International provisions introduced under the Tax Cuts and Jobs Act (TCJA) in 2017 were made permanent with some changes under the newly passed One Big Beautiful Bill Act (OBBBA).
Under the TCJA, a tax incentive was created for C Corporations to generate Foreign-Derived Intangible Income (FDDI)—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 One Big Beautiful Bill Act
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 tax rate with the utilization of the 33.34% IRC Section 250 deduction. This creates an effective tax rate of 14% on foreign exports.
OBBBA changes are effective for taxable years beginning after December 31, 2025. C Corporations are still the only eligible taxpayers for this tax incentive.
Impact
FDDEI’s new provisions will make more income eligible for benefits, resulting in a permanent tax deduction. Under the modifications, C Corporations are not punished for their fixed assets in the U.S. In addition, the expensing of R&D will no longer lead to a reduction in export benefits.
Planning
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
Contact your RKL advisor to discuss the new international tax provisions, schedule an impact analysis and learn how these changes may affect you and your business.
