Foreign-Derived Intangible Income (FDII) was introduced by the Tax Cuts and Jobs Act of 2017 to encourage U.S. corporations to serve foreign markets from the United States. On July 4, 2025, the One Big Beautiful Bill Act renamed FDII as Foreign-Derived Deduction Eligible Income (FDDEI). The change generally applies to taxable years beginning after December 31, 2025. Under the former FDII rules, the deduction required calculating deemed intangible income after a 10% return on qualified business asset investment (QBAI). Beginning in 2026 for calendar-year taxpayers, the deduction is based directly on FDDEI, eliminating the QBAI-based calculation and simplifying the rules.
For corporate taxpayers, the benefit is generally available to domestic C corporations, not S corporations or other pass-through entities. Qualifying income can include sales of products to foreign persons for use outside the United States and income from services provided to customers, businesses, or property located outside the country. Certain leases and licenses may qualify under the ordinary FDDEI rules, but they generally are not treated as sales for the post-OBBBA exclusion of disposition income. That exclusion applies to relevant dispositions after June 16, 2025, so taxpayers must separately identify excluded intangible-property and depreciable, amortizable, or depletable-property dispositions before computing the deduction.
For tax years before 2026, the fdii calculation starts with deduction eligible income, or DEI. From that amount, the company subtracts a deemed tangible income return equal to 10% of qualified business asset investment. The remainder is deemed intangible income. That amount is multiplied by the foreign-derived ratio, which compares qualifying foreign-derived income with total DEI. The result is FDII, and 37.5% is generally deductible. Beginning in 2026, the calculation is simpler: the tangible-asset hurdle is removed, FDII becomes FDDEI, and 33.34% of qualifying FDDEI is generally deductible, subject to the applicable taxable-income limitation under Section 250 rules for corporations.
FDII and Global, Intangible, Low-Taxed Inclusion (“GILTI”) were designed as related parts of the international tax system. FDII reduces the effective U.S. tax rate on qualifying foreign-derived income earned by a domestic corporation, while GILTI generally brings certain controlled foreign corporation earnings into U.S. taxable income. Both historically received deductions through Section 250. For pre-2026 years, the section 250 deduction generally equals 37.5% of FDII plus 50% of GILTI, subject to limits. In 2026, FDII becomes FDDEI and GILTI becomes net CFC tested income, with deduction percentages of 33.34% and 40%, respectively, under the revised rules for qualifying corporations.
Documentation matters because a company must support why income qualifies as foreign-derived. Records should show the customer’s foreign status, where property is used, and where services are provided or where the recipient’s operations benefit from them. Depending on the transaction, support may include contracts, shipping records, customer representations, sales data, invoices, service records, and internal analyses. Companies should also retain workpapers showing how DEI, FDDEI, exclusions, and allocated expenses were determined. For partnerships, information reported through Schedules K-2 and K-3 may also affect a domestic corporate partner’s calculation. Consistent, organized documentation makes the position easier to support if reviewed later.
Yes. Qualifying foreign-derived income can include services provided to customers or business operations outside the United States. The company must be able to substantiate where the recipient is located or where the service benefits operations, depending on the particular service.
S corporations and most pass-through entities do not claim the deduction directly. The benefit is generally available to domestic C corporations. A corporate partner may, however, take into account its distributive share of qualifying partnership items when calculating Section 250.
The TCJA created FDII and set the deduction percentage at 37.5%, producing a 13.125% effective federal tax rate on qualifying income under the 21% corporate rate. Beginning in 2026, later legislation reduces the deduction percentage to 33.34% for qualifying income.
A domestic loss can reduce or eliminate the available benefit because the IRC §250 deduction is limited by taxable income. If FDII and GILTI exceed taxable income, the amounts used to calculate the deduction are reduced under the statutory limitation.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Matt Pellegrom, partner in Bennett Thrasher’s International Tax practice, or call us at 770.396.2200.
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