Tax Reform Benefits for Corporate Exporters
The Tax Cuts and Jobs Act created a deduction for Foreign-Derived Intangible Income (FDII). The name of this deduction is misleading, it is actually a deduction against qualifying export income after a routine rate of return. A high-level explanation of FDII is that it provides a reduced federal tax rate of 13.125% for C corporations on the residual income from the sale of exported products and services after a deemed routine rate of return. The deduction is formula driven, allowing for a 50% deduction against qualified export income after subtracting a deemed rate of return defined to be 10% of qualified fixed asset investment. The deduction is 50% for years beginning before December 31, 2025 resulting in a 13.125% tax rate (corporate tax rate of 21% x 50%). For years beginning after December 31, 2025, the deduction is reduced to reach a 16.406% federal tax rate on this income.
Foreign deduction eligible income is the income derived in connection with property sold, licensed or leased to a person outside the US or services provided to persons located outside the US or with respect to property located outside the US. Qualified fixed asset investment is the average adjusted basis in depreciable tangible property used in the corporation’s trade or business to generate deduction eligible income.
Since this deduction is formula driven, it will be important to understand the definitional requirements for determining deduction eligible income and making the appropriate computations to reach the allowable deduction. If you are a C corporation with export sales, speak with your tax advisor regarding how you may be able to take advantage of this deduction.