Foreign-derived intangible income (FDII) is generated when a C Corporation serves foreign markets. This includes the sale of property, licensing intangible property, as well as providing services to an entity located outside of the U.S.
What Is the FDII Deduction?
The Tax Cuts and Jobs Act (TCJA) introduced a new federal income tax deduction that domestic C Corporations must consider for tax years beginning after 2017.
A domestic C corporation can claim a 37.5% deduction against its FDII. The deduction becomes 21.875% for tax years beginning after 2025.
How to Identify Qualifying Income for the FDII Deduction
The process to determine eligibility, identify qualifying income, and properly calculate FDII tax benefits can be complicated. A proactive tax planning strategy that considers the C Corporation’s structure will help to maximize potential tax savings.
To ensure compliance with tax law, C Corporations must understand items that are excluded from FDII and deduct expenses against foreign sales and services income.
C Corp Scenarios Requiring Special Consideration
Special strategic consideration should be given to the following situations:
Scenario #1: The C Corporation has both FDII and Global Intangible Low Taxed Income (GILTI)
How PBMares Can Help: We help clients perform modeling computations to understand and document the interaction of these two tax-related scenarios, and subsequently design a strategy that maximizes the FDII benefit while minimizing the impact on GILTI.
Scenario #2: The C Corporation operates offices outside the U.S. that qualify as a “foreign branch” of business
How PBMares Can Help: C Corporations can strategically structure supply chains to generate legitimate income from sales and services that are FDII-eligible.
Learn more about how PBMares can help leverage this tax-saving opportunity by developing strategies to maximize benefits and identifying FDII-eligible sales and services. Contact us today.