The final IRC Section 250 regulations were released on July 9, 2020. Section 250 provides deductions for Global Intangible Low-Taxed Income (“GILTI”) and Foreign-Derived Intangible Income (FDII). The final regulations are viewed as taxpayer-favorable as they reduced some documentation requirements and provided more flexibility to substantiate the deductions.
In 2017, the Tax Cuts and Jobs Act (TCJA) introduced GILTI and FDII. View our previous coverage on GILTI here to learn more about the income inclusion. In summary, IRC Section 250 allows for a 50% (37.5% for tax years beginning after 12/31/2025) deduction of GILTI and Section 78 inclusion for C corporations subject to taxable income limitations and a 37.5% (21.875% for tax years beginning after 12/31/2025) deduction for C Corporation’s FDII. FDII is only available for domestic corporations that derive income from selling products or services to non-related parties for foreign use.
Prior to the TCJA, the U.S. allowed deferral of foreign income by taxing the foreign earnings upon repatriation, but the TCJA changed to tax foreign income as it is earned. The deductions in IRC Section 250 are the favorable offset to this change.
Major Highlights of the Final Regulations
- Relaxed documentation requirements and substation burdens for transactions that generate Foreign Derived Deduction Eligible Income (FDDEI)
- Revision of the FDDEI sales and service rules related specifically to digital and advertising services
- More specific substantiation requirements for certain transactions
- Allow individuals to make an election under IRC 962 to be treated like a C Corporation and receive the Section 250 deductions
- Delayed effective date until tax years beginning on or after 1/1/2021
- Taxpayers can early adopt but must apply regulations in its entirety
More to Come
The final regulations still have not finalized the ordering rules when computing taxable income limitations for the deductions. Currently allows taxpayers to utilize a reasonable method until additional guidance is offered.
Tax Modeling Matters – We Can Help
Does the change in the final regulations make the FDII deduction a new avenue for your company? Does your international structure make sense given the final regulations issued in the last couple of weeks? Every taxpayer has a different situation that should be modeled to ensure the best possible answer. Connect with a Barnes Dennig tax expert for answers to questions you have regarding your specific tax situation. We’re here to help.