IRS and Treasury Move to Simplify Foreign Currency Tax Rules for Businesses
The IRS and the U.S. Treasury Department have announced plans to issue new proposed regulations that would change how businesses calculate taxes on foreign currency gains and losses. Released in Notice 2026-17, the announcement targets a complex area of the tax code known as Section 987, which governs how companies with international operations report income from foreign branches. The proposed rules are designed to reduce the compliance burden on affected taxpayers and make the existing regulations easier to follow.
What Is Section 987 and Why Does It Matter?
Section 987 of the Internal Revenue Code deals with how U.S. businesses account for income or losses that run through what the IRS calls a “qualified business unit” — essentially a branch or division of a company that operates in a foreign country and uses a different currency than the parent company.
When the exchange rate between the U.S. dollar and a foreign currency shifts, it can create what’s called a “foreign currency gain or loss.” Under current rules, tracking and reporting these gains and losses has been extremely complicated for multinational businesses, requiring layers of calculations that many companies have struggled to manage. The IRS finalised the most recent version of these rules back in December 2024, but practitioners quickly raised concerns about their complexity.
What the Proposed Rules Would Change
The new proposed rules outlined in Notice 2026-17 aim to make Section 987 compliance simpler and more manageable. One of the key changes would allow businesses to elect a calculation method that closely resembles a simpler approach originally proposed in 1991 — a method many businesses were already more familiar with. This is known as the “equity and basis pool method.”
Beyond that, the proposed regulations would also narrow the scope of the so-called “loss suspension rules,” which currently limit when and how a company can recognise a foreign currency loss on its tax return. The IRS is also looking to simplify the rule that governs when a suspended loss can finally be recognised — reducing unnecessary complexity in what is already a technical area of tax law.
Additionally, the new rules would clarify who counts as a “successor” under the deferral rules — an important distinction for companies undergoing mergers, restructurings, or ownership changes. The definition of a Section 987 hedging transaction, which covers financial tools used to protect against currency risk, would also be expanded.
Relief for Controlled Foreign Corporations
Another significant part of the announcement concerns controlled foreign corporations (CFCs) —these are foreign companies that are majority-owned by U.S. shareholders. Under the proposed rules, CFCs would have the option to elect out of computing or recognising foreign currency gains and losses under Section 987(3), except for certain inbound transactions back to the U.S.
This would be a meaningful relief for large U.S. multinational companies that manage foreign subsidiaries and currently face high administrative costs just to calculate amounts that may ultimately be small or irrelevant to their overall tax position.
The IRS and Treasury noted that further guidance on this election is still coming, and that they also plan to release additional rules around “frequently recurring disregarded transactions” and net investment hedges under Section 987.
Who Is Affected?
These changes will primarily affect U.S. businesses with overseas operations, including multinational corporations, companies with foreign branches, and large businesses that own or control foreign subsidiaries. Tax professionals, accountants, and corporate tax departments at companies with international exposure should pay close attention as these proposed rules develop. The rules are less likely to affect individual taxpayers or small domestic businesses.
What Taxpayers Should Do Now
While these are still proposed regulations — meaning they are not yet final law — businesses and their tax advisors should begin reviewing how the anticipated changes could affect their current Section 987 reporting methods. Companies that have been using complex compliance approaches under the December 2024 final rules may want to evaluate whether the new elective methods could reduce their administrative burden once finalised. Tax professionals should closely monitor IRS guidance for the release of the formal proposed regulations, and businesses with significant foreign currency exposure should consult a qualified international tax advisor to prepare for the transition.
