IRS issues final forms for section 987 compliance

Filing requirement: QBU-by-QBU basis

Each owner (e.g., U.S. person, controlled foreign corporation (CFC)) of a section 987 QBU is required to file a separate Form 8964-TRA for every QBU for which transition information is required. This filing obligation applies regardless of the number of section 987 QBUs owned; a distinct Form 8964-TRA must be completed and filed for each applicable QBU.

Form 8964-TRA must be filed for the tax year beginning on the transition date, which is generally the first day of the first tax year in which the section 987 regulations apply. In the case of a terminating QBU, Form 8964-TRA must instead be filed for the first tax year beginning after Dec. 31, 2024. For this purpose, the transition date is the day after the QBU’s termination date.

The requirement to file Form 8964-TRA is in addition to any obligation to file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). Owners must ensure compliance with both reporting regimes.

If a schedule is required but all reportable amounts are zero, Form 8964-TRA must still be filed for the QBU, with the relevant zero amounts reported.

Failure to file Form 8964-TRA for each applicable QBU results in noncompliance with the section 987 transition rules and can lead to adverse tax and reporting consequences.

Consistency and elections

Taxpayers subject to the section 987 transition rules must comply with the consistency requirements under Reg. section 1.987-1(g) when making section 987 elections, including the amortization election and the small business election. These elections must be made consistently for all members of a consolidated group and all members of a section 987 electing group, including CFCs, for the relevant taxable year.

The small business election and amortization election are made on Form 8964-ELE, not Form 8964-TRA.

Form 8964-ELE, Section 987 Elections

Form 8964-ELE is used to make or revoke elections under the section 987 regulations. These elections include:

• Current rate election (CRE): An election to treat all items of a section 987 QBU as marked items.
• Annual recognition election (ARE): An election to recognize all of the net unrecognized section 987 gain or loss with respect to a section 987 QBU on an annual basis.
• Section 988 mark-to-market election: An election to recognize section 988 gain or loss of a section 987 QBU under a mark-to-market method of accounting.
• Section 987 grouping election: An election to treat all section 987 QBUs of the same owner that have the same functional currency as a single section 987 QBU.
• Election to use a spot rate convention: An election to determine the spot rate using a spot rate convention.
• Election to use the historic inventory method: An election to account for inventory of a section 987 QBU using historic exchange rates.
• Amortization election–transition rules: An election to recognize pretransition gain or loss ratably over a period of ten years.
• Small business election–transition rules: An election for small businesses to treat pretransition gain or loss as zero.
• Section 988 characterization election: An election to characterize passive category section 987 gain or loss of a CFC as foreign currency gain or loss from section 988 transactions for Subpart F purposes.
• Recurring transfer group election: An election to use an average exchange rate to translate assets transferred between a section 987 QBU and its owner when the transfers occur regularly as part of an established recurring transfer group.

The authorized person must attach Form 8964-ELE with its original, timely filed (including extensions) return for the tax year for which the elections are made. Additional requirements apply in certain tax years and for certain elections.

The filing of Form 8964-ELE in accordance with the form instructions satisfies the reporting requirements of Reg. section 1.987-1(g).

Filing requirement: Authorized person basis

An authorized person is generally the owner of the section 987 QBU or, in the case of a CFC, the controlling domestic shareholders acting in concert. For consolidated groups, the common parent or designated agent makes the election. For partnerships and S corporations, the partnership or S corporation itself makes or revokes elections, even though partnerships and S corporations are not required to file Form 8964-TRA. One Form 8964-ELE generally covers all section 987 QBUs owned by the filer, subject to consistency rules for consolidated groups and section 987 electing groups.

A section 987 election is made by the authorized person for the owner and for a taxable year and applies to every section 987 QBU owned by the owner while the election is in effect. Once made, a section 987 election remains in effect until revoked by the authorized person.

First year in which the section 987 regulations apply: For the first tax year that the section 987 regulations apply to an owner—or the first year in which the owner or any member of its consolidated group or section 987 electing group owns a section 987 QBU—there are no additional requirements beyond attaching Form 8964-ELE to the original, timely filed return (including extensions). Elections made in this first year do not require prior IRS consent.

Subsequent years–general rule: After the first year, IRS consent is generally required to make or revoke a section 987 election. Taxpayers must request a private letter ruling under Rev. Proc. 2025-1 (or successor) and attach a copy of the ruling to Form 8964-ELE when filing the return.

Subsequent years–special rule for CRE, ARE and section 988 mark-to-market elections: For the CRE, ARE and section 988 mark-to-market election, IRS consent is not required to make the election. However, these elections have an advance notification requirement: the authorized person must submit Form 8964-ELE to the IRS before the start of the tax year for which the election applies by e-fax, and then attach the same form to the timely filed return for that year. Once elected, these elections cannot be revoked without IRS consent for a 60-month period, and once revoked, cannot be re-elected without IRS consent for another 60-month period. As a result, taxpayers should carefully evaluate these elections before making them in the initial year.

Consistency

Elections must be applied consistently across all members of a consolidated group and all members of a section 987 electing group. A section 987 electing group includes a U.S. person and any CFCs in which the U.S. person owns more than 50% (by vote or value), as well as foreign partnerships in which the U.S. person owns more than 50% of the capital and profits interest. These rules ensure uniform application of elections across related entities.