TAX 9869 Lecture 41: 41

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17 Jul 2020
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Class 8: 7/1/2020
Introduction to FDII “Foreign-Derived Intangible Income”
•Starting in the 2018 tax year, new §250 allows a domestic corporation servicing foreign
markets to deduct 37.50% of its calculated FDII. At the new 21% corporate tax rate, this results
in an effective tax rate of 13.125% on a corporation’s foreign-derived income.
For tax years beginning after December 31, 2025, the allocable deduction is reduced to
21.875%, which produces an effective tax rate of 16.406%.
The FDII deduction is limited to taxable income (after application of net operation loss
carryovers) and such limitation works in conjunction with the GILTI rules. If a taxpayer’s FDII
plus GILTI income exceeds the taxpayer’s taxable income for the taxable year determined
without regard to the §250 deduction, the excess is allocated pro-rata to reduce the taxpayer’s
FDII and GILTI income for the purpose of §250.
•The FDII deduction is only available to domestic corporations taxed as C corporations, which
includes U.S. subsidiaries for foreign-based multinationals.
Currently, regulated investment companies, real estate investment trusts, S corporations,
partnerships, individuals, and foreign corporations with U.S. trade or businesses are not eligible
for the FDII deduction.
However, there may be an opportunity for pass-through entities to issue FDII information to a C
corporation owner as a Schedule K-1 footnote.
•The FDII calculation is mechanical in nature (see details on the following slides). FDII is
generally the portion of domestic corporation’s net income (other than GILTI and certain other
income) that exceeds a deemed rate of return of the corporation’s tangible depreciable business
assets and is attributable to certain sales of property to foreign persons or to the provision of
certain services to any person, or with respect to any property located, outside the United
States.
We are trying allow C corps to have lower federal tax rate on certain types of income
Doesn’t apply to S corps, pships, individuals- only to US C corps
If you have a US C corp that’s a partner in a pship and the pshp generates income
eligible for FDII deduction then C corp partner can take deduction
o Pship will pass thru on k-1 information that partner needs to compute its FDII
deduction
o Pass through to C corp for deduction
FDII Formula
FDII = Deemed Intangible Income x Foreign-Derived Deduction Eligible Income
Deduction Eligible Income
Deemed Intangible Income = Deduction Eligible Income (10% x QBAI)
Deduction Eligible Income = Gross Income Exceptions Allocable Deductions
Formula to figure out deduction
Deemed intangible income formula- includes 10% of QBAI
What is my FDII? What income is the C corp generating that is considered to be foreign
derived income connected with intangible ppty/income?
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