The U.S. Treasury Department and the IRS released proposed regulations under Internal Revenue Code (IRC) section 987. The proposed rules provide long-sought guidance for taxpayers on how to calculate foreign exchange gains and losses of foreign branches and certain non-U.S. entities treated as disregarded entities for U.S. federal income tax purposes, which are referred to as qualified business units (QBUs).


As previously discussed, U.S. taxpayers may operate QBUs with different functional currencies than those of their owners. Under IRC section 987, such QBUs must consider and track foreign exchange gains or losses with respect to the QBU’s assets and liabilities. QBU owners then recognize exchange gains or losses when the QBU makes a remittance to its owner.

IRC section 987 was originally enacted in 1986 and outlines general requirements for the determination of taxable income of QBUs. However, IRC section 987 does not provide detailed rules on how to calculate it. Instead, Congress authorized the U.S. Treasury Department to issue the comprehensive regulations needed to calculate and track realized and unrealized foreign exchange gains or losses of QBUs.

The first set of proposed regulations was issued in 1991, outlining a reasonably good, albeit imperfect, approach to deal with the matter. However, the 1991 proposed regulations were never finalized.

While taxpayers were allowed to rely on them as a “reasonable method” until such time when final regulations were released, the U.S. Treasury Department continued, over the following three decades, to issue various notices and revised proposed, temporary and final regulations, introducing new calculation and tracking methods of increasing complexity.

In 2017, then-President Trump issued Executive Order 13789 under which the 2016 proposed section 987 regulations were identified as one of the significant regulations that posed an undue burden on taxpayers. As a result, the 2016 proposed section 987 regulations were suspended until the issuance of a revised set of rules.

New final regulations were then released in 2019, but they introduced further complexities and did not substantially deviate from the 2016 regulations. The IRS later issued a notice deferring the applicability of these final regulations.

On Nov. 9, 2023, the U.S. Treasury Department issued a new set of proposed regulations that are expected to take effect in taxable years beginning after Dec. 31, 2024. These new regulations introduce certain elections intended to alleviate some of the complexities introduced in the 2006, 2016 and 2019 proposed, temporary and final regulations.


As the 2016 regulations were suspended, most taxpayers could still rely on the 1991 proposed regulations when computing their foreign exchange gains and losses with respect to their QBUs.

Under those rules, U.S. taxpayers had to maintain an equity pool in the QBU’s functional currency and a basis pool in the QBU owner’s functional currency. These pools were increased by the QBU’s earnings and by capital contributions into the QBU, and were reduced by remittances, losses and other transfers from the QBU.

IRC section 987 gain or loss was recognized at the time of a remittance (for example, a distribution from the QBU to the U.S. owner) or upon termination of the QBU.

The amount of the IRC section 987 gain or loss was the difference between the value of the remittance in the taxpayer’s functional currency (translated at the spot rate) and the portion of the basis pool attributable to the remittance.


The latest proposed regulations are built on the basic structure of the 2016 and 2019 regulations but add certain modifications. The proposed regulations apply to individuals, corporations, partnerships, S corporations, non-grantor trusts and estates. The 2016 and 2019 regulations introduced a new approach called the foreign exchange exposure pool (FEEP) method.

At a high level, the FEEP method requires that the balance sheet of a QBU be translated to the QBU owner’s functional currency at the end of every year. When doing so, assets and liabilities are broken out into two different asset types:

  1. Historic Items: These are assets and liabilities that must be translated at the historic currency exchange rates at the acquisition date of the asset or liability. Common examples are non-financial assets such as land, fixed assets, PP&E and related depreciation or amortization.
  2. Marked Items: These are typically financial assets that must be translated at the current spot rate at the end of each year.

Next, the QBU owner must determine the pool of unrecognized IRC section 987 gain or loss based on the annual increase or decrease to the QBU’s balance sheet that is attributable to foreign exchange rate fluctuations.

Since Historic Items are translated at the historic rate, while Marked Items are converted at the applicable spot rate for the year, foreign currency exchange gain or loss on Historic Items is only recognized upon a realization event and will not affect other remittances, while currency fluctuations related to Marked Items do affect those remittances.

In contrast to the 1991 regulations, the FEEP method essentially creates recognition of section 987 foreign exchange gain or loss only with respect to assets and liabilities that are economically exposed to currency fluctuations and prevents taxpayers from recognizing large section 987 losses on items for which foreign exchange fluctuations have a remote effect on value.

Tracking Historic Items creates significant complexity, which was the reason the 2017 Executive Order suspended the 2016 section 987 Regulations. In an effort to remedy this complexity to some extent, the U.S. Treasury Department introduced the following two elections.


To simplify the FEEP method for taxpayers, the proposed regulations include a Current Rate Election and an Annual Recognition Election. Once these elections are made, they cannot be revoked for five years without the IRS Commissioner’s consent. Similarly, once revoked, they cannot be made again for five years without consent.

Current Rate Election

The Current Rate Election is designed to alleviate the compliance burden arising from tracking the historic rate for each Historic Item. With this election, for purposes of computing the taxable income or loss for the U.S. owner, all items of income, gain, deduction and loss with respect to a section 987 QBU would be translated at the yearly average exchange rate for the current tax year. For purposes of computing section 987 gain or loss, all items of the QBU would be translated at the year-end spot rate.

While this election makes the FEEP method simpler to execute, a section 987 loss would be suspended until a tax year in which an equal or greater amount of section 987 gain is recognized or until the occurrence of certain recognition events. In other words, a taxpayer who made the Current Rate Election would only keep track of the accrued net unrecognized section 987 loss and use it to offset future section 987 gains in the same foreign tax credit limitation category.

Annual Realization Election

The Annual Realization Election allows the QBU owner to recognize the full amount of its net unrecognized section 987 gain or loss on an annual basis even if there is no remittance or QBU termination. If a taxpayer makes both the Current Rate Election and the Annual Realization Election, the loss suspension rule under the Current Rate Election does not apply. Since the Annual Recognition Election has the effect of converting some of the QBU owner’s income into section 987 gain or loss, it may change the source and character of such income.


To facilitate the transition to the rules under the proposed regulations, a QBU owner would convert the assets and liabilities on its QBU’s balance sheet using the spot rate on the day before the transition date, which is Jan. 1, 2025 for calendar year taxpayers. This will in effect avoid requiring taxpayers to retrospectively determine historic exchange rates for items acquired before that date.

This pre-transition gain or loss can be computed using any reasonable method (defined as any eligible pretransition method) of applying IRC section 987 before the transition date that fully accounts for foreign currency gain or loss attributable to a QBU’s assets and liabilities. For this purpose, the widely used “earnings and capital” method described in the 1991 proposed regulations would be considered an eligible pretransition method.


Foreign currency is one of the most difficult and often confusing topics in international tax given the complexity of the rules. Taxpayers with foreign branches and disregarded entities must review their business structure and ensure that they are prepared to apply the new IRC section 987 rules correctly. Although the proposed regulations apply to taxable years after Dec. 31, 2024, a significant amount of planning is needed in the interim period to be ready to implement these rules:

  • Determine what method, if any, was applied in prior years for foreign currency in QBUs
  • Consider the effect of termination of QBUs after Nov. 9, 2023
  • Consider non-terminating remittances
  • Consider if the default method (FEEP) or elections should be used

It is now a great time to perform this review and reach out to U.S. international tax experts to model the effects of the rules and plan for the transition.

Please contact GHJ’s International Tax Services Team to discuss how these new proposed regulations might impact a specific business’ U.S. federal tax position and to prepare for the transition to the new regime.

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Andreas Koller

Andreas Koller, CPA, is a leader in GHJ’s International Tax Practice. He has over 20 years of international tax experience in both public accounting and corporate accounting. Throughout his career, Andreas has worked in three countries and served multinational companies in a variety of industries…Learn More

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Jacinta Lam

Jacinta Lam, CPA, has eight years of public accounting experience providing international tax consulting and compliance services to businesses and individuals in the U.S. Jacinta started her career at GHJ in 2015. She worked at two other firms, a top-10 firm and a Big Four firm, before rejoining…Learn More