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The Treasury Department and the IRS released Notice 2026-17 (PDF - 217.22KB) on Feb. 25, announcing their intent to issue proposed regulations under Section 987. Most notably, the notice substantially revives the equity and basis pool method originally set forth in the 1991 proposed regulations, an approach many taxpayers historically have adopted in practice.
The notice builds on the 2024 final Section 987 regulations discussed in our prior Tax Flash 2024‑19 and reflects a continued effort to simplify the existing Section 987 framework, reduce compliance burdens and limit the application of certain rules to ordinary course transactions.
Key highlights
- Election to use equity and basis pool method. The notice permits taxpayers to elect a simplified method for computing Section 987 taxable income or loss and foreign currency gain or loss that is substantially similar to the 1991 proposed regulations.
Under this approach, taxpayers maintain an equity pool (in the qualified business unit functional currency) and a basis pool (in the owner’s functional currency); compute a single, annual net remittance (rather than daily remittances); and translate Section 987 taxable income or loss using the yearly average exchange rate. The election is available only for taxable years in which a current rate election is in effect.
The election to use the equity and basis pool method is a Section 987 election that must be made by attaching an election statement to the taxpayer’s original, timely filed return (including extensions) for the first taxable year in which the election is effective.
Grant Thornton insight:
If a taxpayer elects the equity and basis pool method, Treas. Reg. Sections 1.987‑3 through 1.987‑5 no longer apply. However, other provisions of the 2024 final regulations continue to apply, including the transition rules under Treas. Reg. Section 1.987‑10. Accordingly, taxpayers must still compute pre-transition Section 987 gain or loss and evaluate whether to make the amortization election.
While this new method may reduce ongoing compliance complexity, taxpayers should be mindful that making or maintaining a current rate election will still trigger the suspended loss rules. Accordingly, taxpayers should evaluate the notice’s modifications to the suspended loss rules (discussed further below), including the revised de minimis rule and simplified grouping provisions, in determining whether the simplified method produces a net benefit. Taxpayers may want to assess whether the expanded de minimis thresholds described in the notice mitigate this exposure before making a current rate election.
- Narrowing of loss suspension rules. The forthcoming regulations are expected to narrow the application of the loss suspension rules under the current rate election. Under the framework described in the notice, suspended Section 987 losses generally would arise only if (1) the remittance proportion exceeds 5%, or (2) the amount of loss that would otherwise be suspended exceeds $5 million.
- Simplification of recognition groupings. For non-controlled foreign corporation (CFC) owners, Section 987 gain and loss would be treated as a single recognition grouping for purposes of the loss-to-the-extent-of-gain rule. For CFC owners, recognition groupings would be limited to four categories: tentative tested income, each Subpart F income category, effectively connected income excluded from Subpart F and other income.
- Expanded definition of Section 987 hedging transactions. The notice indicates that the definition of a Section 987 hedging transaction would be expanded to include certain hedges that do not satisfy the GAAP hedging requirement included in the final regulations, provided other regulatory requirements are satisfied. The notice also provides transitional identification relief for certain pre-existing hedges.
- Proposed election for CFCs to exclude Section 987(3). The Treasury Department and the IRS intend to issue future guidance providing an election under which CFCs generally would not compute or recognize foreign currency gain or loss under Section 987(3), except in connection with specified inbound transactions. Transition rules are expected to address pre-election unrecognized Section 987 gain or loss.
The notice indicates that the election would be made on an originally filed return (including extensions) for the first taxable year to which it applies and would be binding absent IRS consent to revoke. The IRS also expects the election to be subject to a consistency requirement across CFCs controlled by the taxpayer and related parties, and it has requested comments on the scope and operation of the election. The notice further signals that this guidance is intended to be issued in time for calendar-year taxpayers to consider the election for the 2025 taxable year.
Grant Thornton insight:
This consistency requirement may present practical challenges for groups with complex ownership structures or limited visibility into elections made by related parties. Taxpayers considering the election should therefore assess groupwide ownership and coordination processes early to ensure the election can be made consistently and to avoid unintended noncompliance. Because final regulations have not yet been issued and are unlikely to be finalized until later in the year — potentially after much of the compliance process is underway — taxpayers should prepare in advance to coordinate with related parties once the rules are finalized.
Applicability
Taxpayers may rely on the notice’s rules relating to the equity and basis pool method and the proposed modifications to the loss limitation and hedging transaction rules for taxable years for which the 2024 final Section 987 regulations apply and that end before the proposed regulations are published in the Federal Register, provided those rules are applied in their entirety and consistently across the taxpayer’s Section 987 electing group.
However, the proposed election for CFCs to exclude Section 987(3) is not currently available for reliance. The Treasury Department and the IRS have indicated that they expect to provide similar reliance once future guidance addressing the CFC election is issued.
Grant Thornton insight:
Taxpayers with significant Section 987 exposure should identify affected entities early and incorporate these developments into their overall Section 987 planning, provision and compliance processes. In particular, taxpayers should evaluate whether the equity and basis pool method meaningfully reduces computational and tracking burdens, while also considering the interaction with the current rate election and the revised loss limitation framework.
Although the simplified approach may ease ongoing compliance, taxpayers should assess how it compares to other methods and whether it affects their broader tax profile.
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