The short version
Issued August 14, 2026, the proposed rules generally allow an eligible controlled foreign corporation, or CFC, to stop calculating and recognizing Section 987 foreign-currency gains and losses for qualifying foreign branches and disregarded entities.
What Is the CFC Exemption Election?
Section 987 applies when a business operates through a qualified business unit, or QBU, that uses a different functional currency from its owner.
For example, a euro-based CFC may have a branch that operates in British pounds. Current rules can require detailed tracking of currency gains and losses involving that branch.
When the new election applies, the CFC generally would not calculate or recognize Section 987 gain or loss from ordinary branch operations. This could reduce the need to track:
- Historic exchange rates
- Transfers and remittances
- QBU assets and liabilities
- Deferred currency gains
- Suspended currency losses
Who May Qualify?
The election is primarily intended for U.S. taxpayers that own CFCs with foreign branches or disregarded entities using a different functional currency.
It is important to understand that this is not a complete exemption from CFC taxation. The election does not eliminate:
- Form 5471 filing requirements
- Subpart F income
- Net CFC tested income
- Foreign tax credit calculations
- Other international reporting obligations
The relief is limited mainly to Section 987 foreign-currency gain and loss calculations.
Important Restrictions
The election generally must be applied consistently across commonly controlled CFCs. Taxpayers cannot simply choose the entities that produce the most favorable tax result.
Once made, the election generally cannot be revoked without IRS consent. Businesses should therefore evaluate the long-term consequences before electing.
Existing Section 987 gains or losses may also need to be recognized over 120 months. However, certain QBUs with average assets below $50 million may qualify for transition relief.
When Can the Election Be Made?
For taxable years beginning after December 31, 2024, and ending on or before December 31, 2026, the election generally may be included with an original, timely filed return, including extensions.
For taxable years beginning in 2025, eligible taxpayers may alternatively make the election on an amended return filed by October 15, 2027.
Although the regulations are still proposed, the IRS permits taxpayers to rely on them when the requirements described in the proposed guidance are followed.
Should Your Business Make the Election?
Businesses should review:
- Each CFC and foreign QBU
- The functional currency used by each entity
- Existing Section 987 gains and losses
- QBU asset values
- Related companies affected by the consistency rules
- The cost of current foreign-currency compliance
The election may reduce future reporting burdens, but it can also create transition calculations and long-term consequences.
Valoria Consulting helps U.S. businesses evaluate CFC reporting, Form 5471 requirements, and international tax elections. Contact us to determine whether the new Section 987 CFC exemption election applies to your foreign operations.
Related reading
- Foreign-Owned U.S. Businesses: Tax Filings That Are Easy to Miss
- What Is Transfer Pricing? A Guide for Businesses With Related Entities
- US Expat Taxes Explained: What Every American Living Abroad Needs to Know
- I Haven't Filed U.S. Taxes in 5 Years and I Live Abroad. What Happens Now?
This article is for general informational purposes and does not constitute tax, accounting, or legal advice. The Section 987 regulations discussed are proposed and may change; eligibility and consequences depend on each taxpayer's individual circumstances.
Evaluate Your Foreign Operations
Schedule a consultation with Valoria Consulting to review your CFC reporting, Form 5471 requirements, and whether the new Section 987 CFC exemption election fits your structure.