Knowledge Center Tax Advice for Specific Needs

Foreign-Derived Deduction Eligible Income for Expat Business Owners

Here’s relief for most American entrepreneurs abroad: according to IRS data, only about 3,900 corporate tax returns claimed the foreign-derived intangible income (FDII) deduction in a recent filing year. This means foreign-derived deduction eligible income (FDDEI) rules affect a relatively small number of businesses.

If you operate as an individual, LLC, partnership, or S corporation, you can skip these complex calculations entirely. FDDEI only matters for C corporations serving foreign markets with intellectual property or tangible goods. Most expat entrepreneurs benefit far more from individual tax strategies like the Foreign Earned Income Exclusion ($130,000 for 2025) or Foreign Tax Credit.

For C corporations that do qualify, FDDEI calculations unlock valuable tax savings. The Section 250 deduction currently reduces the effective corporate tax rate from 21% to 13.125% on qualifying foreign-derived income. That’s a substantial benefit worth pursuing if your business structure and income sources align with the requirements.

See If Your Foreign Business Qualifies for FDDEI

FDDEI can significantly reduce U.S. tax for expat business owners, but only if structured correctly.

This guide explains who needs to worry about FDDEI, how the calculation works, and which expat business owners should focus their energy elsewhere.

Does FDDEI Apply to My Expat Business?

The short answer for most American entrepreneurs abroad: probably not.

FDDEI rules only apply to C corporations

According to IRS regulations, you cannot claim the FDII deduction if you operate as:

An individual filing Form 1040
An LLC taxed as a sole proprietorship or partnership
An S corporation
A partnership
A real estate investment trust (REIT)

When FDDEI calculations matter:

You’ve incorporated as a U.S. C corporation
Your business generates substantial income from intellectual property licensing
You sell technology, software, or tangible goods to foreign customers
You provide services to foreign persons or regarding foreign property

When you can safely ignore FDDEI:

You’re self-employed and file Schedule C
Your business operates through a foreign corporation
You’re employed by another company
Your LLC uses pass-through taxation
You serve only U.S. domestic customers

Many successful expat businesses deliberately choose LLC or S corporation structures specifically to access individual expat tax benefits. For these businesses, the Foreign Earned Income Exclusion often provides greater value than corporate deductions, such as FDII.

What Income Qualifies as Foreign-Derived Deduction Eligible Income?

FDDEI represents the portion of a C corporation’s income derived from serving foreign markets. To qualify, your income must first meet deduction-eligible income (DEI) requirements, then pass specific foreign-use tests.

Qualifying income categories:

Sales of tangible property to foreign customers for use outside the United States
Licensing intellectual property (patents, copyrights, trademarks, know-how) for foreign use
Software licensing and digital services provided to foreign markets
Services performed for foreign persons or related to property located abroad

Income automatically excluded from FDDEI:

Subpart F income from controlled foreign corporations
Financial services income (banking, insurance)
High-taxed GILTI income when certain elections apply
Income effectively connected with a foreign branch
Domestic oil and gas extraction income
Dividends from CFCs

Example: A U.S. software company licenses applications to European businesses. The licensing fees from European customers qualify as FDDEI because the software is used outside the United States. Identical licenses sold to U.S. customers wouldn’t qualify, even if those U.S. companies use the software internationally.

The distinction matters because only FDDEI qualifies for the favorable Section 250 deduction rate.

How Does the FDII Deduction Work?

For C corporations with qualifying foreign-derived income, the Section 250 deduction provides meaningful tax savings through a multi-step calculation process.

Current deduction rates (2025 tax year):

37.5% deduction on FDII
Results in 13.125% effective tax rate (instead of 21%)
Applies to tax years through December 31, 2025

Significant 2026 changes: The One Big Beautiful Bill Act, enacted in 2025, significantly restructured these rules. For tax years beginning after December 31, 2025:

Name change: FDII becomes FDDEI (Foreign-Derived Deduction Eligible Income)
Lower deduction rate: Drops from 37.5% to 33.34%, increasing the effective tax rate from 13.125% to 14%
Simplified calculation: Eliminates the Qualified Business Asset Investment (QBAI) component and removes the complex deemed intangible income (DII) multiplication
Narrower income eligibility: Income from selling intangible property or depreciable assets no longer qualifies
Positive change: Interest and research & experimentation (R&E) expenses no longer need to be allocated against FDDEI income, potentially increasing benefits for some corporations

The basic calculation formula:

Calculate deduction-eligible income (DEI)
Determine deemed intangible income (DII)
Apply the foreign-derived ratio (FDDEI ÷ DEI)
Multiply the result by the deduction percentage

Critical limitation: If the sum of your FDII and GILTI inclusions exceeds taxable income, the Section 250 deduction is limited to your taxable income. This prevents the deduction from creating or increasing a net operating loss.

Example calculation: Your C corporation earns $500,000 in total income. After exclusions and deductions, you have $400,000 in DEI. Of this, $300,000 comes from foreign sales (FDDEI). Your deemed intangible income (after subtracting deemed tangible return) is $250,000. Your FDII would be: $250,000 × ($300,000 ÷ $400,000) = $187,500. The FDII deduction: $187,500 × 37.5% = $70,313.

How Do I Report FDDEI and Claim the Deduction?

C corporations claiming the Section 250 deduction must file Form 8993 with their corporate tax return.

Filing requirements:

Attach Form 8993 to Form 1120 (U.S. Corporation Income Tax Return)
File by your corporate tax deadline (typically April 15, or October 15 with extension)
Maintain detailed documentation supporting foreign use determinations
Keep records proving customer locations and intended product use

Documentation you’ll need:

Revenue allocation between domestic and foreign sales
Customer location records and contracts
Proof of foreign use for licensed intellectual property
Asset basis calculations for qualified business property
Related party transaction documentation

Professional guidance recommended: The complexity of FDDEI calculations, their interaction with GILTI provisions, and the potential for significant penalties make professional tax preparation essential for most C corporations.

Many corporations discover optimization opportunities through expert review of their foreign-derived income classifications and documentation practices.

What Should I Focus On Instead?

For American entrepreneurs abroad who don’t operate C corporations, individual expat tax strategies offer far more relevant benefits.

Individual tax strategies that typically provide greater value:

Foreign Earned Income Exclusion: Exclude up to $130,000 of foreign earnings (2025 tax year)
Foreign Tax Credit: Dollar-for-dollar credit for foreign taxes paid
Treaty benefits: Reduced withholding rates and special provisions
Business expense deductions: Equipment, travel, home office, and professional services

Business structure considerations: Many expat businesses deliberately use structures that allow pass-through taxation. This enables owners to claim individual expat tax benefits, which often prove more valuable than corporate deductions.

Qualifying for the Foreign Earned Income Exclusion

To claim the FEIE, you must pass either the physical presence test (330 days abroad in any 12-month period) or the bona fide residence test (full calendar year of foreign residence). Most expats combine the FEIE with other benefits to eliminate their U.S. tax liability.

You’ll file Form 2555 with your individual tax return to claim the exclusion.

When C corporation status might make sense:

Very profitable businesses (generating well over $130,000 annually)
Substantial intellectual property licensing income to foreign markets
Multiple shareholders require a corporate governance structure
Plans for outside investment or eventual sale

However, even profitable businesses should carefully analyze both current tax savings and future implications before converting to C corporation status.

Frequently Asked Questions About FDDEI

Should I convert my LLC to a C corporation for FDII benefits?

For most expat businesses, no. The Foreign Earned Income Exclusion, combined with pass-through taxation, usually provides better overall results. C corporation status only makes sense for very profitable businesses with substantial foreign IP licensing income.

Can my foreign corporation claim FDII benefits?

No. FDII benefits only apply to U.S. C corporations. Foreign corporations face different rules, including potential controlled foreign corporation regulations if you own a majority stake.

What if I’m behind on my business tax filings?

The complexity of FDII calculations makes catching up particularly challenging without professional help. If you’re behind, focus first on getting current, then evaluate whether FDII benefits apply to your situation. For businesses years behind on filing, Streamlined Filing Procedures may offer a path forward.

How do FDII and GILTI interact?

Both calculations share components and limitations. C corporations with controlled foreign corporations must handle both sets of rules simultaneously. The combined complexity is precisely why professional guidance becomes essential.

Your Next Steps with Foreign-Derived Deduction Eligible Income

Most American expat business owners can focus on individual tax strategies rather than FDDEI calculations. If you operate as an individual, LLC member, partnership, or S corporation shareholder, prioritize optimizing your personal expat tax situation through proven strategies like the Foreign Earned Income Exclusion or Foreign Tax Credit.

If you do operate a C corporation with significant foreign income from intellectual property or tangible goods sales, the Section 250 deduction could provide substantial tax savings. Professional guidance helps you handle the calculations correctly, maintain proper documentation, and avoid costly errors.

Have questions about FDDEI, business structure optimization, or other expat business tax issues? If you’re ready to be matched with a Greenback accountant, click the Get Started button below. For general questions on US expat taxes or working with Greenback, contact our Customer Champions.

Get Help Filing FDDEI Correctly

We’ll determine eligibility, calculate the deduction, and coordinate it with your overall expat tax strategy.

This article provides general information about foreign-derived deduction-eligible income and should not be considered specific tax advice. Tax laws change frequently, and individual situations vary. Consult with a qualified tax professional for advice regarding your specific circumstances.

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