United States: Proposed Rules on Income and Loss Computation for Qualified Business Units
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) are planning to issue proposed regulations concerning the calculation of taxable income or loss and foreign exchange gains or losses for Qualified Business Units (QBUs) under Section 987 of the Internal Revenue Code (IRC).
A Qualified Business Unit is a clearly identifiable and separate unit of a trade or business that maintains its own books and records and may operate with a functional currency different from that of its owner. In these situations, Section 987 establishes the rules for determining income, losses and foreign exchange effects related to activities carried out in a foreign currency.
The proposed regulations aim to simplify the application of Section 987, reduce compliance burdens for taxpayers, and clarify certain technical aspects that may affect ordinary business transactions.
Among the key elements of the proposal is the possibility for taxpayers to adopt an alternative method for calculating income or loss, similar to an approach proposed in the past. This method, known as the “equity pool method,” allows the income, gains, losses, and deductions of the QBU to be determined in the QBU’s functional currency and then translated into the owner’s functional currency using the annual average exchange rate.
The proposal also includes several technical adjustments, such as narrowing the scope of the loss suspension rules, simplifying the recognition of suspended losses, and expanding the definition of hedging transactions for purposes of Section 987.
In addition, Controlled Foreign Corporations (CFCs) may be allowed to elect not to compute or recognize foreign exchange gains or losses, except in connection with certain internal transactions.
Taxpayers may rely on certain provisions of the proposal before the final regulations are issued, provided the rules are applied consistently. The IRS has also opened a public consultation process, with comments accepted until April 26, 2026.
These proposed changes may have important implications for multinational companies operating through business units in different currencies.