In2017, theTax Cuts and Jobs ActgaveC Corporationsin the United Statesa gift, loweringtheir effective tax rate on qualifying export incomefromthe standard21% corporate tax rateto 13.125%.
Now, with therecent passage of theOne Big Beautiful Bill(OBBB), thatgiftwillkeep on giving.The OBBB not only makes the 13.125% rate permanent but also makes several changes that could result in larger deductions for some companies.
Could your company be one of them?If your C Corporation generates income from overseas customers, now is the time to revisit whether FDII applies to your business—and how to maximize the deduction.
What is FDII?
Foreign Derived Intangible Income (FDII) is a tax incentive that reduces the effective tax rate on certain types of export-related income earned by U.S. C Corporations.The reduction occurs through a special deduction on the tax return.
Designed to encourage businesses to keep operations and intellectual property in theU.S.while serving foreign markets, the FDII deduction enablesqualifying corporationstoachieve an effective tax rate of 13.125% on eligible export income,providing a significant competitive advantage and cash tax savings.
Does Your Corporation Have Qualifying Income?
To qualify for FDII, your C Corporation must have gross income fromcertaintypes of internationalbusiness activities. These include:
- Selling productsto foreign parties for use or consumption outside of the U.S.
- Providing servicesfor the benefit of customers orrelatedto propertylocatedoutside of the U.S.
- Licensingintangible property (IP)— like patents, software, or trademarks —outside of the U.S.
- SellingIP and depreciable property(ordeemedsales).
FDIIEligibleSalesExpansion
Worth highlighting is how broad the list of FDII eligible sales, or qualifying income sources, can be if your customers are overseas. Keep in mind that:
- Qualifying income includes both manufactured andpurchasedinventory.
- Both business-to-business (B2B) and business-to-consumer (B2C) transactions qualify.
- Software sales and services can be eligible.
Note:To calculatequalifiedincome forFDIIpurposes, expenses must beallocatedand apportioned to the qualifying gross income.
How is the FDII Deduction Calculated?
The FDII calculation involves several steps. For accuracy, we recommend havingaCPA experienced in international tax perform thiscomputation:
- Determinethe ratioof qualifying income to total domestic income.
- Multiply this ratioby total domestic incomein excess ofa deemed tangible income return (10% of depreciable asset basis).
- Apply the deduction percentageof 37.5% to the result.
This process produces Foreign-Derived Deduction Eligible Income (FDDEI), of which 37.5% is deductible, reducing the effective tax rate on FDII to 13.125%.
What Changes Are Comingto FDIIUnder OBBB?
The One Big Beautiful Bill (OBBB) introduces four major changes to FDII, effective in 2026 for calendar year corporations:
- The tax break is here to stay—butit’sslightly smaller.
The FDII deduction becomes permanent, but the benefit is reduced a bit. Theeffective tax rate on qualifying foreign income will go up slightly—from about13.125%to 14%. - Some types of income no longer qualify.
Income from selling intellectual property (like patents or software) ordepreciable property sales(likebusiness equipment)will no longer count toward the deduction. - One step in the calculation isremoved.
Thedeemedtangible income returnportionof thecalculation is eliminated. That meansyou’llno longer subtract a “standard return” on your U.S. assets (previously 10% of your equipment and property value). This simplifiesthe math. - Interestand R&D allocationisnotrequired.
You no longerhave toallocateinterest or R&Dexpenses, which simplifiescalculationsand could increase the amount offoreignincomeeligible for the deduction.
The overallimpact:The changesthe OBBB makestoFDII in 2026could result in a larger benefit for many taxpayers, even though the effective tax rate increases marginally. This is becausethereis notaqualifyingbusiness asset investment (QBAI)subtraction,andinterestand R&E expenses no longer reducequalifying income.
FDIIPlanning Considerations: WhatC CorporationsNeed to Do Now
C Corporations should dig into this calculationnow(andevery few years)to confirm whether the deduction is applicable and, if so, toassureit’sbeing maximized. This includesreviewingincome, expense allocation, andthe documentationsupporting the foreign use of the property/services.
We recommendthe followingapproach:
1. Evaluate Tax Accounting Methods
Reviewtax accountingmethods,such as prepayments and bonus depreciation,to maximize the permanent benefit of the FDII deduction whilemaintainingfuture benefits oftheseaccounting method changes. Specifically, consider the impact to FDIIin relationto R&E deductions taken under OBBB.
2. Review Transfer Pricing
Evaluate transfer pricing between related partiesthat arelocatedoverseas, as this directlyimpactsthe qualified income of the corporation.
3. Conduct Detailed Expense AllocationReview
Instead of simplyallocatingexpenses based on the ratio of sales/gross income, perform a detailed reviewof expense allocationto ensureitsoptimization in ordertomaximizeyourdeduction.
4. Model Under Current Law vs. OBBBA
Use modeling todeterminewhetheryourdeduction is larger under OBBB or current law for planning, effective tax rate modeling, and cash tax purposes.
5. Develop Proper Documentation
Ensure you have documentation around:
- Customer locations
- Where inventory and services are being sold
- That the use of products or services is occurring outside of the U.S.
Note:Treasuryregulationsinclude specific requirements for this documentation.
Frequently Asked Questions
Q: Can all C Corporations claim the FDII deduction?
A: Only U.S. C Corporations with qualifying export income can claim FDII. Partnerships, S corporations, and individuals are not eligible.
Q: How doesOBBBchange the FDII benefit for my business?
A:OBBBAeliminatesthe requirement toallocatecertain expenses and removes thedeemedtangible income return reduction, which may increase your FDII deduction despite a slightly higher effective tax rate.
Q: What documentation isrequiredto support FDII?
A: You need documentation proving customer locations, where inventory or services are sold, and that the use of the product or service occurs outside of the U.S., as outlined in Treasury Regulations.
Q: Does software as a service (SaaS) qualify for FDII?
A: Yes, SaaS sales and services to foreign customers can qualify if the software is used or consumed outside of the U.S.
Q: Should I wait until 2026 to revisit FDII?
A: No. Reviewing your FDII position now allows you to model the impact of OBBBchanges, adjust tax planning strategies, and ensure proper documentation is in place before the new rules take effect.
Next Steps
As global business opportunities grow, so do the potential tax benefits for U.S. C Corporations serving customers overseas. With significant changes to the FDII deduction taking effect in 2026, now is the time to revisit whether yourC Corporationqualifies—andfind outhowyou canmake the most of the deduction.
Reach out to one of èƵ’sinternational taxconsultantsforassistancewith FDII.