In 2017, the Tax Cuts and Jobs Act gave C Corporations in the United States a gift, lowering their effective tax rate on qualifying export income from the standard 21% corporate tax rate to 13.125%.
Now, with the recent passage of the One Big Beautiful Bill (OBBB), that gift will keep on giving. The OBBB not only makes the 13.125% rate permanent but also makes several changes that could result in larger deductions for some companies.
Could your company be one of them? If your C Corporation generates income from overseas customers, now is the time to revisit whether FDII applies to your business — and how to maximize the deduction.
What is FDII?
Foreign Derived Intangible Income (FDII) is a tax incentive that reduces the effective tax rate on certain types of export-related income earned by U.S. C Corporations. The reduction occurs through a special deduction on the tax return.
Designed to encourage businesses to keep operations and intellectual property in the U.S. while serving foreign markets, the FDII deduction enables qualifying corporations to achieve an effective tax rate of 13.125% on eligible export income, providing a significant competitive advantage and cash tax savings.
Does Your Corporation Have Qualifying Income?
To qualify for FDII, your C Corporation must have gross income from certain types of international business activities. These include:
- Selling products to foreign parties for use or consumption outside of the U.S.
- Providing services for the benefit of customers or related to property located outside of the U.S.
- Licensing intangible property (IP) — like patents, software, or trademarks — outside of the U.S.
- Selling IP and depreciable property (or deemed sales).
FDII Eligible Sales Expansion
Worth highlighting is how broad the list of FDII eligible sales, or qualifying income sources, can be if your customers are overseas. Keep in mind that:
- Qualifying income includes both manufactured and purchased inventory.
- Both business-to-business (B2B) and business-to-consumer (B2C) transactions qualify.
- Software sales and services can be eligible.
Note: To calculate qualified income for FDII purposes, expenses must be allocated and apportioned to the qualifying gross income.
How is the FDII Deduction Calculated?
The FDII calculation involves several steps. For accuracy, we recommend having a CPA experienced in international tax perform this computation:
- Determine the ratio of qualifying income to total domestic income.
- Multiply this ratio by total domestic income in excess of a deemed tangible income return (10% of depreciable asset basis).
- Apply the deduction percentage of 37.5% to the result.
This process produces Foreign-Derived Deduction Eligible Income (FDDEI), of which 37.5% is deductible, reducing the effective tax rate on FDII to 13.125%.
What Changes Are Coming to FDII Under OBBB?
The One Big Beautiful Bill (OBBB) introduces four major changes to FDII, effective in 2026 for calendar year corporations:
- The tax break is here to stay — but it’s slightly smaller.
The FDII deduction becomes permanent, but the benefit is reduced a bit. The effective tax rate on qualifying foreign income will go up slightly — from about 13.125% to 14%. - Some types of income no longer qualify.
Income from selling intellectual property (like patents or software) or depreciable property sales (like business equipment) will no longer count toward the deduction. - One step in the calculation is removed.
The deemed tangible income return portion of the calculation is eliminated. That means you’ll no longer subtract a “standard return” on your U.S. assets (previously 10% of your equipment and property value). This simplifies the math. - Interest and R&D allocation is not required.
You no longer have to allocate interest or R&D expenses, which simplifies calculations and could increase the amount of foreign income eligible for the deduction.
The overall impact: The changes the OBBB makes to FDII in 2026 could result in a larger benefit for many taxpayers, even though the effective tax rate increases marginally. This is because there is not a qualifying business asset investment (QBAI) subtraction, and interest and R&E expenses no longer reduce qualifying income.
FDII Planning Considerations: What C Corporations Need to Do Now
C Corporations should dig into this calculation now (and every few years) to confirm whether the deduction is applicable and, if so, to assure it’s being maximized. This includes reviewing income, expense allocation, and the documentation supporting the foreign use of the property/services.
We recommend the following approach:
1. Evaluate Tax Accounting Methods
Review tax accounting methods, such as prepayments and bonus depreciation, to maximize the permanent benefit of the FDII deduction while maintaining future benefits of these accounting method changes. Specifically, consider the impact to FDII in relation to R&E deductions taken under OBBB.
2. Review Transfer Pricing
Evaluate transfer pricing between related parties that are located overseas, as this directly impacts the qualified income of the corporation.
3. Conduct Detailed Expense AllocationReview
Instead of simply allocating expenses based on the ratio of sales/gross income, perform a detailed review of expense allocation to ensure its optimization in order to maximize your deduction.
4. Model Under Current Law vs. OBBBA
Use modeling to determine whether your deduction is larger under OBBB or current law for planning, effective tax rate modeling, and cash tax purposes.
5. Develop Proper Documentation
Ensure you have documentation around:
- Customer locations
- Where inventory and services are being sold
- That the use of products or services is occurring outside of the U.S.
Note: Treasury regulations include specific requirements for this documentation.
Frequently Asked Questions
Q: Can all C Corporations claim the FDII deduction?
A: Only U.S. C Corporations with qualifying export income can claim FDII. Partnerships, S corporations, and individuals are not eligible.
Q: How does OBBB change the FDII benefit for my business?
A: OBBBA eliminates the requirement to allocate certain expenses and removes the deemed tangible income return reduction, which may increase your FDII deduction despite a slightly higher effective tax rate.
Q: What documentation is required to support FDII?
A: You need documentation proving customer locations, where inventory or services are sold, and that the use of the product or service occurs outside of the U.S., as outlined in Treasury Regulations.
Q: Does software as a service (SaaS) qualify for FDII?
A: Yes, SaaS sales and services to foreign customers can qualify if the software is used or consumed outside of the U.S.
Q: Should I wait until 2026 to revisit FDII?
A: No. Reviewing your FDII position now allows you to model the impact of OBBB changes, adjust tax planning strategies, and ensure proper documentation is in place before the new rules take effect.
Next Steps
As global business opportunities grow, so do the potential tax benefits for U.S. C Corporations serving customers overseas. With significant changes to the FDII deduction taking effect in 2026, now is the time to revisit whether your C Corporation qualifies — and find out how you can make the most of the deduction.
Reach out to one of Rehmann’s international tax consultants for assistance with FDII.