While some lawmakers have called for expanding the foreign-derived intangible income (FDII) deduction – which was intended to keep intellectual property and related profits in the US – others say it should be eliminated entirely. But even if no action is taken, the deduction is set to be cut back in 2026.
Background.
Under Code Sec. 250 , domestic corporations are allowed a deduction of 37.5% of US-taxable FDII – which includes profits from the use of a company’s US intellectual property in goods and services sold in foreign markets.
FDII is calculated by multiplying a corporation’s deemed intangible income by the ratio of the corporation’s foreign-derived deduction eligible income to its deduction eligible income. Deemed intangible income includes a corporation’s deduction-eligible income minus 10% of its qualified business asset investment.
The FDII deduction effectively reduces the tax rate for this foreign-derived income to 13.125% – versus the 21% tax rate for corporate income generally. It is available to domestic entities taxed as C corporations.
The provision was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA, PL 115-97 ), and like several other TCJA provisions, is set to change at the end of 2025 if no further legislation passes. But unlike other provisions of the TCJA that are set to expire, the FDII deduction would simply drop from 37.5% to 21.875% in 2026.
Calls for expansion.
Bipartisan House legislation, the Growing and Preserving Innovation in America Act ( HR 8184 ), calls for increasing the FDII deduction from 37.5% to 50%. The lead sponsor, Representative Michelle Steel (R-CA), described the FDII deduction as a “critical” part of US tax policy at an April 11 Ways and Means Committee hearing, adding that it enhances competitiveness, resulting in more US jobs and US-based research and development. And a “competitive” FDII rate “ensures that American companies are encouraged to invest their profits here at home, creating jobs and developing new technologies that grow our economy,” said Steel when introducing the legislation.
The bill’s sole Democrat co-sponsor, Representative Joe Morelle (D-NY), agreed, adding that “[w]hen we make it easier for American companies to invest their profits here at home instead of overseas, we bolster our country’s global competitiveness and provide better support for families.” Morelle, who represents Rochester – part of one of 31 “Tech Hubs” designated by the US Commerce Department’s Economic Development Administration in October – has been a vocal supporter of measures promoting research and advanced manufacturing.
Calls to eliminate.
Not all see the FDII deduction as a benefit to American taxpayers. President Biden’s fiscal year 2025 proposed budget calls for eliminating the deduction entirely on December 31, 2024. “FDII is not an effective way to encourage research and development” in the US, according to a Treasury budget summary because it “provides large tax breaks to companies with excess profits – who are already reaping the rewards of prior innovation – rather than incentivizing new domestic investment.” It also gives an unfair advantage to companies with high export sales, says Treasury. Biden’s budget proposes to replace the FDII deduction with other, unspecified, research and development incentives.
Likewise, the Democrat-backed No Tax Breaks for Outsourcing Act ( S 357 / HR 884 ) and Corporate Tax Dodging Prevention Act ( S 4098 / HR 7933 ) call for eliminating the FDII deduction. Those bills, however, have not shown signs of moving.
And the FACT Coalition, a self-described nonpartisan alliance of state, national, and international organizations promoting tax fairness, said in a June 10 report that the FDII deduction is a handout for “Big Tech.” FACT cites findings that among Fortune 1000 companies, 10 technology companies received almost 60% of the benefits of the deduction between 2018 and 2022.
But more than that, the FDII deduction “distorts the free market” and “favor[s] sales to foreign rather than domestic consumers,” according to FACT. “This wasteful provision is a fake export subsidy that does little to stimulate domestic innovation, but might perversely stimulate continued offshoring of American jobs and investment,” FACT’s Policy Director Zorka Milin told Checkpoint. “Congress should repeal it,” she added.
If lawmakers cannot agree on how to move forward with the FDII deduction, corporations making use of the deduction can expect their effective tax rate on relevant income to increase from 13.125% to 16.406% in 2026.
For more on the FDII deduction, see Checkpoint’s Federal Tax Coordinator ¶ O-3000 et seq.
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