For tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act (TCJA) provides a new permanent deduction for domestic C-corporations that generate income from serving foreign markets. The deduction would reduce the federal tax rate on such income from 21% to 13.125% (increasing to 16.41% after 2025).
The name of the new deduction provision, Foreign-Derived Intangible Income (FDII), is a bit misleading as this new incentive is not connected to the ownership of specific intangible property. Instead, the deduction applies to the above-routine return arising from the taxpayer’s foreign-derived income – i.e., income earned from providing goods and services to customers outside the United States for foreign use. The above-routine return is considered the “deemed intangible income” and is generally the excess of the taxpayer’s total income over a 10% return on its depreciable tangible property (the routine or “deemed tangible income” return).
An important step in determining the FDII benefit is identifying the income that is considered “foreign-derived” income. The key aspect is that the new deduction applies to taxpayers that generate income from export sales and services. The property must be sold, licensed, or leased to a foreign person (related or unrelated) for use outside the United States; and services must be provided to persons located outside the United States, or with respect to property located outside the United States.
It is important that corporations begin to assess whether they may qualify for this new tax deduction as it can lower estimated tax payments and will have financial reporting implications.
DiSanto, Priest & Co. is experienced in preparing detailed FDII calculations which involve a multi-step process with certain data inputs.