What Is the Section 250 Deduction and Can It Lower My Expat Business Taxes?
Section 250 of the Internal Revenue Code allows qualifying taxpayers to deduct up to 50% of Global Intangible Low-Taxed Income (GILTI) and 37.5% of Foreign-Derived Intangible Income (FDII) for the 2025 tax year. According to the IRS, these deductions can reduce the effective corporate tax rate on qualifying foreign income from 21% to as low as 10.5%, potentially saving expat business owners thousands of dollars each year.
Individual expat business owners can access these deductions through a Section 962 election, which allows you to be taxed at corporate rates on your foreign corporation income. The key scenarios where Section 250 applies:
- You own 10%+ of a foreign corporation and face GILTI tax on its earnings
- You run a U.S. C corporation with sales to foreign customers (FDII)
- Your foreign corporation operates in a low-tax country where Section 250 delivers better results than other expat tax strategies
Does Your Business Structure Support Section 250?
Here’s what Section 250 means for your business, when it makes sense compared to simpler strategies, and why the 2025 tax year is a critical planning window.
How Does the Section 250 Deduction Work?
Section 250 was created by the Tax Cuts and Jobs Act (TCJA) in 2017 to accomplish two goals: encourage U.S. corporations to keep operations and intellectual property at home, and provide partial relief from the GILTI minimum tax on controlled foreign corporation income.
The deduction works differently depending on the type of income:
- For GILTI (most common for expats): If you own 10% or more of a foreign corporation, the U.S. taxes you annually on the corporation’s profits above a certain threshold, whether or not you take any money out. Section 250 provides a 50% deduction on that GILTI income, cutting the effective corporate tax rate in half, from 21% to 10.5%. On top of that, you can claim Foreign Tax Credits for up to 80% of the foreign corporate taxes your company has already paid. If your foreign corporation pays at least 13.125% in local taxes, the combination of the Section 250 deduction and foreign tax credits often eliminates U.S. tax entirely.
- For FDII (less common for expats): If you operate a U.S. C corporation that sells products, licenses intellectual property, or provides services to foreign customers for foreign use, Section 250 provides a 37.5% deduction on the portion of your income classified as FDII. This reduces the effective corporate rate from 21% to 13.125%. FDII is less relevant to most expat entrepreneurs because it applies to domestic corporations that serve foreign markets rather than to foreign corporations.
Section 250 is available only to domestic C corporations and to individuals who make a Section 962 election. S corporations, partnerships (as entities), and sole proprietorships cannot claim this deduction. If you are a freelancer or self-employed expat without a corporate structure, the Foreign Earned Income Exclusion ($130,000 for the 2025 tax year) or Foreign Tax Credit are the strategies that apply to you.
How Do Individual Expats Access the Section 250 Deduction?
As an individual taxpayer, you cannot claim Section 250 directly. The deduction is built for corporations. However, Section 962 creates a bridge that allows individual shareholders of foreign corporations to elect to be taxed as if they were U.S. corporations, thereby unlocking access to Section 250.
Here is how the Section 962 election changes your tax picture:
| Without Section 962 | With Section 962 |
|---|---|
| GILTI taxed at individual rates (up to 37%) | GILTI taxed at corporate rate (21%) |
| No Section 250 deduction available | 50% GILTI deduction reduces effective rate to 10.5% |
| No indirect foreign tax credits on GILTI | Can claim FTC for up to 80% of foreign corporate taxes |
| Simpler filing requirements | Additional forms required (Form 8993, Form 8992, election statement) |
| Future distributions are previously taxed income (not taxed again) | Future distributions are taxable as ordinary income |
The last row is the critical trade-off. When you make a Section 962 election, you pay a lower rate on GILTI now, but future cash distributions from your foreign corporation will be taxed again as ordinary income (or as qualified dividends if a tax treaty applies). This means timing and long-term planning matter. An expat who plans to reinvest profits in the business for years may benefit more from Section 962 than someone who takes regular distributions.
The Section 962 election must be made annually with your original tax return or by the extended due date. Late elections are extremely difficult to obtain and may require a private letter ruling from the IRS.
When Does Section 250 Make Sense vs. Other Expat Tax Strategies?
Section 250 is powerful, but it is not always the best option. The right strategy depends on your income level, business structure, where your company operates, and how much complexity you are willing to manage.
Section 250 with Section 962 Is a Strong Fit When:
- Your foreign corporation operates in a low-tax country (UAE, Singapore, Hong Kong, Estonia) where local corporate tax rates are below 13%
- Your foreign corporation income exceeds the FEIE limit ($130,000 for the 2025 tax year), so the exclusion alone will not cover your earnings
- You are in a higher U.S. individual tax bracket (24% or above) and the difference between individual rates and the 10.5% effective corporate rate is meaningful
- You plan to reinvest profits in the business rather than take regular distributions
- You need to maintain a corporate structure for business, legal, or liability reasons in your country of operation
Simpler Strategies Often Work Better When:
- Your income is under $130,000: The Foreign Earned Income Exclusion can exclude your entire income from U.S. tax with far less complexity. If your foreign entity is eligible, a check-the-box election (Form 8832) to treat it as a disregarded entity lets you use the FEIE and avoids the CFC/GILTI rules entirely.
- Your foreign corporation pays high local taxes: If your company pays 20%+ in local corporate tax (UK, Germany, France, Japan), the Foreign Tax Credit alone may eliminate your U.S. tax liability without needing Section 250 at all. The FTC provides a dollar-for-dollar credit, which is often more valuable than a deduction.
- Your foreign income is taxed at rates above 18.9%: The GILTI high-tax exception allows you to exclude that income from GILTI calculations entirely, removing it from the equation before Section 250 even comes into play.
- You prefer simpler compliance: Section 250 requires Form 8993, Form 8992, Form 5471, and a Section 962 election statement. The compliance burden is substantial. If simpler strategies achieve similar results, the extra cost and complexity may not be justified.
Strategy Decision Framework
| Your Situation | Best Strategy to Explore | Why |
|---|---|---|
| Foreign corporation, low-tax country, income above $130K | Section 250 + Section 962 | Reduces effective rate to 10.5%; FTC alone won’t help in low-tax countries |
| Foreign corporation, high-tax country (20%+) | Foreign Tax Credit | Dollar-for-dollar credit often eliminates U.S. tax completely |
| Foreign corporation, very high-tax country (above 18.9%) | GILTI high-tax exception | Excludes income from GILTI entirely; simplest option |
| Single-member foreign entity, income under $130K | Check-the-box + FEIE | Avoids CFC/GILTI rules entirely; simplest compliance |
| U.S. C corporation selling to foreign customers | FDII deduction (Section 250) | Reduces effective rate on foreign-derived income to 13.125% |
| Self-employed or freelancer, no corporation | FEIE + FTC | Section 250 does not apply; use Form 2555 or Form 1116 |
Your Greenback accountant analyzes all available strategies for your specific situation and recommends the approach that minimizes your tax while keeping compliance manageable. Many clients discover that a combination of strategies delivers the best result.
How Are Section 250 Rates Changing Under the One Big Beautiful Bill?
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, changes both Section 250 deduction rates and the underlying mechanics for tax years beginning after December 31, 2025. This makes the 2025 tax year the last year at the more generous original rates.
| Provision | 2025 Tax Year (Current Rates) | 2026 Tax Year (OBBBA) |
|---|---|---|
| GILTI deduction | 50% | 40% (GILTI renamed “NCTI“) |
| Effective rate on GILTI | 10.5% | 12.6% |
| FDII deduction | 37.5% | 33.34% (FDII renamed “FDDEI”) |
| Effective rate on FDII | 13.125% | ~14% |
| Foreign tax credit on GILTI | 80% of foreign taxes | 90% of foreign taxes |
| QBAI exclusion (10% tangible asset return) | Included | Eliminated |
| Foreign tax rate needed to offset U.S. GILTI tax | 13.125% | ~14% |
What the Changes Mean for Expat Business Owners
The higher effective rates starting in 2026 mean that Section 250 will still provide meaningful tax savings, but the gap between individual rates and the Section 250 effective rate narrows. The elimination of the QBAI exclusion is particularly significant: under the current rules, a 10% return on tangible business assets is excluded from GILTI. Starting in 2026, all foreign corporation income is potentially subject to the NCTI tax, which increases the amount of income that flows through the Section 250 calculation.
On the positive side, the increased foreign tax credit allowance (from 80% to 90%) means that expats in moderately taxed countries will find it easier to offset U.S. tax entirely through credits. The crossover point, where foreign taxes fully eliminate U.S. GILTI tax, rises only modestly from 13.125% to approximately 14%.
If you are considering a Section 962 election or restructuring your business entity, the 2025 tax year represents the best window to lock in the more generous 50% GILTI deduction rate. For detailed guidance on 2026 planning, see our guide on NCTI (Net CFC Tested Income).
What Are Common Mistakes with Section 250?
- Choosing Section 250 when simpler options exist: Section 250 is not always the optimal strategy. For income under $130,000, a check-the-box election combined with the FEIE is often simpler, cheaper, and equally effective. An experienced accountant compares all available strategies before recommending the most complex one.
- Ignoring the Section 962 distribution trade-off: The Section 962 election reduces your current GILTI tax rate, but future distributions from the corporation become taxable. If you plan to withdraw profits regularly, the total tax across both events may exceed what you would have paid under individual rates without the election.
- Underestimating compliance costs: Section 250 requires Form 8993, Form 8992, Form 5471, and potentially Form 8833 for treaty positions. The IRS estimates Form 8993 alone takes over 25 hours for corporations. The tax savings need to justify this investment.
- Not coordinating with foreign tax credits: The Section 250 deduction and the Foreign Tax Credit interact in ways that can reduce the benefit of both if not planned carefully. The FDII deduction must be allocated between U.S. and foreign-source income for FTC limitation purposes, and getting the allocation wrong can cost thousands.
- Missing the Section 962 election deadline: Unlike many tax elections, Section 962 generally cannot be made after the return due date (including extensions). If you miss it, you lose access to Section 250 for that year entirely.
How Does Section 250 Fit Into My Overall Expat Tax Plan?
Section 250 is one piece of a broader international tax strategy. Your Greenback accountant considers how it interacts with every other provision that affects expat business owners:
- Business structure review: Before Section 250 even enters the picture, the right entity classification matters. If your foreign entity can be treated as a disregarded entity (Form 8832), you may avoid GILTI rules entirely and use the FEIE instead. If it is classified as a corporation (either by default or because it is a per se corporation in your country), then Section 250 becomes relevant.
- Multi-year planning: Section 962 elections, GILTI high-tax exception elections, and check-the-box elections all have long-term consequences. The 60-month rule on entity reclassification means you generally cannot switch back and forth. A Greenback accountant models multiple years before recommending a path.
- State tax considerations: Some U.S. states do not conform to the Section 250 deduction, which means you could owe state tax on GILTI income even if you owe nothing at the federal level. This is particularly relevant if you maintain state tax residency.
- Coordination with tax treaties: Treaty provisions can affect withholding rates on distributions from your foreign corporation, which directly impacts the Section 962 distribution trade-off. Treaties may also provide reduced rates on royalties, dividends, and service income that affect the overall comparison between strategies.
Let Greenback Build the Right Strategy for You
Section 250 can deliver substantial tax savings for expat business owners in the right circumstances. But the right circumstances are specific, and the wrong approach can cost more in compliance expenses and unintended tax consequences than it saves. The interaction between entity classification, GILTI calculations, Section 962 elections, foreign tax credits, and upcoming OBBBA changes requires expert analysis.
If you own a foreign business, our CPAs evaluate every available strategy, from the simplest FEIE to the most sophisticated Section 250 planning, and recommend the approach that saves you the most with the least complexity. We handle the full reporting chain as part of our small business tax preparation services.
No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind, knowing that your taxes were done right. Have questions about the process or next steps? Contact us, and one of our Customer Champions will happily address all your concerns. If you’re ready to be matched with a Greenback accountant, click the get started button below.
Lower Your Effective Corporate Tax Rate Legally
This article is for informational purposes only and does not constitute legal or tax advice. Section 250 deductions involve complex interactions between corporate, individual, and international tax provisions. Tax laws change frequently. For guidance on your specific situation, contact Greenback to speak with an expat tax specialist.
Related Resources
- Form 8993: How Can It Reduce My U.S. Taxes on Foreign Business Income?
- What Is GILTI and How Does It Affect My Expat Business?
- NCTI (Net CFC Tested Income): 2026 Guide
- Section 962 Election: Tax Strategy for Expat Business Owners
- Foreign-Derived Deduction Eligible Income for Expat Business Owners
- GILTI High Tax Exception: How to Exclude High-Taxed Foreign Income
- What Is a Controlled Foreign Corporation (CFC)?
- Form 8832: Entity Classification Election Guide
- Form 5471: Filing Requirements with Your Expat Taxes
- Foreign Business Tax Reporting: Forms and Requirements
