
Section 987 generally applies to taxpayers that own a QBU with a functional currency other than the functional currency of the QBU’s owner (section 987 QBU). Section 987(1) and (2) provide rules for determining and translating taxable income or loss with respect to a section 987 QBU (section 987 taxable income or loss).
In addition, under section 987(3), taxpayers must make proper adjustments (as prescribed by the Secretary) for transfers of property between QBUs of the taxpayer having different functional currencies. Under section 987(3), the owner of a section 987 QBU recognises foreign currency gain or loss (section 987 gain or loss) when the section 987 QBU makes a remittance.
Section 989(c) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subpart J of subchapter N of Chapter 1 of Subtitle A of the Code (which includes section 987), including regulations limiting the recognition of foreign currency loss on certain remittances from QBUs.
