TAX 9869 Lecture Notes - Lecture 40: Foreign Earned Income Exclusion, C Corporation, Internal Revenue Service
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• General formula deemed intangible income * foreign derived deduction eligible
income/deduction eligible income
• For midterm: not going to give more than 1 specific question on FDII
• KNOW: exists, not too much time going through all of the nuances of it
• Deemed intangible income= your deduction eligible income- 10% of QBAI (qualified
business asset investment)
o Concept for GILTI
▪ I take my tangible depreciable assets of the US corporation
▪ Whatever tax basis is of those assets, that is my QBAI
▪ I multiply that by 10%
▪ I have certain amount of income (deduction eligible income) and anything
used/invested, anything above that, deduction eligible income -10%=
▪ Given the numbers on the test (plug and play #s)
▪ 37.5% deduction on that amount on FDII- deduction on that, pay lower tax
•Foreign-derived deduction eligible income (FDDEI): Any deduction eligible income which is
derived in connection with:
⁻Property sold (or leased, licensed, or exchanged) to non U.S. persons for use, consumption, or
disposition outside the U.S.
⁻Services provided to any person, or with respect to property, located outside the U.S.
⁻Special rules apply to transactions that involve domestic intermediaries or related parties
⁻Many related party transactions are likely to qualify if the property or services is for use by a
third party outside the U.S.
•Foreign use for the purpose of FDII:
⁻Foreign use means any use, consumption or disposition that is not within the United States.
Sales of property to another person for further manufacture or other modification within the
United States are not treated as sold for a foreign use even if the other person subsequently
uses such property for a foreign use, subject to exceptions with respect to related parties and
for property that the taxpayer establishes to the satisfaction of the Internal Revenue Service is
for a foreign use. Property sold to a related person is not treated as sold for a foreign use unless
certain conditions are met and the taxpayer establishes to the satisfaction of the Internal
Revenue Service that such property is for a foreign use.
⁻Services provided to another person (except certain related parties) located within the United
States are not generally treated as provided outside of the United States, even if the other
person uses the services in order to provide further services outside the United States. If
services are provided to a related party who is not located in the United States, the services are
not treated as provided outside of the United States unless the taxpayer establishes to the
satisfaction of the secretary that such service is not substantially similar to services provided by
such related party to persons located within the United States.
• What is the income upon which I can get my deduction? FDDEI
• In addition to 37.5% deduction on FDII, know that FDDEI
• In order for income to qualify as FDDEI
o It needs to be property sold/licensed to non US persons/services who will use the
property outside of US