IRS Instruction 8993 – In today’s global economy, U.S. businesses with international operations often face complex tax rules. One key provision is the Section 250 deduction, which helps reduce taxes on certain foreign-derived income. IRS Instruction 8993 provides detailed guidance on completing Form 8993 to claim this deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI). This article breaks down the essentials, including eligibility, calculations, and recent updates, to help taxpayers navigate these instructions effectively.
What Is the Section 250 Deduction?
The Section 250 deduction, introduced by the Tax Cuts and Jobs Act of 2017 (Public Law 115-97), allows eligible U.S. entities to deduct a portion of their FDII and GILTI. It aims to level the playing field for domestic corporations by encouraging U.S.-based intangible income generation tied to foreign markets.
For tax years beginning before January 1, 2026, the deduction rates are:
- 37.5% of FDII
- 50% of GILTI (plus any related Section 78 gross-up)
After 2025, these rates drop to 21.875% for FDII and 37.5% for GILTI. However, the total deduction is limited to the taxpayer’s taxable income if the sum of FDII and GILTI exceeds it.
This provision neutralizes tax incentives that might otherwise push companies to shift intangible assets abroad, supporting U.S. economic growth through exports and foreign services.
Key Terms Explained in IRS Instruction 8993
Understanding the terminology is crucial for applying IRS Instruction 8993 correctly. Here’s a breakdown of essential concepts:
- Foreign-Derived Intangible Income (FDII): This represents the portion of a corporation’s Deduction Eligible Income (DEI) derived from selling property or providing services to foreign persons for use outside the U.S. It excludes certain items like subpart F income and focuses on intangible returns from foreign markets.
- Global Intangible Low-Taxed Income (GILTI): Defined under Section 951A, GILTI captures excess returns from foreign operations attributable to intangibles. It’s calculated on Form 8992 and then used in Form 8993.
- Deduction Eligible Income (DEI): Gross income minus exclusions (e.g., subpart F inclusions, dividends from CFCs, foreign branch income) and allocable deductions.
- Deemed Intangible Income (DII): DEI minus Deemed Tangible Income Return (DTIR), where DTIR is 10% of Qualified Business Asset Investment (QBAI).
- Foreign-Derived Deduction Eligible Income (FDDEI): DEI specifically from foreign-derived sales or services, substantiated per IRS regulations.
- Foreign-Derived Ratio (FDR): FDDEI divided by DEI (capped at 1).
- Qualified Business Asset Investment (QBAI): Average adjusted basis of depreciable tangible property used in the business.
These definitions, drawn from Regulations sections 1.250(b)-1 through 1.250(b)-6, ensure accurate computation.
Who Must File Form 8993?
According to IRS Instruction 8993, domestic corporations (excluding REITs, RICs, and S corporations) must file Form 8993 if claiming the Section 250 deduction. U.S. individuals electing under Section 962 for CFC income also qualify.
Partners in partnerships should refer to Regulations sections 1.250(b)-1(e) and 1.250(b)-3(e) for treatment. Attach the form to your income tax return by the due date, including extensions.
U.S. expats with foreign business income may benefit, as the deduction can lower effective tax rates on GILTI and FDII.
Step-by-Step Guide to Completing Form 8993
IRS Instruction 8993 outlines a structured process for calculating the deduction. Follow these steps based on the form’s parts:
Part I: Determining DEI and DII
- Enter gross income (Line 1).
- Subtract exclusions like subpart F income, GILTI inclusions, and post-June 16, 2025, gains from intangible or depreciable property sales (Line 2).
- Calculate gross DEI (Line 4).
- Deduct allocable expenses (Line 5).
- Compute DEI (Line 6).
- Calculate DTIR as 10% of QBAI (Line 7).
- Determine DII (Line 8).
If DEI or DII is zero or negative, the FDII deduction is zero.
Part II: Determining FDDEI
Break down foreign-derived gross receipts by category (general property, intangible property, services) on Lines 9a–9b.
- Subtract cost of goods sold (Lines 10a–10b).
- Allocate deductions, including interest and R&E expenses (Lines 12–17).
Part III: Determining FDII and/or GILTI Deduction
- Enter FDDEI (Line 19).
- Calculate FDR (Line 20).
- Compute FDII (Line 21).
- Input GILTI from Form 8992 (Line 22).
- Check for excess over taxable income and apply reductions (Lines 23–27).
- Apply deduction rates: 37.5% for FDII (Line 28) and 50% for GILTI (Line 29).
For partnerships, include distributive shares from Schedule K-3.
Recent Updates and Changes
As of the December 2025 revision of IRS Instruction 8993, key changes include:
- Exclusions for income from sales of intangible or depreciable property after June 16, 2025, per Public Law 119-21 (One Big Beautiful Bill Act).
- Incorporation of final regulations (T.D. 9901) from July 2020.
For 2023 and 2024 tax years, no major shifts were noted beyond these, but always check IRS.gov for the latest. Deduction rates remain unchanged until 2026.
Tips for Compliance and Optimization
- Substantiation: Maintain records to prove foreign use and FDDEI eligibility.
- Related Forms: Use Form 8992 for GILTI and attach it to Form 8993.
- Amendments: File corrected forms if needed.
- Professional Advice: Consult a tax expert for complex scenarios, especially involving CFCs or partnerships.
By leveraging the Section 250 deduction via Form 8993, eligible taxpayers can significantly reduce their U.S. tax burden on foreign intangible income. Stay informed through official IRS resources to ensure compliance and maximize benefits.