In our most recent blog about The Tax Cuts and Jobs Act (“the Act”) with an international focus, we had to talk about mandatory repatriation which is one of the few provisions effective for the 2017 tax year. However, we are back with some good news! For C Corporations, the Act introduces IRC Section 250 that provides for a deduction centered around Foreign-Derived Intangible Income.
What exactly is Foreign-Derived Intangible Income (“FDII”)? FDII is the portion of a domestic corporation’s intangible income that is derived from serving foreign markets. The income comes from property sold and services provided to any person, who is not a U.S. person, for foreign use, consumption, or disposition not within the U.S.
In general, the FDII benefit is:
- a 37.5% deduction in tax years 2018 through 2025 (13.125% effective tax rate), and
- a 21.875% deduction beginning with tax year 2026 (16.406% effective tax rate).
While this definition and benefit may seem straightforward, there are additional rules and regulations to be addressed in you specific analysis. The Internal Revenue Service is expected to issue regulations guiding the application of section 250.
In general, FDII is determined by the following multi-step calculation:
Step 1: Deduction Eligible Income
Very broadly, deduction eligible income is a corporation’s gross income in excess of deductions (including taxes) and certain exceptions. The exceptions are:
- Subpart F income
- Global Intangible Low-Taxed Income (“GILTI”)
- Financial services income
- Dividends received from a CFC
- Domestic oil and gas extraction income
- Foreign branch income
The calculation for the first step is: Deduction Eligible Income = Gross Income - Exceptions - Allocable Deductions
Step 2: Deemed Intangible Income
Deemed intangible income is the amount of deduction eligible income (Step 1) in excess of 10% of a corporation’s Qualified Business Asset Investment (“QBAI”). QBAI is the quarterly average aggregate adjusted bases of depreciable tangible property. Assets such as land and intangible property are not considered QBAI.
The calculation for the second step is: Deemed Intangible Income = Deduction Eligible Income - (10% x QBAI)
Step 3: Foreign-Derived Intangible Income
Combining the above steps, FDII is calculated as:
FDII = Foreign-Derived Deduction Eligible Income divided by Deduction Eligible Income x Deemed Intangible Income
The new FDII deduction is available to U.S.-based C Corporations, as well as U.S. corporation subsidiaries of foreign-based companies. Contact HLB Gross Collins, P.C. to see how much potential benefit exists for your company when utilizing this new provision of the law.
- Michelle Jenkins, CPA, MBA