Tax Insight

Proposed regulations would ease Section 987 rules for CFCs

Insight
5 minute read
August 19, 2026

What happened?

Treasury and the IRS on August 14, 2026, published proposed regulations that would allow taxpayers to generally elect out of computing and recognizing Section 987 gain or loss under Section 987(3) for qualified business units (QBUs) owned by controlled foreign corporations (CFCs), except in the case of inbound nonrecognition transactions. Under this proposed CFC exemption election, an electing CFC generally would no longer recognize Section 987 gain or loss on ordinary remittances or QBU terminations, although the rules for determining and translating QBU income or loss and transfers between a QBU and its owner would continue to apply. The framework also would extend to certain partnership-owned QBUs.

Why is it relevant?

The proposed regulations would reduce the recurring Section 987 compliance burden for many multinational groups, but the relief is not a complete exemption. The CFC exemption election generally must be applied consistently across commonly controlled CFCs, and pre-election Section 987 gain or loss generally would be amortized and recognized over 120 months, with an asset-based exception for qualifying QBUs with average assets over the preceding three-year period below $50 million. In addition, taxpayers should recognize Section 987 gain, but not loss, on certain inbound liquidations and reorganizations. Consistent with Notice 2025-72, the proposed regulations separately would revise the existing pretransition amortization election to use a 120-month convention, reducing distortions associated with short tax years.

Actions to consider

Taxpayers should evaluate the election as a group-wide planning decision rather than a QBU-by-QBU compliance choice. Key considerations include reducing the compliance burden while foregoing the ability to recognize future Section 987 losses, which year to make the election, given that the 120-month amortization of pre-election gain or loss will begin affecting taxable income in that year, whether the $50 million asset-based exception reduces transition work and/or eliminates pretransition losses already computed, the effect of the consistency and revocation rules, and whether planned inbound restructurings could result in gain under Prop. Reg. 1.987-16. Taxpayers also should assess whether to rely on the proposed rules before finalization and coordinate any early adoption across the relevant consolidated and Section 987 electing groups.

Companies should consider providing comments on the proposed regulations, which are due by November 12, 2026.