What Is FDII? Deduction Rate, Qualifying Income, and Form 8993

Foreign-Derived Intangible Income, or FDII, is a federal tax deduction that lowers the corporate tax rate a domestic C-corporation pays on profits from selling goods, licensing intangibles, or providing services to foreign customers. For tax years beginning in 2026, the deduction brings the effective federal rate on qualifying income to roughly 14%, compared with the standard 21% corporate rate.¹ Recent legislation renamed the concept to “foreign-derived deduction eligible income” (FDDEI) in the statute text, but FDII remains the common name and still appears on IRS Form 8993.

The Deduction and Its Effective Rate

Section 250 of the Internal Revenue Code lets a domestic corporation deduct 33.34% of its qualifying foreign-derived income from taxable income.¹ The deduction doesn’t remove the income from the return. It shrinks the taxable portion. On every dollar of qualifying FDII, the corporation pays federal tax on the remaining 66.66 cents, which at 21% produces about 14 cents of tax.

The rate is slightly higher than in earlier years. From 2018 through 2025, the deduction was 37.5%, producing an effective rate of 13.125%.² The One Big Beautiful Bill Act permanently set the deduction at 33.34% for tax years beginning after December 31, 2025, and renamed the underlying income category in the statute.¹

Who Can Claim FDII

Only domestic C-corporations subject to federal income tax can claim the deduction. Section 250 applies “in the case of a domestic corporation,” and no other entity type is listed.¹ “Domestic” means the corporation was created or organized in the United States or under U.S. or state law.

S-corporations, partnerships, LLCs taxed as pass-throughs, sole proprietors, and individuals cannot claim FDII. The rule was built to reduce entity-level corporate tax on intangible income, so it only reaches income taxed at the corporate rate.

For a consolidated group filing a single return, the FDII deduction is computed at the group level and then allocated among members based on each member’s share of qualifying foreign income.³ A member with no foreign-derived income gets no share.

What Kind of Income Qualifies

Income qualifies as foreign-derived if it comes from one of two transaction types.

The first is property transactions: selling, leasing, or licensing property to a non-U.S. person for foreign use. That covers tangible goods manufactured domestically and shipped abroad as well as intangible property like software licenses or patents granted to foreign buyers. The corporation must be able to show both that the buyer is foreign and that the property will actually be used outside the United States.¹

The second is services provided to any person, or with respect to property, located outside the United States.¹ A U.S. engineering firm designing a factory in Germany, or a software company delivering cloud analytics consumed entirely overseas, would look at those transactions as potential FDII.

The foreign-use requirement has real teeth. Selling to a foreign distributor who ships the goods back into the U.S. for American consumers does not count. The corporation carries the burden of proving foreign use, and the documentation standards vary depending on whether the buyer is an end user, a reseller, or a manufacturer.⁴

Income Stripped Out Before the Calculation

Not all corporate income enters the FDII formula. The starting point is “deduction eligible income” (DEI), and several categories are removed before any foreign-derived math begins:¹

Subpart F income from controlled foreign corporations.
GILTI income under Section 951A.
Financial services income (banking, insurance, financing, and similar activities).
Dividends received from controlled foreign corporations.
Domestic oil and gas extraction income.
Foreign branch income.
Gains from selling intangible property or other depreciable and amortizable assets, with limited Treasury exceptions.

These exclusions prevent double-counting. Income already taxed under a separate international regime doesn’t also get the FDII benefit. Financial services income is carved out because FDII targets returns from intellectual property and innovation, not lending or insurance activity. A corporation with heavy revenue in these categories will find less of its total income flowing into the FDII pool.

How the FDII Amount Is Built

The calculation is sequential. Each step feeds the next, so a wrong input early on distorts everything after it.

Step 1: Deduction Eligible Income

The corporation first computes DEI: total gross income minus the excluded categories above, then minus allocable expenses and deductions other than interest expense and research expenditures.¹

Step 2: Deemed Tangible Income Return

Next comes the deemed tangible income return (DTIR), which equals 10% of the corporation’s qualified business asset investment (QBAI).⁵ QBAI is the average adjusted basis in tangible property used in the trade or business, measured quarterly and valued under the alternative depreciation system. The idea is that a 10% return on physical assets is routine profit any business with those assets would earn, so only income above that threshold is treated as intangible.

Step 3: Deemed Intangible Income

Deemed intangible income (DII) is DEI minus DTIR. A corporation with $50 million of DEI and $200 million of QBAI has a $20 million DTIR (10% of QBAI), leaving $30 million of deemed intangible income.⁶

Step 4: Apply the Foreign-Derived Ratio

The corporation divides its qualifying foreign-derived income by total DEI. If 60% of DEI comes from qualifying foreign transactions, 60% of the $30 million DII, or $18 million, is FDII.

Step 5: Take 33.34%

The deduction equals 33.34% of the FDII amount. In this example, the deduction is roughly $6 million, saving about $1.26 million in federal tax compared with paying the full 21% rate on the same income.¹

The Taxable Income Cap

Section 250 includes a limitation that trims the deduction when it would otherwise exceed the corporation’s taxable income. If the combined FDII and GILTI deduction amounts exceed taxable income calculated before the Section 250 deduction, both amounts are reduced proportionally.¹

This tends to bite corporations with significant domestic losses or heavy deductions in the same year they generated foreign income. The Section 250 deduction can never create or enlarge a net operating loss; it can only reduce taxable income to zero. Any deduction lost to the cap does not carry forward. Corporations in that position should model the limitation before filing.

Filing Form 8993

Form 8993 is where the Section 250 deduction is computed and reported. It walks through the calculation in order: gross income, DEI, QBAI, DTIR, DII, the foreign-derived ratio, FDII, and the deduction itself.⁷ The corporation attaches the completed form to its Form 1120 and files both by the same deadline.⁸

For most C-corporations, the deadline is the 15th day of the fourth month after the tax year closes, which is April 15 for calendar-year filers.⁹ On an automatic extension, Form 8993 is due with the final return.

To fix an error after filing, the corporation files a new Form 8993 marked “Corrected” at the top, attached to an amended Form 1120.⁷ The IRS expects underlying records and calculations to be retained for at least three years from the filing date.¹⁰ Given the international documentation involved, keeping shipping manifests, export certificates, service agreements, and proof of the buyer’s foreign status longer is prudent.

State Tax Treatment

The federal FDII deduction does not automatically reduce state corporate income tax. Roughly half of states with a corporate income tax conform to the federal deduction and let it flow through to the state return; the rest require the deduction to be added back to state taxable income. A corporation operating in several states may capture the federal savings while still paying full state rates in decoupled jurisdictions, so checking each filing state’s conformity before estimating the combined benefit is worth the time.

1
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
2
Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Large Businesses and International Taxpayers
3
eCFR. 26 CFR 1.1502-50 – Consolidated Section 250
4
Federal Register. Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
5
Internal Revenue Service. IRC Section 250 Deduction – Foreign-Derived Intangible Income (FDII)
6
eCFR. 26 CFR 1.250(b)-1 – Computation of Foreign-Derived Intangible Income (FDII)
7
Internal Revenue Service. Instructions for Form 8993
8
Internal Revenue Service. About Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)
9
Internal Revenue Service. Publication 509 – Tax Calendars
10
Internal Revenue Service. How Long Should I Keep Records