Tax Planning
Optimizing the Section 987 Rules for Multinational Businesses
Many companies with foreign operations are facing changes to Section 987 taxable income or loss. This article walks you through what’s changing—and how to adjust your tax planning accordingly.
By NomadicTax Research Team • 5-8 min read • August 31, 2026
## What’s New with Section 987 Rules?
On **August 27, 2026**, the U.S. Internal Revenue Service (IRS) issued updates in its *Forms, Instructions and Publications* section to reflect revised rules regarding **Section 987 taxable income and loss**. These updates clarify how Qualified Business Units (QBUs) with functional currencies other than the U.S. dollar should translate income, determine gains/losses, and recognize deferred amounts.([irs.gov](https://www.irs.gov/forms-pubs/changes-to-current-forms-publications?utm_source=openai))
These changes stem from **final regulations under Section 987**, which address:
- Determination and translation of income or loss within QBUs with non-dollar functional currencies;
- Treatment of foreign currency gains or losses upon remittances or terminations;
- Transition-rules for QBUs changing methods or being terminated.([irs.gov](https://www.irs.gov/irb/2025-03_IRB?utm_source=openai))
## Implications for Multinational Enterprises
These updates have meaningful effects for global groups operating with foreign operations and holding assets in different currencies. Key implications include:
- **Currency-translation exposure**: Consistent methods for translating QBU income/loss will be required. Deviations may result in recognition issues or increased volatility.
- **Recognizing deferred losses**: Changes in recognition and deferral rules could affect timing of loss deductions, potentially impacting taxable income in unpredictable ways.
- **Partnership and S-corporation owners**: The rules include special provisions for QBUs owned by partnerships or S-corporations, including election options and deferral timing.([irs.gov](https://www.irs.gov/irb/2026-03_IRB?utm_source=openai))
## Actionable Strategies
To navigate these changes, consider the following steps:
1. **Review your QBU structure**
- Identify all QBUs with non-dollar functional currencies.
- Determine which ones may trigger the deferral or suspended loss rules under the updated regulations.
2. **Evaluate elections carefully**
- There are elections available (e.g., annual recognition election, mark-to-market election) that may reduce volatility or simplify fiscal reporting.([irs.gov](https://www.irs.gov/irb/2026-03_IRB?utm_source=openai))
- Also check whether your foreign entity qualifies for any de minimis thresholds—certain small operations may get relief.([irs.gov](https://www.irs.gov/irb/2026-03_IRB?utm_source=openai))
3. **Update systems and compliance calendar**
- Ensure your accounting systems track currency gains/losses separately under Section 987 where required.
- Anticipate when remittances or terminations of QBUs occur—since those trigger recognition events.
4. **Coordinate with foreign tax practitioners**
- Translating income or losses in foreign jurisdictions may have impact on credits or other foreign tax consequences.
- Likewise, ensure that foreign partners/shareholders understand their obligations if QBUs are owned through a partnership or S-corporation structure.
## Example Scenario
**Company A** operates with a Canadian subsidiary (the Canadian QBU) whose functional currency is the Canadian dollar.
- Pre-update, Company A would apply a chosen method to convert profits/losses at year-end and defer certain foreign currency losses until QBU termination or remittance.
- Under updated rules, if Company A opts for the **annual recognition election**, gains and losses will be recognized each taxable year. If the loss exceeds thresholds or improper methods used, loss may get suspended or differences recognized only at termination/remittance.
- If Company A qualifies under de minimis thresholds (assets or gross receipts), it may choose simplified reporting, easing compliance burden.
## Bottom Line
With the updated Section 987 rules, multinational companies need to sharpen their foreign currency accounting, understand when recognition events occur, and evaluate elections early. Proactively implementing robust tracking and aligning practice with the new regulatory landscape will minimize risks and optimize tax outcomes globally.