The Treasury and IRS have finalized new regulations under Internal Revenue Code Section 987 that will reshape how U.S. taxpayers with foreign branches and disregarded entities report and recognize foreign currency transactions. Effective for tax year 2025, these rules bring significantly expanded reporting requirements and could increase compliance costs for many multinational businesses.
Here’s what finance leaders need to understand and how to prepare.
Who Should Pay Attention
These regulations affect U.S. taxpayers invested in foreign branches and disregarded entities operating in non-USD functional currencies. If your business has international operations with currency exposures, the new requirements apply to you.
Key Changes to Section 987 Compliance
More Detailed QBU Tracking Required
Under the final rules, taxpayers must identify all Section 987 qualified business units (QBUs), including foreign branches and foreign disregarded entities, and confirm their functional currencies. This isn’t new, but the level of detail is.
Your team will need to track transactional and balance sheet data by individual QBU and by currency. This includes intercompany settlements, remittances, and historic activity potentially dating back to 2006 or your original investment date.
Expanded Form 8858 Disclosures
Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) is getting a significant overhaul. The IRS has indicated that the revised form will require more detailed profit and loss, balance sheet information, and foreign currency gain/loss reporting at the QBU level.
The goal is closer alignment between Section 987 calculations, local GAAP/IFRS accounting records, and U.S. tax reporting. The reality is more preparation time, more data reconciliation, and more scrutiny from reviewers.
Tighter Rules on Measuring FX Gains and Losses
The 2025 Final Regulations clarify how to measure and recognize Section 987 gains and losses. Expect more detailed requirements for exchange rate documentation, historic asset pooling, remittance tracking, and transition adjustments for existing QBU structures.
Existing foreign currency workpapers may not meet the new standards, particularly companies with complex branch structures or significant currency volatility.
Business Impact: What This Means for Your Finance Team
Increased Compliance Effort
For organizations with multiple foreign branches or complex treasury arrangements, the new Form 8858 requirements will add time to data gathering, reconciliation, and review. If your company has large FX swings or intricate intercompany structures, expect more detailed questions from your tax advisors and, eventually, from the IRS.
Potential Scope and Budget Adjustments
Finance leaders should discuss these changes with their tax teams now. Engagement scoping, timelines, and fees may need adjustment where the expanded Form 8858 requirements materially increase work effort.
How to Prepare Before the First Filing Season
Assess Your Exposure
Identify which clients, entities, or subsidiaries have foreign branches or disregarded entities and rank them by expected complexity. Companies with significant FX volatility or numerous QBUs should be prioritized.
Review Current Data Processes
Evaluate whether your existing systems capture the granular transactional and balance sheet data required by the new rules. Gaps in historical data or currency-tracking processes need to be addressed before year-end.
Update Internal Controls
Coordinate with your accounting team to ensure foreign currency workpapers meet the expanded standards. This may require new templates, additional reconciliations, or changes to your data aggregation processes.
Communicate Early With Stakeholders
Finance leaders, controllers, and external advisors should align timeline expectations and resource needs. The earlier these conversations happen, the less stressful the first filing season will be.
Looking Ahead to Section 987 Rules
The IRS has signaled that it expects more detailed scrutiny of Section 987 compliance, particularly complex structures. Companies that prepare now will be better positioned to meet these requirements efficiently while minimizing last-minute surprises.
If your organization has foreign operations with currency exposures, this is the time to assess your readiness and make adjustments before the 2025 filing season.
Questions? Reach out to a Wiss team member for more information or assistance. Contact us today.
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