Form 8993 and the FDII deduction explained

Form 8993 is the IRS form used to compute the Section 250 deduction for foreign-derived intangible income, or FDII, and global intangible low-taxed income, or GILTI.

Domestic C corporations – and certain individuals who make a Section 962 election – file this form to claim a deduction that lowers the effective US tax rate on qualifying income earned from serving foreign markets.

The FDII side of the deduction rewards US-based export activity. The GILTI side reduces the tax on income earned through controlled foreign corporations, or CFCs.

At a glance

• Who files: Domestic C corporations and Section 962 electing individuals
• What it calculates: The Section 250 deduction for both FDII and GILTI
• Attaches to: The filer’s federal income tax return – Form 1120 for corporations
• Key distinction: FDII applies to income a US corporation earns by selling goods or services to foreign persons; GILTI applies to certain income earned by the corporation’s CFCs abroad

What is FDII, and who can claim the FDII deduction?

FDII stands for foreign-derived intangible income – the full form of the acronym. It is a category of income that qualifies a domestic C corporation for a reduced effective tax rate of 13.125% for tax year 2025 under Section 250 of the Internal Revenue Code.

The deduction is designed to encourage US corporations to keep intellectual property and high-value activity onshore rather than shifting it overseas.

The FDII deduction is available to domestic C corporations that earn income from selling property to, licensing to, or providing services for persons located outside the United States.

The income must be “deduction eligible income” – meaning it excludes Subpart F income, GILTI, financial services income, dividends received from a controlled foreign corporation, domestic oil and gas extraction income, and foreign branch income.

For sales or other dispositions occurring after June 16, 2025, DEI also excludes gain from the sale of certain intangible property and depreciable, amortizable, or depletable property, under an exclusion added by the One Big Beautiful Bill Act (IRS Notice 2025-78; proposed regulations REG-117130-25).

The FDII deduction is limited to domestic C corporations; Section 962 electing individuals can access only the GILTI side.

 

Based on TFX client scenario: A US-based software company licenses its product to customers in Europe and Asia. The licensing revenue qualifies as foreign-derived deduction eligible income, or FDDEI, and the company claims the FDII deduction on Form 8993 – reducing the effective US tax rate on that revenue from 21% to 13.125%.

Why Form 8993 matters for owners of foreign corporations

Even if you own a foreign corporation rather than a domestic one, Form 8993 may still affect your tax position. The form is not limited to the FDII side – it also computes the Section 250 deduction for GILTI, which directly applies to US shareholders of CFCs.

The following 3 points explain why this matters:

• If you are a US individual who owns 10% or more of a CFC and makes a Section 962 election, Form 8993 is where the GILTI-side Section 250 deduction is calculated.
• The FDII deduction and the GILTI deduction are separate calculations with separate reporting goals – FDII rewards US-based export activity, while the GILTI deduction reduces the double-tax burden on CFC income.
• Getting this wrong – or skipping Form 8993 when it applies – can result in overpaying tax or triggering an IRS notice during examination.

For tax year 2025 returns filed in the 2026 filing season, the GILTI deduction rate remains 50%. The reduced 40% rate applies only to tax years beginning after December 31, 2025.

What is Form 8993, and who needs to file it?

IRS Form 8993 is the form used for figuring the Section 250 deduction for FDII and GILTI. Every domestic C corporation that has deduction-eligible income or a GILTI inclusion must file it.

Section 962 electing individuals – US persons who choose to be taxed at corporate rates on their CFC inclusions – also use this form.

The Section 962 election applies to the GILTI-side deduction only.

The following 4 situations require you to file Form 8993:

• You are a domestic C corporation with gross income from foreign sales or services – the FDII side
• You are a domestic C corporation with a GILTI inclusion from one or more CFCs – the GILTI side
• You are a US individual making a Section 962 election and claiming the GILTI deduction
• You need to compute the taxable income limitation that caps the combined FDII and GILTI deduction

Where does it go? Form 8993 attaches to the filer’s federal income tax return. For corporations, that is Form 1120.

The form is due when the underlying return is due, including extensions. There is no separate extension request.

The Form 8993 instructions – revised December 2025 – confirm that both domestic corporations and 962 electing individuals use this form.

If you are uncertain whether you need to file, the threshold question is whether you have either FDII-qualifying income or a GILTI inclusion. If either applies, the form is generally required.

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Which form does what: Form 5471 vs. Form 8992 vs. Form 8993

Three forms come up repeatedly in cross-border corporate tax compliance, and each serves a different purpose.

The FDII tax form – Form 8993 – sits alongside Form 5471 and Form 8992 in the international tax workflow.

Form 5471 reports ownership, Form 8992 computes the GILTI inclusion, and Form 8993 calculates the Section 250 deduction – each form feeds the next.

 

Form 5471 is the ownership and reporting layer. Form 8992 computes the GILTI inclusion amount.

Form 8993 then takes the GILTI figure from Form 8992 – along with any FDII-qualifying income – and determines the Section 250 deduction.

Formula
GILTI = Aggregate CFC tested income – Net DTIR, where Net DTIR = (10% × aggregate QBAI) – specified interest expense

Worked example

A US shareholder owns 100% of two CFCs. CFC A has tested income of $500,000 and QBAI of $1,000,000. CFC B has tested income of $300,000 and QBAI of $600,000.

Aggregate tested income is $800,000. Net DTIR is 10% × $1,600,000 = $160,000. GILTI inclusion = $800,000 – $160,000 = $640,000.

This example assumes no specified interest expense at the shareholder level. If the CFCs carry net interest expense, net DTIR – and the resulting GILTI inclusion – will differ.

 

NOTE! For tax years beginning after December 31, 2025, the One Big Beautiful Bill Act – signed July 4, 2025 – eliminates the QBAI/DTIR component from the GILTI calculation and renames GILTI to “net CFC tested income,” or NCTI. The mechanics above apply to tax year 2025 returns filed in 2026.

In the worked example below, a corporation with $5,000,000 in gross income and a 60% foreign-derived ratio claims a $630,000 FDII deduction for tax year 2025.

 

In this example, the corporation reduces its taxable income by $630,000 for tax year 2025 through the FDII deduction, bringing the effective FDII tax rate on the foreign-derived portion below the standard 21% corporate rate.

 

The following 5 categories of documentation support the FDII calculation:

• Gross income detail by category – domestic vs. foreign-derived
• Expense allocation workpapers
• QBAI schedules – adjusted basis of tangible depreciable property
• Transaction-level documentation supporting foreign-use or foreign-person status
• Export/service records for FDDEI substantiation

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FDII rate and effective tax rate by tax year

For tax year 2025, the FDII deduction is 37.5%, and the GILTI deduction is 50%; for tax year 2026 onward, both drop under the OBBBA to 33.34% and 40%.

 

The FDII deduction rate change matters for year-end planning. Starting with tax year 2026, the rate drops from 37.5% to 33.34%, which raises the FDII effective tax rate on foreign-derived income from 13.125% to approximately 14%.

On the GILTI side, the deduction drops from 50% to 40%, raising the effective rate from 10.5% to 12.6%.

Before the OBBBA, Section 250 was scheduled to reduce the FDII deduction to 21.875% for tax years beginning after December 31, 2025. That would have pushed the effective FDII rate above 16%.

The OBBBA replaced that sunset with the 33.34% figure – a smaller reduction than originally scheduled.

Confirm the applicable tax year before using any percentage in your planning. Returns filed in 2026 for tax year 2025 use the 37.5% and 50% rates.

The 33.34% and 40% rates apply only to income earned in tax years beginning January 1, 2026, or later.

FDII regulations: What the 2020 final rules changed and what still applies now

The IRS issued final regulations on the FDII and GILTI deductions in July 2020 under T.D. 9901 (Federal Register), 85 FR 43042.

The tax-reform changes to FDII through these rules clarified several open questions from the 2019 proposed regulations and remain the primary regulatory framework for the Section 250 deduction.

What changed with the 2020 final rules

The following 4 areas were addressed by the final regulations:

• Documentation and substantiation. The final rules established specific documentation requirements for FDDEI – the taxpayer must have records supporting that property was sold for foreign use or that services were provided to a person located outside the United States. The final rules replaced the proposed regulations’ specific document lists with more flexible substantiation requirements for certain higher-risk transactions, while other transactions can rely on general recordkeeping under section 6001 – rather than a bright-line safe harbor.
• Expense allocation. The regulations refined how deductions are allocated and apportioned between DEI and non-DEI income, including rules for R&D expenses and interest expense.
• Foreign-use property. The rules clarified when a sale of property qualifies as a sale for foreign use, including provisions for property sold to related foreign persons and property that is later resold into the United States.
• Services rules. The regulations addressed how to determine where a service is provided and consumed, including rules for electronically supplied services and advertising services.

What still applies now

The 2020 final FDII regulations remain in effect for tax year 2025 returns.

The One Big Beautiful Bill Act – signed July 4, 2025 – changed the deduction percentages and simplified the calculation formula for tax years beginning in 2026, but it did not repeal the regulatory framework for substantiation, expense allocation, or the FDDEI classification rules.

Taxpayers filing for tax year 2025 should follow the full T.D. 9901 framework.

For tax year 2026, the OBBBA eliminates the QBAI/deemed tangible income return component from the FDII calculation and renames FDII to “foreign-derived deduction-eligible income” – FDDEI as a statutory term, replacing the regulatory usage.

The IRS and Treasury have begun issuing guidance on these changes.

Notice 2025-78 (December 2025) provided preliminary rules for the new deduction-eligible income exclusion covering certain property dispositions, and on August 20, 2026, Treasury and the IRS published proposed regulations (REG-117130-25) addressing that exclusion. Taxpayers should monitor IRS.gov/Form8993 for further updates as additional regulations are finalized.

Section 962, FDII, and GILTI: What applies to which taxpayer?

Section 962 allows certain US individual shareholders of CFCs to elect to be taxed at corporate rates on their Subpart F and GILTI inclusions.

This election opens the door to the Section 250 deduction on the GILTI side – but not the FDII side.

The interaction between GILTI and FDII depends on the taxpayer’s entity type and election status.

The FDII code section is Section 250, subsection b, of the IRC.

Only domestic C corporations can claim both the FDII and GILTI deductions; Section 962 electing individuals access only the GILTI side at a 10.5% effective rate for tax year 2025.

 

Decision tree

1. Are you a domestic C corporation with foreign-derived income? → File Form 8993 for both the FDII deduction and the GILTI deduction.
2. Are you a US individual who owns 10%+ of a CFC and makes a Section 962 election? → File Form 8993 for the GILTI deduction only. The FDII deduction does not apply.
3. Are you a US individual without a Section 962 election? → Form 8993 does not apply. Your GILTI inclusion is taxed at individual rates with no Section 250 deduction.

 

Section 962 creates the exception that lets individuals access the GILTI side of Form 8993 by electing corporate-style treatment.

How the Section 250 deduction affects FDII and GILTI reporting

The Section 250 deduction is the mechanism that makes both FDII and GILTI attractive from a tax rate standpoint. Without it, FDII would be taxed at the full 21% corporate rate and GILTI at the full individual or corporate rate.

The deduction creates the gap between the statutory rate and the effective rate.

How it works

Effective FDII rate = Corporate rate × [1 – FDII deduction %]

Effective GILTI rate = Corporate rate × [1 – GILTI deduction %]

For tax year 2025: the FDII deduction rate is 37.5% of FDII, which produces an effective rate of 13.125% at a 21% corporate rate. The GILTI deduction is 50% of the GILTI amount, producing an effective rate of 10.5%.

For tax year 2026 onward: the FDII deduction drops to 33.34% – effective rate ~14% – and the GILTI deduction drops to 40% – effective rate 12.6%.

Taxable income limitation. If the combined FDII and GILTI deductions exceed the corporation’s taxable income, both are reduced proportionally. This means the benefit can shrink in low-income years.

The following 3 factors affect the final deduction amount:

• Taxable income level. A corporation with a net operating loss or low taxable income may see the deduction reduced or eliminated entirely for that year.
• Entity type. Only C corporations – and Section 962 electing individuals for GILTI – can claim the deduction. Choosing the wrong entity structure locks you out.
• Year of return. The deduction percentage depends on the tax year. Returns for tax year 2025 and tax year 2026 use different rates – confirm which year applies before computing.

Common Form 8993 mistakes and documentation traps

The most common errors on Form 8993 fall into three categories: misclassifying income, using the wrong deduction percentage, and failing to substantiate FDDEI.

The following 7 mistakes appear most frequently on Form 8993 filings – and each one can result in an understated or overstated deduction.

 

The IRS’s FDII rules require complete workpapers supporting every line on the form. Review the instructions for Form 8993 at the IRS website for updated line-by-line requirements.

If your return involves both FDII and GILTI calculations, maintaining gross income breakdowns, QBAI schedules, and FDDEI documentation is the strongest protection against adjustment.

The IRS generally expects you to retain tax and financial records for at least three years from the filing date – longer if FDDEI substantiation is in question.

If you suspect an error on a previously filed return, a structured expat tax return review can identify whether Form 8993 was completed correctly before deciding whether to amend.

When amended returns may help reduce GILTI tax

Filing an amended return can correct GILTI-related errors and, in some cases, reduce the tax owed – but it works only within specific procedural windows.

When an amendment may help

The following 3 situations are the most common reasons to amend a return involving Form 8993:

• Math corrections. If Form 8992 or Form 8993 was completed incorrectly – wrong GILTI inclusion amount, wrong deduction percentage, or missed taxable income limitation – an amendment can fix the numbers and recover overpaid tax.
• Missing forms. If Form 8993 was not filed with the original return but should have been, an amended return can add it and claim the Section 250 deduction retroactively.
• Section 962 election. If a US individual did not make the Section 962 election on the original return, it may be possible to make the election on an amended return. However, this is not guaranteed – the IRS treats Section 962 as an annual election, and the question of whether it can be made or changed on an amended return is not fully settled in published guidance.

Procedural limits

• Time window. Generally, an amended return must be filed within three years from the original filing date or two years from the date the tax was paid, whichever is later under IRC § 6511.
• Section 962 timing. If a Section 962 election is involved and foreign corporation reporting is required, ensure all related forms – Form 5471, Form 8992, and Form 8993 – are filed consistently.
• Protective claims. If you are uncertain about the outcome but want to preserve the refund period, consider filing a protective claim.

 

Caution: Amending a return that involves foreign corporation reporting can trigger additional scrutiny. If the original return was under-inclusive – for example, it omitted a Form 5471 – the amendment may resolve the penalty exposure, but it may also surface other filing gaps. Model the full impact before filing.

An amended expat tax return requires filing Form 1040-X.

Attach corrected versions of every affected schedule, including Form 8993.

TFX handles amended return filings for US expats whose original returns need correction.

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