IRC Section 250: 33.34% FDDEI and 40% GILTI Deduction Rates

For tax years beginning after December 31, 2025, the IRC Section 250 deduction rates are 33.34% of foreign-derived deduction eligible income (FDDEI) and 40% of net CFC tested income (GILTI).{¹} Against the 21% corporate rate, those percentages produce effective federal tax rates of roughly 14% on qualifying foreign-derived income and 12.6% on GILTI, before any foreign tax credits. The One Big Beautiful Bill, signed on July 4, 2025, set these rates permanently and cancelled the steeper phase-down that had been scheduled under the 2017 Tax Cuts and Jobs Act.

How the Rates Changed for 2026

Older planning materials still quote the original TCJA percentages, so the history matters when reading them. From 2018 through 2025, the deduction was 37.5% of FDII and 50% of GILTI, producing effective rates of 13.125% and 10.5%. The TCJA had those percentages dropping in 2026 to 21.875% for FDII and 37.5% for GILTI, which would have pushed effective rates up to 16.406% and 13.125%.

The One Big Beautiful Bill replaced that scheduled cut. For tax years beginning after December 31, 2025, the deduction is fixed at 33.34% for FDDEI and 40% for GILTI.{¹} The new law also renamed the domestic side of the deduction. What used to be foreign-derived intangible income (FDII), a figure that required computing a deemed tangible income return and isolating an intangible portion, is now foreign-derived deduction eligible income (FDDEI). The deduction applies directly to that broader amount, eliminating several intermediate steps.

Who Can Claim the Deduction

The Section 250 deduction is available almost exclusively to domestic C corporations. Partnerships, S corporations, and sole proprietors cannot claim it directly.{¹}

There is one narrow exception. An individual U.S. shareholder of a controlled foreign corporation can make a Section 962 election to be taxed as though they were a corporation and, by doing so, claim the GILTI portion of the deduction. The election does not extend to FDDEI. An individual who makes it must file Form 8993 with their individual return and can only use the 40% deduction to reduce tax on GILTI inclusions.{²}

Applying the 33.34% Rate to FDDEI

The starting point is deduction eligible income (DEI), which is the corporation’s gross income minus allocable deductions, excluding several specific categories. DEI does not include Subpart F income, GILTI, dividends received from controlled foreign corporations, financial services income, domestic oil and gas extraction income, or foreign branch income.{³} Those exclusions keep income taxed under separate regimes out of the calculation.

Interest expense, research and development costs, and general overhead have to be allocated and apportioned against DEI under the Section 861 regulations, and that step can meaningfully reduce the eventual FDDEI figure.{⁴}

FDDEI is the slice of DEI derived from qualifying transactions with foreign persons. Sales of property qualify when the end use occurs abroad. For general property sold to a foreign distributor or manufacturer, the seller must be able to show the property will ultimately be used or consumed outside the United States. Intangible property qualifies based on the share of revenue the buyer earns from exploiting the intangible abroad.{⁵} For services, the rules turn on the type of service: a service to a business recipient generally qualifies if the recipient is located outside the United States, and a service performed on property qualifies if the property is located outside the country.

Once FDDEI is fixed, the deduction is 33.34% of that number. A corporation with $10 million of FDDEI takes a $3,334,000 deduction, leaving $6,666,000 subject to the 21% corporate rate. That produces $1,399,860 of tax, an effective rate of about 14%.

Corporations no longer subtract a 10% return on qualified business asset investment (QBAI) when computing the domestic-side deduction. That intermediate step was central to the old FDII framework and was eliminated by the statutory change. QBAI still matters on the GILTI side.

Applying the 40% Rate to GILTI

GILTI is a mandatory income inclusion for U.S. shareholders who own 10% or more of a controlled foreign corporation. It captures a floor of U.S. tax on foreign earnings considered to exceed a routine return on tangible offshore assets.{⁶} The inclusion is computed at the shareholder level by aggregating tested income from all CFCs, then subtracting a net deemed tangible income return equal to 10% of aggregate QBAI minus certain specified interest expense.

Tested income excludes Subpart F income, income from certain related-party transactions, and any income already subject to an effective foreign tax rate above 18.9% if the corporation elects the GILTI high-tax exclusion.

The Section 250 deduction is 40% of the net CFC tested income, plus 40% of the associated Section 78 gross-up (the amount treated as a deemed dividend representing foreign taxes paid).{¹} The gross-up shows up whenever the corporation claims a foreign tax credit on GILTI, and including it in the deduction keeps that grossed-up amount from being taxed in full at the regular 21% rate.

The Taxable Income Cap

The Section 250 deduction cannot exceed the corporation’s taxable income for the year, computed without regard to the deduction itself.{¹} When the combined FDDEI and GILTI amounts push above that ceiling, the deduction is scaled down proportionally, with each component reduced based on its share of the total excess.{⁷}

This is the most commonly missed trap. A corporation with sizable FDDEI and GILTI but significant domestic losses can watch the deduction partially or entirely disappear. There is no carryforward or carryback for the lost amount. Whatever the cap cuts is gone.

How the Rate Interacts With the Foreign Tax Credit

For GILTI, corporations can claim a deemed-paid credit under Section 960(d) equal to 90% of the foreign income taxes their CFCs paid on tested income, multiplied by the corporation’s inclusion percentage.{⁸} The 90% figure is new for 2026; under prior law, only 80% was creditable. The remaining 10% is permanently lost.

The Section 250 deduction also feeds directly into the Section 904 foreign tax credit limitation. When the limitation is computed for the GILTI basket, the deduction is allocated against foreign-source income, reducing the amount of creditable foreign taxes the corporation can actually use.{⁹} Excess credits in the GILTI basket cannot be carried forward or back. If foreign taxes exceed the limitation for a year, that excess is wasted.

That is why the rate change does not mechanically translate into a proportional benefit for every corporation. A larger deduction lowers taxable income, but it also shrinks the FTC limitation. Corporations with CFCs in high-tax jurisdictions sometimes find the deduction adds little on a net basis once the credit dynamics run through, and some prefer to elect the GILTI high-tax exclusion instead. The exclusion removes the income from GILTI entirely but forfeits the ability to credit the associated foreign taxes against other U.S. income.

Reporting the Deduction on Form 8993

Corporations claim the deduction by completing Form 8993 and attaching it to the corporate return by the filing deadline, including extensions. The form walks through both the FDDEI and GILTI components and applies the taxable income limitation.{²} If a previously filed Form 8993 was wrong, a corrected version marked “Corrected” at the top must be attached to an amended return.

Substantiation matters at the FDDEI stage. Final Treasury Regulations require documentation proving that sales or services actually qualify as foreign-derived, covering three transaction categories: sales of general property to foreign resellers or manufacturers, sales of intangible property, and general services provided to business recipients.{⁵} Acceptable documentation includes a binding contract restricting subsequent sales to foreign locations, proof the property was designed or labeled for a foreign market, or credible evidence from the buyer obtained in the ordinary course of business. The documents must exist by the filing deadline, and the corporation must be able to produce them within 30 days of an IRS request. Corporations whose gross receipts, aggregated with related parties, were under $25 million in the prior tax year are exempt from these specific documentation rules but still bear the general burden of proving entitlement.

The penalty exposure is real. The IRS imposes a 20% accuracy-related penalty on underpayments resulting from negligence or a substantial understatement, and given the dollar amounts typical in Section 250 calculations, a computational error can trigger meaningful penalties plus interest.{¹⁰}

1
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
2
Internal Revenue Service. Instructions for Form 8993
3
eCFR. 26 CFR 1.250(b)-1 – Computation of Foreign-Derived Intangible Income (FDII)
4
eCFR. 26 CFR 1.861-8 – Computation of Taxable Income From Sources Within the United States and From Other Sources and Activities
5
eCFR. 26 CFR 1.250(b)-4 – Foreign-Derived Deduction Eligible Income (FDDEI) Transactions
6
Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
7
Internal Revenue Service. IRC Section 250 Deduction – Foreign-Derived Intangible Income
8
Office of the Law Revision Counsel. 26 USC 960 – Deemed Paid Credit for Subpart F Inclusions
9
Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit
10
Internal Revenue Service. Accuracy-Related Penalty