IRC 987: Branch Functional Currency Gain and Loss -- FEEP Method, Remittance, Form 8964-TRA, Form 8964-ELE, and Notice 2026-17 Practitioner Guide

When a U.S. person operates a foreign branch in euros, yen, or any functional currency other than the dollar, exchange rate movements create a layer of tax exposure that does not arise in a purely domestic business. IRC 987 is the provision that governs that exposure. Its core function is to require the owner of a qualified business unit (QBU) to recognize foreign currency gain or loss -- not on every transaction, but at the moment value flows back from the foreign branch to the U.S. owner. That recognition event is called a remittance, and computing it correctly under the 2024 final regulations requires the Foreign Exchange Exposure Pool (FEEP) method.

For most calendar-year U.S. taxpayers, 2025 is the first year subject to the FEEP method under T.D. 10016 -- which means 2025 returns filed in 2026 are the first compliance cycle. Two new IRS forms (Form 8964-TRA and Form 8964-ELE) accompany the transition. And in February 2026, the IRS issued Notice 2026-17 proposing further simplifications to the FEEP computation -- proposals that are not yet final and cannot be applied as binding authority. This guide is written for CPAs, tax attorneys, and enrolled agents who need a practitioner-grade orientation to IRC 987 mechanics, the FEEP method, the new forms, and the significant open questions that remain as of mid-2026. All statutory citations, regulatory references, example amounts, and positions stated in this guide must be verified at IRS.gov and against T.D. 10016 before reliance in any specific client matter. This guide is for informational purposes only and does not constitute legal or tax advice.

Section 1: The Purpose of IRC 987 and Why It Matters Now

The Policy Problem IRC 987 Addresses

A U.S. business operating a foreign branch faces a currency mismatch: the branch earns income in euros or yen, but the U.S. owner reports income in dollars. As the dollar strengthens or weakens against the branch's functional currency, the dollar value of the branch's net assets changes -- even if the branch's local-currency balance sheet is unchanged. Without a mechanism to track and recognize those exchange rate movements, the U.S. owner could defer indefinitely the gain (or loss) embedded in the branch's assets that is attributable purely to currency fluctuation.

IRC 987 addresses this by requiring the owner to recognize foreign exchange gain or loss when value moves from the branch back to the owner (a remittance). The amount recognized reflects the cumulative unrecognized exchange rate effect on the branch's net assets during the owner's ownership period. The provision applies when the QBU's functional currency differs from the owner's functional currency -- in most U.S. outbound contexts, when a U.S. dollar-functional owner operates a branch in a non-dollar functional currency environment.

Why the 2024 Final Regulations (T.D. 10016) Are the Critical Development

IRC 987 has existed since 1986, but its regulations have been contested and in flux for decades. Treasury issued temporary regulations in 1991 and in 2016 (T.D. 9794) that introduced the FEEP method, but those temporary regulations expired and were challenged. In December 2024, Treasury issued T.D. 10016, which finalized and updated the FEEP method and made it mandatory for most taxpayers for tax years beginning on or after December 7, 2024.

The practical implication: for calendar-year U.S. persons, 2025 is the first full compliance year under T.D. 10016, and the 2025 return filed in 2026 is the first return on which the FEEP method is required and the new forms (8964-TRA and 8964-ELE) must be used. Verify all effective dates, scope, and transition provisions against the current text of T.D. 10016 and IRS.gov before applying any of these rules to a specific taxpayer.

Section 2: Who Is Subject to IRC 987 -- Owners and QBUs

The Owner: U.S. Persons with Foreign-Currency QBUs

IRC 987 applies to the "owner" of a QBU when the QBU's functional currency differs from the owner's functional currency. The owner is the U.S. person -- including a domestic corporation, a domestic partnership, or a U.S. individual -- that owns or operates the QBU. In the most common outbound scenario, the owner is a U.S. dollar-functional domestic corporation that operates a foreign branch in a non-dollar functional currency (for example, a German branch with a euro functional currency). Verify the definition of "owner" and the applicable entity types under the current text of IRC 987 and T.D. 10016 at IRS.gov.

What Is a Qualified Business Unit (QBU)

A qualified business unit is generally any separately identifiable trade or business that maintains its books and records in a functional currency other than the U.S. dollar (or, more precisely, other than the owner's functional currency). QBUs include foreign branches of domestic corporations, certain foreign operating divisions, and other separately identified units with distinct books and records. The QBU concept is defined under IRC 989(a) and the regulations thereunder. Verify the precise definition against Treas. Reg. 1.989(a)-1 and the current text of IRC 989 at IRS.gov before determining whether a particular operation qualifies as a QBU.

Not all foreign operations are QBUs. A de minimis foreign operation that does not maintain separate books and records in a foreign currency, or that is not a "trade or business" in the relevant sense, may not constitute a QBU. This threshold determination affects whether IRC 987 applies at all and must be made on the specific facts of each operation. Verify QBU status against Treas. Reg. 1.989(a)-1 and IRS.gov before assuming IRC 987 applies.

The Functional Currency of a QBU

The functional currency of a QBU is the currency of the primary economic environment in which the QBU operates -- generally the currency in which the QBU primarily generates and expends cash. This concept is governed by IRC 985 and the regulations thereunder. The determination of a QBU's functional currency is a facts-and-circumstances inquiry and is foundational to the IRC 987 analysis: if the QBU's functional currency is the same as the owner's functional currency, IRC 987 does not apply. Verify the functional currency determination against IRC 985 and current IRS.gov resources before proceeding with the IRC 987 analysis.

Inbound Scenarios: Foreign Persons with U.S. QBUs

IRC 987 can also apply in inbound scenarios -- for example, a foreign corporation (with a non-dollar functional currency) that operates a U.S. branch (with a dollar functional currency). The direction of the functional currency mismatch is reversed, but the IRC 987 framework still governs. This guide focuses primarily on the outbound scenario (U.S. owner with a foreign-currency QBU), which is the more common compliance challenge for U.S. practitioners. Verify inbound application of IRC 987 against the current text of the statute and T.D. 10016 for any non-standard fact patterns.

Section 3: The FEEP Method -- Core Mechanics Under T.D. 10016

What the Foreign Exchange Exposure Pool Tracks

Under the FEEP method mandated by T.D. 10016, the owner of a QBU maintains a "foreign exchange exposure pool" (FEEP) that tracks the QBU's cumulative net unrecognized IRC 987 gain or loss. In general terms, the FEEP reflects the difference between the owner's dollar basis in its net investment in the QBU and the dollar value of that net investment at current exchange rates. As the functional currency of the QBU appreciates or depreciates against the dollar, the FEEP grows or shrinks to reflect the embedded gain or loss that has not yet been recognized.

The precise computation of the FEEP -- including which assets and liabilities are included in the QBU's net investment, how translation rates are applied, and how the pool is updated each year -- is governed by the detailed rules in T.D. 10016. These computational rules are technical and must be verified against the current text of T.D. 10016 and IRS.gov before applying them to any specific taxpayer. The description above is a conceptual summary only and does not substitute for the regulatory text.

The Remittance: When Recognition Is Triggered

Under the FEEP method, IRC 987 gain or loss is recognized when the owner makes a remittance from the QBU. A remittance is generally a transfer of money or other property from the QBU to its owner, or any other event that T.D. 10016 treats as a remittance. The remittance is the triggering event -- the FEEP accumulates without recognition until a remittance occurs, at which point a proportionate share of the FEEP is taken into income (or deducted as a loss). Verify the definition of remittance and the full list of events that constitute or are treated as remittances under the current text of T.D. 10016 and IRS.gov.

The Remittance Proportion

Not all of the FEEP is recognized on every remittance. The amount of FEEP recognized is determined by the "remittance proportion" -- a fraction that reflects the relative size of the remittance compared to the total assets of the QBU. In general conceptual terms, the remittance proportion is the ratio of the assets remitted to the total QBU assets (computed as defined in T.D. 10016). The recognized IRC 987 gain or loss for the year equals the FEEP multiplied by the remittance proportion.

The precise computation of the remittance proportion -- including how QBU assets are valued, which assets are included in the denominator, and how partial-year remittances are handled -- is governed by T.D. 10016. These mechanics are technical and require verification against the current regulatory text before application. The description above is a conceptual orientation only.

Section 4: The Transition From Prior Methods to the FEEP Method

Prior Methods Under the 2016 Temporary Regulations

Before T.D. 10016, taxpayers with IRC 987 exposure operated under a fragmented regulatory landscape. The 2016 temporary regulations (T.D. 9794) had introduced the FEEP method and made it available, but those temporary regulations expired and were not universally applied. Some taxpayers used the "spot rate" method (translating QBU income items at spot rates on a current basis), while others used the approach from the 1991 proposed regulations or a "reasonable method" in the absence of binding final guidance.

Under T.D. 10016, these prior methods are generally no longer permitted for most taxpayers for tax years beginning on or after December 7, 2024. The transition from a prior method to the mandatory FEEP method is not automatic: taxpayers must use the procedures specified in T.D. 10016 to convert prior-method FEEP balances (or reconstruct a FEEP balance from scratch) for the transition year. Verify the precise transition rules, the scope of the prohibition on prior methods, and any taxpayer categories that may continue to use alternative methods against T.D. 10016 and IRS.gov.

The Transition Relief Agreement and Form 8964-TRA

T.D. 10016 provides a transition relief agreement (TRA) mechanism that allows taxpayers to treat certain pre-transition FEEP amounts as having been computed under the FEEP method without requiring a complete restatement of prior years. This is a significant administrative relief provision for taxpayers who used a non-FEEP method before the final regulations. The TRA is documented and reported on the new Form 8964-TRA.

Form 8964-TRA is new for 2025 returns. Because it is a first-year form, it may be subject to interim IRS updates or corrections between issuance and the filing deadline. All eligibility conditions for the TRA, the mechanics of the pre-transition amount computation, the form completion requirements, and any applicable deadlines must be verified against the current Form 8964-TRA instructions at IRS.gov before filing. Do not complete Form 8964-TRA based solely on the description in this guide.

Section 5: Elections Available Under T.D. 10016 and Form 8964-ELE

Overview of Available Elections

The 2024 final regulations provide several elections that qualifying taxpayers may make with respect to QBU-level computations and the FEEP method. These elections can affect how the FEEP is computed, which assets are included in or excluded from the QBU's balance sheet for FEEP purposes, and whether certain financial assets held by the QBU are subject to a mark-to-market approach rather than the standard FEEP treatment.

All available elections, their specific mechanics, eligibility conditions, the manner of making each election, applicable deadlines, and whether any election is revocable or irrevocable must be verified against the current text of T.D. 10016 and the Form 8964-ELE instructions at IRS.gov before filing. Do not make or rely on any election based solely on descriptions in secondary sources, including this guide. Election deadlines under the final regulations can be strict, and a missed election deadline may not be correctable after filing.

Form 8964-ELE: The Election Filing Vehicle

Elections available under T.D. 10016 are made on Form 8964-ELE. Like Form 8964-TRA, this form is new for 2025 returns and did not exist in prior years. The form covers multiple distinct elections, and completing it correctly requires applying the eligibility conditions for each election to the specific facts of the QBU and its owner. Verify all election boxes, required disclosures, and attachment requirements against the current Form 8964-ELE instructions at IRS.gov before filing.

Section 6: Notice 2026-17 -- Proposed Simplifications That Are Not Yet Final

What Notice 2026-17 Proposes

In February 2026, Treasury and the IRS issued Notice 2026-17 announcing that the government intends to propose significant simplifications to the FEEP computation method required under T.D. 10016. Notice 2026-17 reflects acknowledgment that the FEEP method as finalized in T.D. 10016 imposes substantial computational and administrative burdens on affected taxpayers, particularly for taxpayers with many QBUs or complex multi-currency structures.

The specific content of Notice 2026-17's proposals, and whether those proposals will be adopted in whole, in part, or in modified form, are not described in this guide. The reason is that Notice 2026-17 is a notice of proposed guidance, not a final rule or binding authority, and describing its content as if it were settled law would be misleading to practitioners.

What Practitioners Should Do While Notice 2026-17 Remains Pending

While Notice 2026-17's proposals are pending, taxpayers filing 2025 returns must apply T.D. 10016 as written. Practitioners should note the following action items:

• File 2025 returns using T.D. 10016: The FEEP method as currently required by T.D. 10016 governs 2025 returns. Pending simplifications do not change this obligation.
• Monitor IRS.gov for finalization: Set up a monitoring protocol to detect any proposed regulation, final regulation, or additional notice addressing the Notice 2026-17 proposals.
• Evaluate impact if simplifications are adopted: Depending on what is finalized, simplified FEEP mechanics may affect the 2026 filing year or potentially earlier years if the IRS provides retroactive application. Understand the taxpayer's current FEEP position under T.D. 10016 so the impact of any simplification can be assessed quickly.
• Document reliance on T.D. 10016 in the workpapers: Workpapers for 2025 IRC 987 computations should clearly state the method applied (FEEP under T.D. 10016), the regulatory authority, and a note that Notice 2026-17 exists but has not been finalized. This protects the position in the event of examination.

Section 7: Character and Source of IRC 987 Gain and Loss

Character: Ordinary Income or Loss

IRC 987 gain or loss recognized on a remittance is generally treated as ordinary income or ordinary loss -- not as capital gain or capital loss. This characterization matters because it determines the applicable tax rate (ordinary rates, not preferential capital gain rates) and the loss limitation rules (ordinary losses are generally fully deductible against ordinary income without the capital loss limitations of IRC 1211 and 1212). Verify the ordinary character rule against the current text of IRC 987 and applicable Treasury regulations at IRS.gov before relying on this characterization for any specific client matter.

Source: Generally the Country of the QBU

For foreign tax credit (FTC) purposes, the source of IRC 987 gain or loss matters because it determines which FTC basket the income or loss falls into. Under Treas. Reg. 1.987-6 (verify the current citation at IRS.gov), IRC 987 gain or loss is generally sourced to the same country as the QBU that generated it -- that is, the country where the QBU operates. This sourcing rule means that IRC 987 gain from a German branch (euro QBU) is generally sourced to Germany. Verify the source rule against the current text of Treas. Reg. 1.987-6 and IRS.gov before applying it to any specific situation.

FTC Basket Assignment for IRC 987 Gain or Loss

IRC 987 gain or loss is treated as ordinary income and is generally assigned to the general limitation basket for FTC purposes under IRC 904. The general limitation basket applies to most non-passive, non-NCTI (and non-GILTI) income from foreign sources. Because IRC 987 gain does not arise from a dividend or Subpart F / NCTI inclusion, no deemed-paid foreign tax credit under IRC 960 applies -- only actual foreign taxes paid or accrued on the IRC 987 income itself would be creditable, and those taxes would be the taxes imposed by the foreign country on the owner's IRC 987 income (to the extent it is taxable under foreign law). Verify the basket assignment and FTC rules applicable to IRC 987 gain or loss against IRC 904 and IRS.gov.

Practitioners should also be aware that the One Big Beautiful Budget Act (OBBBA) included new Section 904(b)(5), which restructured certain FTC basket rules for post-2025 tax years. Whether and how Section 904(b)(5) affects the basket assignment of IRC 987 gain or loss has not been addressed in IRS guidance as of July 2026. This is identified as an open question in Section 11. Verify the current basket rules under IRC 904 and IRS.gov, including any post-OBBBA modifications, before computing the FTC consequences of IRC 987 income.

For further detail on FTC basket allocation and the OBBBA Section 904(b)(5) changes, see the companion guide: IRC 904 FTC limitation, basket allocation, and the OBBBA Section 904(b)(5) changes affecting IRC 987 gain/loss sourcing.

Partnership Reporting: Schedule K-1

When the owner of a QBU is a partnership, the recognized IRC 987 gain or loss flows through to the partners on Schedule K-1. Each partner includes its allocable share of the IRC 987 gain or loss in its own return as ordinary income or loss. The character (ordinary) and source (country of QBU) flow through to each partner. Verify the K-1 reporting requirements and the applicable K-1 line items against the current Form 1065 Schedule K-1 instructions at IRS.gov for the applicable tax year.

Section 8: Illustrative Example -- FEEP Gain Recognition on Remittance

Section 9: Partnership-Specific Complexities Under the FEEP Method

The Partnership FEEP Problem

Partnerships that own QBUs face a layer of complexity under the FEEP method that does not arise for corporate or individual owners. A corporation owning a QBU has a single FEEP balance attributable to a single owner. A partnership owning a QBU must, at minimum, track how the partnership's FEEP balance is attributable to each partner -- because each partner's share of the FEEP may differ depending on ownership percentages, special allocations under the partnership agreement, and the timing of partner admissions and departures.

The 2024 final regulations (T.D. 10016) do not fully resolve how the FEEP method applies in all partnership contexts. Key computational and allocation issues remain open or have been addressed only partially. Before applying the FEEP method to a partnership that owns a QBU, practitioners must review the current text of T.D. 10016 and any subsequent IRS guidance specifically addressing partnership-level issues, and should engage qualified international tax counsel with partnership tax expertise.

Section 10: Forms 8964-TRA and 8964-ELE -- Filing Requirements and Practical Considerations

Form 8964-TRA: Transition Relief Agreement

Form 8964-TRA is used to elect into and report on the transition relief agreement provided under T.D. 10016. The TRA allows a taxpayer to treat certain pre-transition FEEP amounts -- the amounts accumulated before the FEEP method became mandatory -- as having been computed under the FEEP method without requiring a full restatement of every prior tax year's IRC 987 computations. This is an administrative relief provision, not an obligation. Taxpayers must evaluate whether electing the TRA or undertaking a full restatement produces the better outcome under their specific facts.

Because Form 8964-TRA is new for 2025 returns, practitioners should anticipate that the form instructions may be updated by the IRS between initial release and the filing deadline. Verify the current instructions at IRS.gov, confirm the exact form and instructions are the most current version available, and complete the form strictly in accordance with those instructions. If the IRS issues any supplemental guidance on the TRA after the form instructions are released, that guidance may modify the completion requirements.

Form 8964-ELE: Elections Under the Final Regulations

Form 8964-ELE is the filing vehicle for elections available under T.D. 10016. These elections include, among others, certain QBU-level elections that modify how the FEEP is computed and the mark-to-market election available for certain financial assets held by the QBU. Making an election on Form 8964-ELE has consequences that may extend to future tax years and, in some cases, cannot be undone without IRS consent.

Practitioners must approach Form 8964-ELE with care. Each election box on the form corresponds to a specific regulatory election with its own eligibility conditions, mechanics, and consequences. The instructions to the form are the authoritative source for how to complete each section. Verify all election boxes, required attachments, and the precise regulatory authority for each election against the current Form 8964-ELE instructions at IRS.gov before completing the form. As with Form 8964-TRA, interim IRS updates to the instructions should be monitored and applied.

Filing Logistics for Both Forms

Both Form 8964-TRA and Form 8964-ELE are attached to the owner's timely filed (including extensions) return for the first tax year beginning on or after December 7, 2024. For most calendar-year taxpayers, that means the forms are attached to the 2025 return. Verify the attachment and filing logistics -- including whether the forms are filed with the initial return or can be filed on an amended return if missed initially -- against the current form instructions and T.D. 10016 at IRS.gov. Missing a required filing may affect the availability of the TRA or the validity of an election.

Section 11: Open Questions and Pending Guidance

The following questions remain unresolved or insufficiently addressed by IRS guidance as of July 2026. Each represents an area of meaningful uncertainty for practitioners advising clients with IRC 987 exposure. The absence of guidance does not mean a position cannot be taken; it means any position carries elevated risk and requires additional documentation, professional judgment, and in most cases engagement of qualified international tax counsel.

1. Finalization of Notice 2026-17 Simplifications (Unresolved as of July 2026)

Whether and when Treasury will finalize the proposed FEEP simplifications described in Notice 2026-17 is unknown as of July 2026. If finalized, the simplifications could substantially reduce the computational burden of the FEEP method for future years and potentially affect previously filed returns if retroactive application is provided. Until finalization, taxpayers must apply T.D. 10016 as written. Monitor IRS.gov for any proposed regulation or final regulation implementing Notice 2026-17.

2. Full Partnership FEEP Computation Mechanics for Tiered Structures (Unresolved as of July 2026)

Comprehensive guidance on how the FEEP method applies in tiered partnership structures -- including the allocation of the FEEP balance among partners, the interaction with IRC 704(b), and the flow-through of IRC 987 gain and loss through multiple partnership tiers -- has not been issued as of July 2026. T.D. 10016 does not fully resolve all partnership-level issues. Practitioners handling partnerships with foreign QBUs must exercise judgment in the absence of definitive guidance and document the approach taken. Monitor IRS.gov for partnership-specific IRC 987 regulations or notices.

3. IRC 987 Gain/Loss Basket Assignment Under OBBBA Section 904(b)(5) (Unresolved as of July 2026)

The OBBBA added new Section 904(b)(5) to restructure certain FTC basket rules. No IRS guidance has been issued as of July 2026 addressing whether and how Section 904(b)(5) affects the FTC basket assignment for IRC 987 gain or loss. The general limitation basket assignment described in this guide reflects the pre-OBBBA framework; it is uncertain whether post-OBBBA rules alter this assignment. Practitioners must verify the current basket rules under IRC 904 and any post-OBBBA guidance at IRS.gov before computing the FTC consequences of IRC 987 income for tax years beginning after the OBBBA effective date.

4. Branch QBUs Converting to Subsidiaries in a Transition Year (Unresolved as of July 2026)

When a branch QBU is converted to a separate subsidiary (for example, through an IRC 351 contribution or a local-law incorporation) during a year that is also a transition year to the mandatory FEEP method, the interaction of the transition rules in T.D. 10016 with the conversion treatment may not be fully addressed in the final regulations. Whether the conversion is treated as a remittance of all QBU assets, how the accumulated FEEP is recognized (or deferred) in the conversion year, and how the transition relief agreement applies in this scenario are not clearly resolved for all fact patterns. Verify the treatment of any such conversion at IRS.gov and against T.D. 10016 before reporting, and engage qualified international tax counsel.

5. FEEP Mark-to-Market Election Interaction with ASC 830 Financial Reporting (Unresolved as of July 2026)

For calendar-year taxpayers with QBUs that hold financial assets subject to ASC 830 (Foreign Currency Matters) translation in their financial statements, the interaction between the FEEP mark-to-market election (available under T.D. 10016 for certain financial assets) and the ASC 830 financial reporting treatment creates potential book-tax differences that have not been fully addressed in the final regulations or in financial reporting guidance. Practitioners advising calendar-year filers on the mark-to-market election should model the book-tax difference consequences and ensure that the election's tax effects are properly disclosed in the financial statements and tax provision. Monitor IRS.gov and FASB guidance for any clarification on this interaction.

Section 12: Practitioner Checklist for IRC 987 FEEP Compliance (2025 Returns)

The following checklist covers the key steps in preparing a 2025 return with IRC 987 exposure. All items must be verified at IRS.gov and against T.D. 10016 and applicable Treasury regulations before reliance in any client matter. This checklist is not exhaustive and does not substitute for engagement of qualified international tax counsel on complex IRC 987 positions.

• Identify all QBUs and confirm functional currency mismatch. For each foreign branch or separately identified trade or business with separate books and records, determine the QBU's functional currency under IRC 985. Confirm that the QBU's functional currency differs from the owner's functional currency, triggering IRC 987. Verify QBU definition against Treas. Reg. 1.989(a)-1 and IRS.gov.
• Determine the prior method used (if any) and confirm the transition to the FEEP method. Review prior-year returns and workpapers to identify what method was previously used to compute IRC 987 gain or loss (FEEP, spot rate, proposed regulation method, or reasonable method). Confirm that the mandatory FEEP method under T.D. 10016 applies for 2025. Verify scope of the prior-method prohibition and any exceptions at IRS.gov.
• Compute or reconstruct the FEEP balance at the start of the first FEEP year. If the taxpayer previously used the FEEP method under the 2016 temporary regulations, carry that FEEP balance forward (adjusted as required by T.D. 10016). If the taxpayer used a non-FEEP method, compute the opening FEEP balance using the transition procedures in T.D. 10016 -- or evaluate eligibility for the transition relief agreement (Form 8964-TRA). Verify all opening FEEP computations against T.D. 10016 and IRS.gov.
• Evaluate and (if applicable) complete Form 8964-TRA. Determine whether the transition relief agreement is available and beneficial given the taxpayer's prior method and accumulated FEEP position. If the TRA is elected, complete Form 8964-TRA in accordance with the current instructions at IRS.gov. Verify the TRA eligibility conditions, the pre-transition amount computation, and the form completion requirements before filing.
• Evaluate and (if applicable) complete Form 8964-ELE. Review all elections available under T.D. 10016. Determine which elections, if any, are beneficial for the specific taxpayer and QBU. Verify eligibility conditions, mechanics, and irrevocability of each election before making it. Complete Form 8964-ELE in accordance with current IRS.gov instructions. Attach to the timely filed (including extensions) 2025 return.
• Update the FEEP balance for 2025 year-end exchange rates and QBU activity. Apply the FEEP computation rules in T.D. 10016 to update the FEEP balance for exchange rate movements during 2025, additions to QBU net assets, and other adjustments specified in the final regulations. Verify all update mechanics at IRS.gov.
• Identify all remittances during 2025 and compute the remittance proportion for each. Review all transfers from the QBU to the owner during 2025, and identify any events that T.D. 10016 treats as deemed remittances. For each remittance, compute the remittance proportion using the asset valuation rules in T.D. 10016. Verify the remittance definition and proportion computation at IRS.gov.
• Compute recognized IRC 987 gain or loss for each remittance and the aggregate for the year. Multiply the FEEP balance (as of the remittance date, using the sequence rules in T.D. 10016) by the remittance proportion for each remittance. Sum the recognized amounts for the year. Verify the computation formula and any elections that modify it against T.D. 10016 and IRS.gov.
• Report the recognized IRC 987 gain or loss as ordinary income on the owner's return. Include the net recognized IRC 987 gain or loss for the year as ordinary income or loss on the appropriate line of the owner's return. For corporate owners, include on the applicable Schedule C or other income schedule. For partnership owners, report on Schedule K and flow through to partners on Schedule K-1. Verify reporting line and form instructions at IRS.gov for the applicable tax year.
• Compute the FTC consequences of IRC 987 income and verify basket assignment. Determine the FTC basket applicable to the IRC 987 gain or loss under IRC 904 and Treas. Reg. 1.987-6 (verify current citation). Apply any actual foreign taxes paid or accrued on the IRC 987 income. Note the open question regarding OBBBA Section 904(b)(5) basket changes and document the approach taken. See the companion FTC guide for basket mechanics.
• For partnership owners: verify FEEP allocation among partners and K-1 reporting. If the owner is a partnership, document the methodology used to allocate the FEEP balance and recognized IRC 987 gain or loss among partners. Address any partner-level changes during the year. Verify K-1 line items against current K-1 instructions. Note open guidance issues on partnership FEEP mechanics. Engage qualified international tax counsel with partnership expertise if allocation is uncertain.
• Monitor Notice 2026-17 for finalization and assess impact on future years. Set a calendar reminder to check IRS.gov periodically for any guidance finalizing, modifying, or withdrawing Notice 2026-17's proposed FEEP simplifications. If simplifications are finalized before the 2026 return is filed, assess their impact on the FEEP computation methodology and whether any amended returns for 2025 are warranted or permitted.