The Treasury and the IRS recently issued Notice 2026-17, announcing their intent to release proposed regulations that would significantly simplify the complex rules for foreign currency gain or loss under section 987. The notice comes as a relief to many taxpayers grappling with the burdensome 2024 final section 987 regulations.
RSM Insight: A simplification package, not a rewrite of section 987
Notice 2026‑17 leaves the 2024 final regulations in place. It introduces elective changes intended to reduce day‑to‑day compliance burden. The notice does not change the basic policy of section 987. The relief is focused on mechanics and administration.
The forthcoming regulations are expected to:
The notice allows immediate reliance on two changes: the equity and basis pool method and the relaxed loss suspension and grouping rules. These changes must be applied as a package. A taxpayer cannot apply them selectively. If a taxpayer relies on them, they must be applied consistently across the related entities that are required to follow the same section 987 election posture under the regulations. The CFC election is only previewed in the notice. It is not yet available for reliance.
U.S. taxpayers that operate a foreign branch or a disregarded entity with a functional currency different from the U.S. dollar must calculate foreign currency gains and losses under section 987. These foreign operations are treated as qualified business units (QBUs) for section 987 purposes.
Final regulations issued in late 2024 (the 2024 final regulations) introduced a detailed framework for computing and recognizing section 987 gain or loss using what practitioners commonly refer to as the FEEP (foreign exchange exposure pool) approach, which is implemented through an annual determination of net unrecognized section 987 gain or loss and recognition upon remittance.
Although those regulations offered simplifying elections, such as the current‑rate election (CRE) and annual recognition election (ARE), taxpayers consistently reported that the overall methodology remained complex, data‑intensive, and operationally challenging, particularly in areas requiring daily remittance tracking and balance‑sheet‑based computations. In response, the IRS released Notice 2026‑17, which previews new simplifications and elective regimes designed to reduce compliance burdens more substantially.
RSM Insight: Treasury is responding to what made the 2024 rules hard to run
The notice focuses on the parts of the 2024 final regulations that have been hardest to implement. These include daily remittance tracking. They also include broad loss suspension in years when a CRE is in effect. In addition, the notice addresses the administrative burden that arises in structures with frequent disregarded transfers, particularly in CFC chains.
A critical point emphasized in the notice is that the 2024 final regulations remain in effect. The default method—the FEEP method—continues to apply unless a taxpayer elects one of the simplified alternatives described in the notice.
The notice also does not modify the mandatory transition rules under the 2024 final regulations. Every taxpayer subject to section 987 must still perform a pre‑transition computation under Reg. section 1.987‑10, regardless of any prior methodology. This requirement applies even when a taxpayer previously relied on a method consistent with the 1991 proposed regulations and elects to adopt the new simplified equity and basis pool method for post‑transition years.
The notice confirms that the pre‑transition gain or loss amount remains a necessary input for establishing the opening balance of the basis pool under the new method. Taxpayers that were on an ineligible or inconsistent method prior to transition must continue to calculate pre‑transition gain or loss using a modified FEEP approach, a point that maintains the complexity of the transition year.
RSM Insight: The limits of the notice matter as much as the relief
Notice 2026‑17 does not undo the 2024 final regulations. It does not reduce the transition work. It also does not make the CFC election available at this time. These limits drive much of the compliance workload for 2025, even for taxpayers that plan to rely on the simplified rules in later years.
The notice introduces an election to use an ‘equity and basis pool method’ to determine section 987 gain or loss. This method is substantially similar to the more straightforward approach outlined in the 1991 proposed regulations.
A significant simplification is that the method requires just a single annual computation of net remittances for a QBU, avoiding the daily remittance tracking and balance‑sheet‑driven computations required under the FEEP method. To use this method, a taxpayer must also have a CRE in effect.
The notice provides that taxpayers may rely on both the CRE framework and this simplified method immediately.
RSM Insight: The pool method builds on a current rate election
The equity and basis pool method replaces daily remittance tracking with an annual net remittance calculation. The method is available only in years in which a CRE is already in effect. As a result, the simplification sits on top of a CRE posture. It also depends on consistent tracking of transfers between the owner and the QBU.
The notice significantly relaxes the loss suspension rules under the 2024 final regulations. Under the final regulations, taxpayers making a CRE were generally required to suspend any section 987 losses. The notice provides that this loss suspension rule will now only apply if either:
Importantly, these thresholds are tested for each QBU individually, not on an aggregate basis at the taxpayer level. This change will allow many taxpayers to recognize section 987 losses generated from ordinary course business remittances, which was a major concern under the 2024 final regulations.
The notice also simplifies the loss-to-the-extent-of-gain rule. For most taxpayers, all section 987 gains and losses will be treated as a single recognition grouping. This makes it much easier to use suspended losses to offset gains from any QBU, rather than tracking them in separate, narrow categories.
RSM Insight: Loss suspension is narrower, but it does not disappear
The revised thresholds should keep more ordinary‑course losses out of suspension. Loss suspension can still apply for QBUs with larger remittances or larger loss positions. The simplified recognition grouping reduces tracking burden. It also increases the importance of modeling how gains and losses will be recognized over time.
The notice also previews changes that matter most in transaction years. These include clearer limits on when loss suspension applies. They also include a more targeted successor standard for deferral purposes. In addition, the notice expands the definition of a section 987 hedging transaction. These changes are intended to reduce unexpected results when a QBU terminates, assets move within a group, or a treasury hedge is in place.
Perhaps the most significant change previewed in the notice is a forthcoming election for CFCs—a CFC election. If this election is made, a CFC would generally not be required to compute or recognize any foreign currency gain or loss under section 987(3). This would effectively turn off the remittance-based gain and loss calculations for CFCs, eliminating a substantial compliance burden.
The notice indicates there will be a transition rule for taxpayers making this election, requiring any unrecognized section 987 gain or loss that arose before the election to be recognized over a 120-month period.
Importantly, taxpayers cannot yet rely on the CFC election. The Treasury and IRS intend to issue guidance in the near future to allow taxpayers to make this election for their 2025 taxable year.
RSM Insight: The CFC election targets high‑volume structures
The CFC election is aimed at structures where CFCs own multiple disregarded entities. These structures often have frequent intercompany movements. That is where section 987(3) tends to create the most administrative burden. The notice also signals that the election will include inbound transaction rules and a transition rule. The goal is simplification, not a clean slate.
Notice 2026‑17 does not materially change the treatment of partnerships or S corporations under section 987. As with the 2024 final regulations, only limited provisions apply to these entities, and the notice does not address the open questions Treasury highlighted in the preamble regarding how section 987 should operate in the passthrough context. The notice confirms that the equity and basis pool method generally does not apply to QBUs owned by or through partnerships or S corporations, or to partnerships that are themselves treated as QBUs. Instead, a method consistent with the equity and basis pool principles—or a similar approach such as the method described in the 1991 proposed regulations—may be treated as a reasonable method under Reg. section 1.987‑7(b). Beyond acknowledging this limitation, the notice remains largely silent on partnership‑ and S corporation‑specific issues and leaves those topics for future guidance.
The simplified loss suspension rules, however, should apply to QBUs owned by partnerships or S corporations. The relaxed thresholds apply at the QBU level and do not exclude passthrough‑owned QBUs. This change should permit more ordinary‑course remittance losses to be recognized. Nevertheless, the broader structural questions surrounding how section 987 should apply in the partnership and S‑corporation setting remain unresolved.
RSM Insight: Passthrough structures remain in the reasonable‑method framework
For QBUs owned by partnerships or S corporations, the notice provides limited relief through the revised loss suspension thresholds. It does not create a new election that allows these structures to use the equity and basis pool method. In practice, compliance continues to depend on applying a reasonable method consistently and supporting it with documentation.
Notice 2026-17 provides that the election to use the simplified equity and basis pool method is a section 987 election, subject to the general procedural requirements of Reg. section 1.987-1(g). The IRS recently released Form 8964-ELE, Section 987 Elections, which is intended to satisfy the reporting requirements for section 987 elections under those regulations.
RSM Insight: Navigating reporting for the new elections
The notice previews two significant new elections, but only the election to use the equity and basis pool method is available for immediate reliance. The other major simplification, the CFC election, is not yet available, and its reporting requirements are expected to be addressed in future guidance.
Because the equity and basis pool election was announced after Form 8964-ELE was finalized, the current version of the form does not provide a mechanism for making this specific election. Therefore, until updated forms or instructions are issued, taxpayers relying on the notice to make the equity and basis pool election should attach a separate election statement to their return that complies with the general requirements for making elections under Reg. section 1.987-1(g). Taxpayers should monitor for updated forms and instructions to ensure proper reporting.
If a taxpayer chooses to rely on the notice’s simplified rules before proposed regulations are issued, those rules must be applied consistently. They must be applied across the taxpayer and the related entities that are required to follow the same section 987 election posture under the regulations. This requirement makes partial or one‑off adoption difficult in practice.
The relief provided in Notice 2026-17 is welcome news for multinational businesses. Taxpayers can rely on the simplified equity and basis pool method and the relaxed loss limitation rules (described in sections 3 and 4 of the notice) for taxable years to which the 2024 final regulations apply (generally, tax years beginning after Dec. 31, 2024).
To rely on this guidance, a taxpayer and all members of its section 987 electing group must apply the rules in their entirety and in a consistent manner.
Taxpayers with section 987 QBUs should immediately begin to model the effects of these new elective regimes to determine the most advantageous path forward. They should also monitor for the forthcoming guidance on the CFC election, which could provide a permanent and significant simplification for their foreign operations.
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