The IRS has updated its practice unit on Foreign-Derived Intangible Income (FDII). The overview is as follows:
The Tax Cuts and Jobs Act enacted section 250, which provides for a deduction with respect to Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII). The deduction is only available to domestic corporations (except that the GILTI deduction is also available to individuals that make a section 962 election).
The section 250 deduction helps neutralize the role that tax considerations play when a domestic corporation chooses the location of intangible income attributable to foreign-market activity, that is, whether to earn such income through its controlled foreign corporations (CFCs) or through its U.S.-based operations.
For income earned by a domestic corporation through its CFCs, section 250 provides a deduction of 50%* of GILTI (including the section 78 gross-up).
For income earned by a domestic corporation through its U.S.-based operations, section 250 provides a deduction of 37.5%* of FDII.
The section 250 deduction is limited if a domestic corporation’s taxable income (not taking into account the section 250 deduction) is less than the sum of its GILTI and FDII.
*The percentages are reduced to 37.5% (GILTI) and 21.875% (FDII) for taxable years beginning after December 31, 2025.
- Section 250 is effective for taxable years beginning after December 31, 2017.
- Proposed Section 250 Regulations were released in March 2019.
- Final Section 250 Regulations were published on July 15, 2020.
- The Final Section 250 Regulations apply to tax years beginning on or after January 1, 2021.
- For tax years beginning before January 1, 2021, taxpayers may:
- Rely on the Proposed Regulations in their entirety (but taxpayers may rely on the special transition rule for documentation for all taxable years beginning before January 1, 2021); or
- Apply the Final Regulations in their entirety (excluding certain substantiation requirements and once applied, must be applied for all subsequent years); or
- Apply a reasonable interpretation of the statute.
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.