The IRS and Treasury Department announced Wednesday they plan to issue simplified regulations for calculating foreign currency gains and losses, potentially cutting compliance costs for the roughly 25,000 U.S. companies operating foreign business units. Notice 2026-17 signals a shift back toward methods proposed over three decades ago that many tax professionals had long advocated for.
The forthcoming proposed regulations would allow taxpayers to elect a simpler approach for tracking currency fluctuations in their foreign operations, building on final rules published just two months earlier in December 2024. The changes target Section 987 of the tax code, which governs how companies calculate taxable income when their foreign branches operate in currencies other than the U.S. dollar.
What’s Changing
The proposed rules would permit companies to use what’s known as the equity and basis pool method for computing unrecognized Section 987 gains or losses. This approach closely resembles regulations originally proposed in 1991 but never finalized, which many practitioners considered more straightforward than the current system.
According to the notice, the regulations would “simplify the operation of the section 987 regulations, reduce compliance burdens for taxpayers, and refine the scope of certain rules to limit their effect on ordinary course of business transactions.”
The changes would narrow loss suspension rules, meaning fewer routine business transactions would trigger complex deferral calculations. The proposed regulations would also expand the definition of qualifying hedging transactions and clarify what constitutes a successor entity when companies restructure their foreign operations.
For controlled foreign corporations, the rules would introduce an election allowing them to skip computing foreign currency gains or losses under Section 987(3) except for certain transactions involving transfers back to the United States. This could significantly reduce the administrative burden for companies with multiple foreign subsidiaries.
Decades of Regulatory Complexity
Section 987 has presented challenges for multinational businesses since its enactment. The provision requires companies to separately track income and currency gains for qualified business units—essentially any foreign branch or division that maintains its books in a functional currency different from the dollar.
The IRS published proposed regulations in 1991 that used a relatively simple basis pooling approach. Those rules were never finalized, leaving taxpayers in limbo for decades. The agency issued new proposed regulations in 2006 and again in 2016, each time increasing complexity.
Final regulations published December 6, 2024, as Treasury Decision 9923, adopted a modified profit-and-loss method that applies to tax years beginning on or after January 1, 2026. Industry estimates suggested these final rules would require an average of 3.2 hours of compliance work per affected taxpayer annually, totaling roughly 160,000 hours across approximately 50,000 entities.
The simplifications in Notice 2026-17 aim to reduce that burden by allowing elections that bring back elements of the 1991 approach while maintaining the structure of the 2024 final regulations.
Impact on Foreign Operations
U.S. companies reported $12.4 billion in net Section 987 losses in 2023, according to IRS Statistics of Income data. Much of that remained deferred under prior rules. The final December 2024 regulations projected a 10 to 15 percent increase in recognized gains and losses without additional simplifications.
Roughly 90 percent of U.S.-controlled foreign corporations maintain qualified business units, meaning more than 40,000 entities must navigate Section 987 calculations annually based on IRS Form 5471 filings. The proposed election for controlled foreign corporations could materially affect how companies report income under Subpart F and global intangible low-taxed income rules.
“For CFCs, the Section 987(3) election could materially reduce Subpart F/GILTI inclusions from FX volatility, but taxpayers must monitor inbound transaction triggers,” according to a February 2026 alert from PwC’s global tax team.
Tax analysts noted the proposals address longstanding practitioner concerns. “While the final Section 987 regs provide much-needed certainty, their complexity remains a barrier; the equity pool election in Notice 2026-17 is a welcome step toward the simpler 1991 proposal,” Lee Meyercord, international tax editor at Tax Analysts, wrote in January 2026 analysis.
What Comes Next
The notice indicates additional guidance will follow on several topics, including treatment of recurring disregarded transactions and net investment hedges. The IRS plans to describe the controlled foreign corporation election rules more fully in future guidance.
Companies should review their current Section 987 computations to determine whether the equity and basis pool election makes sense for their operations once the proposed regulations are published, likely by mid-2026. Early adoption provisions may allow retroactive application to tax years beginning January 1, 2026.
Deloitte’s tax policy group estimated in February 2026 that narrowing loss suspension rules and expanding hedging definitions could save mid-sized multinationals 20 to 30 percent in compliance costs for routine intercompany transfers.
The proposed regulations will go through a public comment period before finalization. Taxpayers who don’t elect the simplified methods will continue using the December 2024 final regulations, which apply a more complex profit-and-loss approach to tracking foreign currency fluctuations.
For businesses with significant foreign operations, the changes represent an opportunity to reduce administrative burdens while maintaining compliance with foreign currency reporting requirements. Companies should consult tax advisors to model the impact of available elections, particularly those with controlled foreign corporations operating in high-volatility currency environments.
Sources
Notice 2026-17: Proposed Regulations Under Section 987 | Internal Revenue Service
SOI Tax Stats – Controlled Foreign Corporations | Internal Revenue Service