FDII Tax Reform: OBBBA Changes, Calculation, and Form 8993

The FDII changes under the OBBBA rewrote the core mechanics of the Section 250 deduction for tax years beginning after December 31, 2025. The One Big Beautiful Bill Act (Pub. L. 119–21), signed July 4, 2025, renamed foreign-derived intangible income to “foreign-derived deduction eligible income” (FDDEI), set the deduction at 33.34% of qualifying income, eliminated the Qualified Business Asset Investment offset, and removed interest expense and research or experimental expenditures from the expense allocation. The net result for a domestic C corporation is an effective federal rate of roughly 14% on qualifying foreign-derived income, in place of the 21% corporate rate.¹

The Core Changes for 2026 and After

Four shifts matter most if you’re working from older guidance or a prior-year return.

New names. FDII is now FDDEI. On the companion side of Section 250, GILTI is now “net CFC tested income” (NCTI). The rename tracks a substantive change in how the deduction is computed, not just relabeling.¹

New deduction percentages. The FDDEI deduction dropped from 37.5% to 33.34%. The NCTI deduction dropped from 50% to 40%. Both figures are permanent and apply to tax years beginning after December 31, 2025. Under the original TCJA schedule, the rates were set to fall further (to 21.875% and 37.5%), which would have pushed the effective FDDEI rate above 16%. The new law is meaningfully more favorable than what was on the books before it passed.¹

QBAI is gone. The old formula subtracted a “deemed tangible income return” equal to 10% of the corporation’s investment in tangible depreciable assets, and only income above that floor qualified for the deduction. The 2025 law scrapped that step. The deduction now applies directly to the foreign-derived portion of deduction eligible income, regardless of how much the corporation has tied up in physical assets. Capital-intensive businesses that previously watched most of their income disappear under the QBAI floor are the biggest beneficiaries of this change.

Interest and R&E no longer reduce the pool. Under prior law, all deductions properly allocable to gross income were subtracted when computing deduction eligible income. The amended statute excludes interest expense and research or experimental expenditures from that allocation. Research-heavy corporations keep more of their income in the qualifying pool as a result.

How the New Calculation Runs

The 2026 sequence is shorter than the pre-2026 version because the QBAI step is gone.

Start with gross income and remove the excluded categories (subpart F inclusions, NCTI, financial services income, CFC dividends, domestic oil and gas extraction income, and foreign branch income). Then subtract properly allocable expenses, other than interest and R&E. The result is deduction eligible income (DEI).
Determine how much of that DEI comes from qualifying foreign transactions. That figure is FDDEI.
Multiply FDDEI by 33.34%. That product is the Section 250 deduction attributable to foreign-derived income.

At the 21% corporate rate, a 33.34% deduction produces an effective rate near 14% on qualifying income.¹ The pre-2026 effective rate was 13.125%; without the OBBBA, the rate for 2026 would have been about 16.4%.

What Counts as Qualifying Foreign-Derived Income

Not every dollar earned abroad qualifies. DEI is the corporation’s gross income after stripping out several categories that are taxed under other international provisions:

Subpart F inclusions under Section 951(a)(1), including Section 78 gross-up amounts
Net CFC tested income under Section 951A, including its Section 78 gross-up
Financial services income as defined in Section 904(d)(2)(D)
Dividends received from a controlled foreign corporation
Domestic oil and gas extraction income
Foreign branch income as defined in Section 904(d)(2)(J)

From what remains, the corporation subtracts expenses and deductions properly allocable to that gross income, with interest and R&E now excluded from the allocation. What’s left is DEI.²

To become FDDEI, that DEI has to come from a qualifying foreign transaction.

Property Sales

A sale qualifies when the buyer is not a U.S. person and the property is for foreign use, meaning it will be used, consumed, or disposed of outside the United States. “Sales” includes leases, licenses, exchanges, and other dispositions. Goods exported and then brought back into the country don’t qualify.²

Services

Services qualify when they are provided to a person located outside the United States, or with respect to property located outside the United States. A consulting engagement performed for a U.S.-based client can still qualify if the work relates to property situated abroad.²

Related-Party Transactions

Sales to related foreign parties qualify only when that party resells the property to an unrelated foreign person, or uses it to manufacture products ultimately destined for foreign consumption. Running revenue through a foreign affiliate and calling it a qualifying foreign sale does not work.²

Who Can Claim the Deduction

Section 250 is limited to domestic C corporations subject to federal corporate income tax. Sole proprietors, S corporations, and partnerships cannot claim it directly.¹ For a business planning significant foreign sales, entity choice becomes a real question because of this deduction.

A domestic C corporation that holds a partnership interest can claim the deduction on its distributive share of the partnership’s qualifying foreign-derived income; the partnership itself receives no deduction. Regulated investment companies and REITs are excluded because their pass-through tax structures are incompatible with a corporate-level deduction.

The Taxable Income Limitation

A cap catches corporations in loss or low-income years. If your taxable income (computed without the Section 250 deduction) is less than the combined FDDEI and NCTI, both amounts must be reduced before the deduction percentages are applied. The reduction is proportional: FDDEI absorbs a share of the excess based on its ratio to the combined total, and NCTI absorbs the rest.³

In a year with large FDDEI but modest overall taxable income, this limitation can sharply reduce or eliminate the benefit. Some corporations respond by accelerating income or deferring certain deductions to preserve the Section 250 benefit, though that kind of planning carries trade-offs beyond this deduction alone.

Substantiation the IRS Expects

Treasury regulations do not set a single document checklist. The general rule is that you bear the burden of proving entitlement to the deduction, as with any other deduction.⁴

For certain transaction types (sales to resellers and manufacturers, sales of intangible property, and general services provided to business recipients), the regulations require at least one of the following:

Credible evidence from the recipient obtained or created in the ordinary course of business that establishes the foreign-use or foreign-location requirement
A written taxpayer statement containing required information (recipient name, address, description of property or services) and corroborated by credible evidence
A binding contract specifying that the property is for resale or exploitation only outside the United States

These documents must exist by the time you file the return claiming the deduction, including extensions. If the IRS requests them during an examination, you generally have 30 days to produce them.⁴

For other elements, such as establishing that a buyer is a foreign person, proving foreign use on direct sales to end users, or establishing the location of a service consumer, the regulations impose no specific documentation requirements beyond general record-keeping under Section 6001. No specific requirement is not the same as no documentation needed. If you can’t demonstrate entitlement upon examination, the IRS can disallow the deduction and assess a 20% accuracy-related penalty on the resulting underpayment.

Filing Form 8993

Corporations claim the deduction on Form 8993, “Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).” The form walks through the computation of DEI, FDDEI, and the resulting deduction, and the final figures flow to Schedule C of Form 1120.⁵ Form 8993 must be attached to the corporation’s income tax return and filed by the due date, including extensions.

Most corporations e-file Form 8993 as part of their Form 1120 package. The IRS uses automated matching between Form 8993 and Schedule C, so mismatches tend to generate notices quickly. Given the scale of the 2026 changes, expect updated Form 8993 instructions reflecting the elimination of QBAI and the new deduction percentages. Check irs.gov for the latest revision before filing.

State Tax Does Not Follow Automatically

The federal deduction does not automatically reduce your state tax bill. Many states decouple from Section 250 entirely and require corporations to add the deduction back when computing state taxable income. Others conform to the Internal Revenue Code broadly enough that the deduction carries through, sometimes with modifications. The same corporation may pay an effective 14% federal rate on FDDEI while owing full state corporate tax on that same income. Check your state’s conformity status before building projections around the federal benefit.

1
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
2
Internal Revenue Service. IRC Section 250 Deduction – Foreign-Derived Intangible Income (FDII)
3
eCFR. 26 CFR 1.250(a)-1 – Deduction for Foreign-Derived Intangible Income
4
Federal Register. Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
5
Internal Revenue Service. Instructions for Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)