At a Glance
U.S. businesses that export products or services may have opportunities to reduce their federal tax liability through an Interest-Charge Domestic International Sales Corporation (IC-DISC) structure or the Foreign-Derived Deduction Eligible Income (FDDEI) deduction.
An IC-DISC may allow qualifying exporters to convert a portion of ordinary income into qualified dividend income. FDDEI may provide qualifying C corporations with a Section 250 deduction for certain foreign-derived income.
Key Takeaways
- An IC-DISC may provide tax savings for corporations and pass-through entities with qualifying export sales.
- To qualify for IC-DISC benefits, exported goods generally must be manufactured, produced, grown, or extracted in the United States, meet a foreign-content limitation, and be sold for foreign use.
- For pass-through entities, an IC-DISC structure may create tax savings from the difference between ordinary income tax rates and qualified dividend tax rates.
- FDDEI is available only to C corporations and applies to taxable years beginning after December 31, 2025.
- Under the updated FDDEI rules, qualifying income is eligible for a 33.34% Section 250 deduction, resulting in an effective tax rate of 14% on qualifying foreign exports.
Who Is Affected
These provisions may affect:
- U.S. businesses that export products to foreign markets
- U.S. businesses that provide qualifying services related to physical products used abroad
- Corporations and pass-through entities with qualifying export sales
- C corporations earning qualifying foreign-derived income from foreign sales, services, intangibles, royalties, rent, or other qualifying activities
Eligibility and Key Requirements
Eligibility Requirements
IC-DISC
Both corporations and pass-through entities may use an IC-DISC structure.
To qualify for IC-DISC benefits, export sales must meet all of the following requirements:
- The goods must be manufactured, produced, grown, or extracted within the United States.
- No more than 50% of the exported product’s fair market value may be attributable to foreign components.
- The product must be sold for consumption, use, or disposition outside the United States.
Certain services may also qualify as exports when they are related to the use of a physical product outside the United States.
FDDEI
FDDEI is available only to C corporations.
Qualifying transactions may include:
- Sales of property and inventory to a non-U.S. party for foreign use
- Income generated by intangibles
- Property exploited outside the United States, including royalties and rent
- Services provided to non-U.S. persons located in foreign markets
Limits, Thresholds, and Phaseouts
For an IC-DISC structure:
- The IC-DISC pays no federal income tax on commissions it receives from the exporting company.
- Qualified dividends paid by the IC-DISC to shareholders are taxed at a maximum rate of 23.8%.
- At a 37% ordinary income tax rate and a 23.8% maximum qualified dividend rate, a pass-through entity may generate tax savings of up to 13.2% on commissions paid.
- For pass-through entities using the Section 199A deduction, potential tax savings are reduced to 5.8%.
For FDDEI:
- Qualifying income is eligible for a 33.34% Section 250 deduction.
- The deduction results in an effective tax rate of 14% on qualifying foreign exports.
The article does not identify additional dollar limits, thresholds, or phaseouts for either incentive.
Exclusions and Special Rules
IC-DISC
An IC-DISC structure applies only to qualifying export sales. Goods with more than 50% of their fair market value attributable to foreign components do not satisfy the stated export requirement.
Services must be related to the use of a physical product abroad to qualify as exports.
FDDEI
The updated FDDEI rules include the following special provisions:
- FDII is renamed Foreign-Derived Deduction Eligible Income, or FDDEI
- The calculation includes foreign-derived income without the prior asset limitation
- Expenses are limited to those properly allocable to the applicable gross income
- Interest expense and research and development expenses are excluded from the expense-allocation calculation
- Income from dispositions of intangible property is excluded from derived eligible income
Documentation and Reporting
The article does not identify specific reporting requirements. Businesses should retain records supporting:
- The source, destination, and foreign use of exported products
- Manufacturing, production, growing, or extraction activities performed in the United States
- The fair market value of products and the portion attributable to foreign components
- Export sales and qualifying service revenue
- IC-DISC commission calculations and qualified dividends paid
- Foreign-derived income and expenses properly allocable to that income
- The calculation of any FDDEI Section 250 deduction
Effective Dates
The updated FDDEI rules apply to taxable years beginning after December 31, 2025.
The article does not identify a separate effective date or expiration date for IC-DISC structures.
Planning Considerations
Businesses with export sales should evaluate whether their products satisfy the IC-DISC requirements, including U.S. production and the limitation on foreign components. Businesses providing services should assess whether the services relate to the use of a physical product abroad.
When considering an IC-DISC structure, businesses should evaluate the potential commission, the tax treatment of resulting dividends, and whether the business is a corporation or pass-through entity. Pass-through entities should also consider the potential effect of the Section 199A deduction on the available tax-rate benefit.
C corporations should review foreign sales, services, royalties, rent, and other income-producing activities to identify potential FDDEI income. They should also evaluate the impact of the revised expense-allocation rules, including the exclusion of interest and research and development expenses from the calculation.
C corporations may also consider whether restructuring shipments through U.S. entities could improve the availability of FDDEI benefits. Other provisions that may warrant consideration as part of an overall analysis include:
- 100% business depreciation
- 100% depreciation for real property
- Increased Section 179 expensing limits
- Changes to the business interest expense limitation
- The treatment of U.S. research and development costs
Example
A U.S. pass-through business manufactures products in the United States and sells them to customers for use outside the United States. Less than 50% of the products’ fair market value is attributable to foreign components.
The business may be able to use an IC-DISC structure. The exporting business pays a commission to the IC-DISC, deducting the commission from its ordinary income. The IC-DISC does not pay federal income tax on the commission and may pay qualified dividends to its shareholders.
In contrast, if more than 50% of the product’s fair market value is attributable to foreign components, the sale would not meet the stated IC-DISC export requirement.
Next Steps
- Review export sales and service revenue to identify potentially qualifying transactions.
- Confirm whether exported products meet the U.S. production, foreign-content, and foreign-use requirements for IC-DISC purposes.
- For C corporations, analyze foreign-derived income and the effect of the revised FDDEI expense-allocation rules.
- Retain records supporting product origin, foreign use, foreign-component value, export transactions, commissions, and deduction calculations.
Want to learn more about foreign tax export incentives? Contact your RKL advisor today.
Frequently Asked Questions
Who may use an IC-DISC structure?
Corporations and pass-through entities with qualifying export sales may use an IC-DISC structure.
What products qualify for IC-DISC benefits?
The products must be manufactured, produced, grown, or extracted in the United States; have no more than 50% of their fair market value attributable to foreign components; and be sold for foreign use.
Can services qualify for IC-DISC benefits?
Certain services may qualify if they relate to the use of a physical product outside the United States.
Who qualifies for FDDEI?
Only C corporations may qualify for the FDDEI deduction.
When do the updated FDDEI rules apply?
The updated rules apply to taxable years beginning after December 31, 2025.
What income does not qualify for FDDEI?
Income from dispositions of intangible property is excluded from derived eligible income.
