The One Big Beautiful Bill Act (OBBBA) changes the foreign tax export incentives available for U.S. taxpayers; however, these incentives remain a strong opportunity to optimize your tax strategies. Taxpayers exporting products or services from the United States to foreign markets should consider whether a Foreign-Derived Intangible Income deduction or an Interest-Charge Domestic International Sales Corporation structure could enhance their tax strategy.
Interest-Charge Domestic International Sales Corporation – IC-DISC
An IC-DISC is exempt from federal taxation on commissions earned from specific export sales. As a separate legal corporation, it can provide permanent reductions in tax rates, tax-deductible dividends and significant tax deferrals. Corporations and pass-through entities can both utilize and benefit from an IC-DISC structure.
To qualify for the IC-DISC benefit, export sales must meet three criteria:
- The goods must be manufactured, produced, grown or extracted within the United States.
- No more than 50% of the fair market value of the exported product can be attributed to foreign components.
- The product must be sold for consumption, use or disposition outside the United States.
Certain types of services can also qualify as exports, but they need to be related to the use of a physical product abroad.
How an IC-DISC Works
An IC-DISC structure works in the following way:
- An exporting company pays a commission to the IC-DISC based on the profitability of its export sales.
- The commission expense is deducted from the exporting company’s ordinary income.
- The IC-DISC corporation, classified as a tax-exempt entity, does not pay any federal income tax on the commissions received from the exporting company.
- The IC-DISC pays out a qualified dividend to its shareholders at a maximum rate of 23.8%.
A corporation can utilize an IC-DISC structure to convert non-deductible dividends into a tax-deductible commission expense, generating permanent tax savings. A pass-through entity can benefit from the arbitrage created by reduced tax rates. At a 37% tax rate on ordinary income rate and a maximum tax rate on qualified dividend income of 23.8%, a pass-through entity can create up to 13.2% in tax savings on commissions paid. For pass-through entities utilizing the 199A deduction, those tax savings are reduced to 5.8%.
Foreign-Derived Deduction Eligible Income (formerly known as Foreign-Derived Intangible Income)
International provisions introduced under the Tax Cuts and Jobs Act (TCJA) were made permanent with some changes under the OBBBA.
Under the TCJA, a tax incentive was created for C Corporations to generate Foreign-Derived Intangible Income (FDII)—income over 10% return on assets. The excess income is eligible for a 37.5% IRC Section 250 deduction, creating an effective tax rate of 13.125% on foreign exports of sales, services and intangibles. Pre-OBBBA rules required expense allocation of indirect expenses, including interest, IRC Sec 174 and R&D expenses.
Changes Under The OBBBA
The OBBBA includes various changes to FDII, including:
- Renaming FDII to Foreign-Derived Deduction Eligible Income (FDDEI).
- Updating the calculation to include all foreign-derived income without asset limitations.
- Redefining expense allocation to only expenses “properly allocable to such gross income,” excluding interest and R&D expenses.
- Redefining derived eligible income to exclude income from dispositions of intangible property.
- The income is eligible for a reduced income tax rate of 33.34% IRC Section 250 deduction. This creates an effective tax rate of 14% on foreign exports.
The OBBBA changes are effective for taxable years beginning after December 31, 2025. C Corporations are still the only eligible taxpayers for this tax incentive.
Qualifying transactions include:
- The sale of property and inventory to a non-U.S. party for foreign use.
- Income generated by intangibles.
- Property exploited outside the U.S. (royalties, rent, etc.).
- Provision of services to non-U.S. persons located in foreign markets.
Analysis Opportunities
C Corporations should review opportunities to restructure shipments through their U.S. entities. To maximize the FDDEI permanent tax deductions, C Corporations should also consider an impact analysis of all the new tax provision changes, including:
- 100% business depreciation
- 100% depreciation for real property
- Increased 179 expensing limits
- Interest limitation changes
- S. research and development no longer being capitalized
Want to learn more about how to utilize a foreign tax export incentive? We are here to help! Contact your RKL advisor today.
