QBAI Definition: Adjusted Basis, GILTI and FDII Impact, 2026 Changes

Qualified Business Asset Investment, or QBAI, is the quarterly average of a controlled foreign corporation’s adjusted basis in depreciable tangible property used in its trade or business. The figure matters because 10 percent of it, reduced by certain interest expense, shelters a matching amount of the CFC’s foreign earnings from the higher U.S. tax rate that applies to what was called Global Intangible Low-Taxed Income (GILTI) and, for tax years beginning after December 31, 2025, is called Net CFC Tested Income (NCTI). A company with a large physical footprint abroad gets a bigger shelter; a company earning high margins on patents, software, or brand value gets little or none.

The underlying assumption in the tax code is that a business should earn roughly 10 percent per year on its tangible investments as ordinary operating profit. Earnings up to that level are treated as a routine return on hard assets. Everything above the line is treated as income from intangibles and taxed at a higher effective rate.

What Property Counts as QBAI

Only tangible, depreciable property used in a CFC’s trade or business counts. The property must be the kind for which a depreciation deduction is allowed under Section 167, meaning it wears out and has a determinable useful life.¹ Treasury regulations call this “specified tangible property” and add that it must be used in producing tested income during the tax year.²

In practice, that means factories, warehouses, manufacturing equipment, vehicles, and office buildings. Land is out because it does not depreciate. Software licenses, brand names, patents, and trade secrets are out because they are intangible. When a piece of property is only partially depreciable, only the depreciable portion counts; a building on land contributes the structure but not the land value.³

How the Adjusted Basis Is Measured

QBAI is not a year-end snapshot. It is the average of the CFC’s total adjusted basis in qualifying property measured at the close of each quarter, summed and divided by four.² Quarterly averaging keeps companies from buying assets right before year-end to inflate the base and dumping them shortly after.

The Alternative Depreciation System Requirement

One detail catches people off guard. The adjusted basis for QBAI must be computed using the Alternative Depreciation System (ADS) under Section 168(g), not the accelerated methods most companies use on domestic returns. ADS uses straight-line depreciation over longer recovery periods based on the property’s class life.⁴

Slower depreciation means the adjusted basis stays higher for longer, which produces a larger QBAI figure and a larger shelter. For property placed in service before December 22, 2017 (the date Section 951A was enacted), the regulations require recomputing the basis as if ADS had applied from the property’s original in-service date.²

The key ADS recovery periods are:

Personal property with a class life: depreciated over that class life
Personal property without a class life: 12 years
Residential rental property: 30 years
Nonresidential real property: 40 years

These longer timelines apply uniformly across jurisdictions, so a plant in Ireland and a plant in Singapore are measured the same way.

How QBAI Reduces the Tax on Foreign Earnings

QBAI drives a figure called the net deemed tangible income return. The formula is 10 percent of the U.S. shareholder’s pro rata share of aggregate QBAI across all its CFCs, reduced by specified interest expense.⁵ That amount is subtracted from net CFC tested income to arrive at the shareholder’s GILTI or NCTI inclusion.⁶

A worked example makes the mechanics concrete. Suppose a U.S. parent’s CFCs have $50 million in aggregate QBAI and $12 million in net tested income, with no specified interest expense. The deemed tangible income return is $5 million (10 percent of $50 million). Only $7 million of the tested income is included as NCTI. If the same CFCs held no qualifying tangible assets, all $12 million would face the higher rate.

Specified Interest Expense

The 10 percent return is not the final number. Specified interest expense reduces it. That expense is the excess of the shareholder’s pro rata share of each CFC’s tested interest expense over its share of each CFC’s tested interest income.⁵ Put plainly, if a CFC borrows heavily to buy tangible assets, the interest cost eats into the QBAI benefit. The rule blocks companies from leveraging up foreign subsidiaries purely to inflate the deemed return.

Tested Income Is the Only Income QBAI Shelters

QBAI reduces the NCTI inclusion and nothing else. Tested income is defined as the CFC’s gross income minus allocable deductions, but several categories are carved out: Subpart F income (even when excluded under the high-tax exception), income effectively connected with a U.S. trade or business, certain related-party dividends, and certain foreign oil and gas income. A CFC can hold substantial tangible assets and still see little benefit from QBAI if most of its earnings fall into one of those excluded buckets.

What Changed in 2026

The One Big Beautiful Bill Act, signed into law on July 4, 2025, changed the effective rate on this income for tax years beginning after December 31, 2025. Under the earlier TCJA rules, corporate shareholders could deduct 50 percent of their GILTI inclusion under Section 250, producing an effective rate of 10.5 percent. The new law cuts that deduction to 40 percent, raising the effective rate on NCTI to 12.6 percent.⁷ Every dollar of deemed tangible income return now shelters income that would otherwise face a steeper rate, which raises the stakes on QBAI planning.

The same law also removed QBAI from the Section 250 export-income calculation. Before 2026, domestic corporations used QBAI on the domestic side to compute a deemed return that reduced Foreign-Derived Intangible Income (FDII), so a portion of qualifying export income received a Section 250 deduction.⁸ FDII has been replaced by Foreign-Derived Deduction-Eligible Income (FDDEI), and the new regime drops the QBAI offset entirely. The Section 250 deduction for FDDEI is permanently set at 33.34 percent, producing an effective rate of about 14 percent on qualifying income. For companies that had built export planning around domestic QBAI, the calculation now looks nothing like it did.

Anti-Abuse Rules for Asset Transfers

Treasury regulations include anti-avoidance rules aimed at companies that try to inflate QBAI by shuffling assets between related entities. If a related party transfers property to a CFC and the adjusted basis immediately after the transfer exceeds the basis immediately before the transfer plus any recognized gain, the excess is treated as “disqualified basis” and is excluded from QBAI.²

The target is straightforward: a parent transferring property to a CFC at a stepped-up basis to pump the deemed return and shrink the NCTI inclusion. Disqualified basis is not necessarily permanent. It can shrink as the property depreciates or is sold in a taxable transaction. But passing the property to another related party does not clean the tainted basis, so recycling the asset inside the corporate group does not solve the problem. Ignoring the rule invites the IRS to recompute QBAI at a lower figure.

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
eCFR. 26 CFR 1.951A-3 – Qualified Business Asset Investment
3
eCFR. 26 CFR 1.250(b)-2 – Qualified Business Asset Investment (QBAI)
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
6
Joint Committee on Taxation. Overview of the Taxation of Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income Sections 250 and 951A
7
Bipartisan Policy Center. How Does the GOP Tax Law Change International Tax Rules?
8
Internal Revenue Service. IRC Section 250 Deduction: Foreign-Derived Intangible Income (FDII)