Foreign-derived intangible income (FDII) deduction, IRC 250 currently allows U.S. C corporations a reduced tax rate for income from goods and services sold to foreign customers. FDII was enacted with the Tax Cuts and Jobs Act of 2017 (TCJA), which reformed the U.S. system for taxing international corporate income. FDII was one of several new laws designed with the goal to make U.S. businesses more competitive while also protecting domestic jobs.

Under Republican leadership will FDII change?

Unlike much of TCJA, the FDII deduction is not scheduled to expire in 2026.  Instead, it is set to be cut back. Currently, the FDII deduction effectively reduces the general 21% corporate tax rate for certain export income to 13.125%. Starting in 2026 the reduced rate will be 16.4%.

Donald Trump has proposed to make the provisions of the TCJA permanent, which would presumably include the FDII deduction in its current form, including the scheduled 2026 reduction.

Who is eligible for FDII?

U.S. C corporations that export goods or services may benefit from this deduction. Despite the name, FDII is not limited to earnings from “intangible” assets. The corporation does not have to patent, copyright, or even identify the intangible property as the benefit is derived from a “deemed” return on tangible assets.

How is FDII calculated?

Strategies to maximize the FDII deduction can be analyzed by breaking down the calculation:

  1. First determine the “intangible” income by starting with most all of the corporation’s income. Then subtract 10% of qualified business asset investment (QBAI). QBAI is the average of the corporation’s adjusted basis in depreciable tangible property used to produce the income. The result is “deemed” to be intangible income.
  2. Next determine the foreign portion of the deemed intangible income. For this purpose, a foreign sale is defined very broadly as a sale, lease, license, exchange, or other disposition. Foreign-derived income includes the sale of property to a foreign person for foreign use. It also includes income from services provided to a person or property located outside of the U.S for use, consumption, or disposition overseas.
  3. Finally, calculate the FDII deduction by multiplying the foreign portion of the deemed intangible income by 37.5% (21.875% starting in 2026). The result is an effective rate on this export income of 13.125% (21% X (100%-37.5%)) and 16.4% starting in 2026.

Before you get too excited, note that this FDII deduction will not increase a net operating loss and can not be carried forward or back, so it likely will not benefit a C corporation in the year of a loss. However, if you have missed the deduction you may be able to amend the prior 3 years to claim a refund.

How can we help?

Post-election, it continues to be worthwhile to understand the FDII deduction to be able to maximize its benefits. The PBMares International Tax Team is prepared to assist in tax planning as we continue to navigate the developing changes.