IRS Form 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 incomes. IRS Form 8993 is the essential tool for calculating this deduction, specifically for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI). This article breaks down everything you need to know about Form 8993, including eligibility, calculations, and recent updates, to help optimize your tax strategy.
Whether you’re a domestic corporation or a U.S. expat business owner, understanding Form 8993 can lead to significant tax savings. Let’s dive into the details.
What Is the Section 250 Deduction?
The Section 250 deduction, introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, allows eligible taxpayers to deduct a portion of their FDII and GILTI. This provision aims to encourage U.S. companies to keep intangible assets and related income within the country rather than shifting them abroad. It neutralizes tax considerations in deciding whether to earn intangible income through U.S.-based operations or controlled foreign corporations (CFCs).
For tax years beginning before January 1, 2026, the deduction rates are:
- 37.5% for FDII
- 50% for GILTI (including the Section 78 gross-up)
These rates drop to 21.875% for FDII and 37.5% for GILTI starting in 2026. If the sum of FDII and GILTI exceeds taxable income, the deduction is limited to taxable income, with proportional reductions applied.
Understanding FDII: Foreign-Derived Intangible Income
FDII represents the portion of a domestic corporation’s intangible income derived from serving foreign markets. It’s calculated as the excess of income from export sales over a fixed 10% return on tangible depreciable assets (Qualified Business Asset Investment or QBAI).
Key elements of FDII include:
- Income from sales of property to foreign persons for use outside the U.S.
- Income from services provided to foreign persons or regarding property located abroad.
FDII is part of Deduction Eligible Income (DEI), adjusted by the foreign-derived ratio (FDDEI/DEI). This deduction effectively lowers the tax rate on FDII to 13.125% through 2025, making it attractive for U.S. exporters.
Understanding GILTI: Global Intangible Low-Taxed Income
GILTI targets income from intangible assets held in low-tax foreign jurisdictions. It’s included in the gross income of U.S. shareholders of CFCs under Section 951A. GILTI is essentially the excess of a CFC’s “tested income” over a 10% return on its tangible assets (QBAI).
U.S. shareholders owning at least 10% of a CFC must include GILTI in their income, similar to Subpart F rules. The Section 250 deduction reduces the effective tax rate on GILTI to 10.5% through 2025, after applying an 80% foreign tax credit.
Who Needs to File IRS Form 8993?
Form 8993 must be filed by:
- Domestic corporations (excluding REITs, RICs, and S corporations) claiming the Section 250 deduction.
- U.S. individual shareholders of CFCs who make a Section 962 election, allowing them to be taxed as a corporation and access the deduction.
This is particularly beneficial for U.S. expats owning foreign businesses, as it can reduce their effective tax rate on GILTI to around 10.5% instead of individual rates up to 37%. Partnerships may also need to provide relevant information on Schedule K-3.
Attach Form 8993 to your income tax return (e.g., Form 1120) and file by the due date, including extensions. For 2025 tax returns, the deadline is March 17, 2026, or September 15, 2026, with an extension.
How to Fill Out IRS Form 8993: Step-by-Step Guide?
Form 8993 is divided into three parts. Here’s a simplified overview based on the latest instructions.
Part I: Determining DEI and DII
- Enter gross income (Line 1).
- Subtract exclusions like Subpart F income, GILTI, financial services income, CFC dividends, etc. (Line 2).
- Calculate gross DEI (Line 4).
- Subtract allocable deductions (Line 5) to get DEI (Line 6).
- Compute DTIR as 10% of QBAI (Line 7).
- DII = DEI – DTIR (Line 8).
Part II: Determining FDDEI
- Report foreign-derived gross receipts from sales and services (Lines 9a-9b).
- Subtract cost of goods sold (Lines 10a-10b) to get gross FDDEI (Line 11).
- Subtract allocable deductions, including interest, R&E, and others (Lines 12-17).
- FDDEI = Gross FDDEI – Total Deductions (Line 18).
Part III: Determining FDII and GILTI Deduction
- Foreign-Derived Ratio = FDDEI / DEI (Line 20, capped at 1).
- FDII = DII × Ratio (Line 21).
- Enter GILTI from Form 8992 (Line 22).
- Total FDII + GILTI (Line 23).
- If exceeds taxable income (Line 24), compute excess (Line 25) and proportional reductions (Lines 26-27).
- FDII Deduction = (FDII – Reduction) × 37.5% (Line 28).
- GILTI Deduction = [(GILTI – Reduction) + Section 78 Gross-Up] × 50% (Line 29).
Use worksheets for reductions and include partnership shares where applicable.
| Key Calculation | Formula | Purpose |
|---|---|---|
| DEI | Gross Income – Exclusions – Allocable Deductions | Base for FDII and DII |
| DII | DEI – (10% × QBAI) | Intangible income portion |
| FDDEI | Foreign Gross Receipts – COGS – Allocable Deductions | Foreign-derived eligible income |
| FDII | DII × (FDDEI / DEI) | Deductible FDII amount |
| Section 250 Deduction | (Adjusted FDII × 37.5%) + (Adjusted GILTI × 50%) | Total tax relief |
Recent Updates and Changes for 2026
As of the December 2025 revision of Form 8993 instructions:
- New exclusions under Public Law 119-21 for DEI related to sales or dispositions of intangible or depreciable property after June 16, 2025 (excludes leases/licenses).
- Deduction rates reduce starting in 2026: 21.875% for FDII (effective rate ~16.4%) and 37.5% for GILTI (effective rate ~13.125%).
- Final regulations (T.D. 9901) incorporated, emphasizing documentation for foreign use and substantiation.
The TCJA provisions, including Section 250, may face changes or extensions post-2025, so monitor IRS updates.
Benefits for U.S. Expats and Business Owners
U.S. expats with CFCs can elect Section 962 to claim the Section 250 deduction, potentially slashing taxes on foreign business income. This is ideal for those with GILTI exposure, as it allows the 50% deduction and foreign tax credits.
Common FAQs About IRS Form 8993
What if my DEI is negative?
If DEI is zero or negative, the FDII deduction is zero.
Can individuals file Form 8993?
Only via a Section 962 election for CFC shareholders.
Where do I report the deduction?
On Form 1120, Schedule C, or equivalent for individuals.
Conclusion
IRS Form 8993 is a powerful tool for claiming the Section 250 deduction, helping U.S. businesses and expats minimize taxes on FDII and GILTI. By accurately calculating DEI, FDDEI, and reductions, you can unlock substantial savings. Always consult a tax professional for personalized advice, especially with upcoming rate changes in 2026. For the official form and instructions, visit the IRS website. Stay compliant and optimize your global tax strategy today.