FDII is gone. For tax years beginning after December 31, 2025, the export incentive is called Foreign-Derived Deduction Eligible Income, or FDDEI. The deduction rate drops from 37.5% to 33.34%, pushing the effective rate from 13.125% to about 14%. But the base gets bigger and simpler: the 10% tangible-asset haircut is repealed, and interest and R&D costs no longer shrink the base. Many exporters will come out ahead anyway.
FDII vs. FDDEI at a glance
| FDII (through 2025) | FDDEI (2026 forward) | |
|---|---|---|
| Full name | Foreign-Derived Intangible Income | Foreign-Derived Deduction Eligible Income |
| Law | Section 250 (2017) | Section 250 as amended by the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) |
| Tangible asset haircut (QBAI) | 10% deemed return on US tangible assets excluded | Repealed entirely |
| Section 250 deduction | 37.5% | 33.34% |
| Effective corporate rate | 13.125% | About 14% (13.9986%) |
| Interest and R&D allocation | Allocated against the base, shrinking it | Excluded from the base calculation |
| Who claims it | Domestic C corporations | Domestic C corporations |
It is more than a new name
The old name said "intangible" because the formula carved out a deemed 10% return on tangible US assets like factories and equipment. That carveout punished exactly the companies the incentive was meant to help: manufacturers with heavy domestic plants saw their benefit diluted. The new law repeals the carveout, so the "intangible" label no longer fits. The replacement name describes what the rule actually taxes now: deduction-eligible income derived from foreign sales and services.
What counts as FDDEI? Income from property a US company sells to non-US buyers for foreign use, and income from services provided to foreign persons or for foreign-located property. If you export goods or sell services abroad, this is your provision.
The rate math, plainly stated
The Section 250 deduction falls from 37.5% to 33.34% of FDDEI. With the 21% corporate rate, the effective rate is 21% times the 66.66% that remains taxable, which equals 13.9986%, or about 14%. Under FDII it was 21% times 62.5%, or 13.125%.
To see what that means in dollars: on $1 million of FDDEI, the deduction is worth $333,400, leaving $666,600 taxable at 21%, or about $140,000 of tax. Under the old 37.5% rate, the same $1 million produced about $131,250 of tax. The rate increase is real, but as the next section shows, most exporters are not working with the same base anymore.
The base gets bigger and simpler: the part most explainers skip
Two mechanical changes expand what qualifies, and neither shows up in a headline about the rate.
First, the QBAI repeal. Under FDII, you subtracted 10% of your qualified business asset investment before computing the benefit. A manufacturer with a $50 million US plant lost $5 million of base every year to that subtraction. Under FDDEI, that subtraction is gone. Nearly all of a US company's export income can now qualify.
Second, the expense allocation cleanup. Under the old rules, interest expense and R&E costs were allocated against deduction-eligible income, shrinking the base before the deduction applied. The new law excludes both from that allocation. Interest on US debt and domestic research spending no longer eat into the export benefit. Proposed IRS regulations published September 10, 2026 (REG-117273-25) spell out the mechanics, and taxpayers may rely on them in full while they are still proposed.
Together, these two changes mean the 33.34% deduction applies to a larger number than the 37.5% deduction ever did for many companies.
Take a simple example
A US manufacturer has $10 million of export sales income. Under the old FDII rules, it first subtracted a 10% return on its factory assets, say $600,000, and allocated $1 million of interest expense against the export income. Its FDII base was $8.4 million, and the 37.5% deduction was worth about $3.15 million. Under FDDEI, there is no asset subtraction and no interest allocation, so the base is the full $10 million and the 33.34% deduction is worth about $3.33 million. The rate went down, but the bigger base more than made up for it. Your numbers will differ, but the direction is what matters: compare base against base, not just rate against rate.
Who gains and who loses
Gainers: manufacturers with heavy US plants and equipment, who lost the most to the old 10% haircut. Companies with significant US interest expense or domestic R&D, whose costs no longer shrink the base. Service exporters, whose income was always mostly eligible and now faces simpler math.
Roughly neutral: asset-light exporters with little debt and little R&D. For them the base barely changes, so the rate cut from 37.5% to 33.34% is a small net cost.
Losers and watch-outs: companies planning to sell intellectual property or depreciable business property. Proposed regulations from August 2026 would exclude gains from sales of intangible property and depreciable property from deduction-eligible income entirely. If an IP sale was part of your export planning, that door may be closing.
The trap: the taxable income limitation
Here is the modeling wrinkle almost nobody mentions. The Section 250 deduction is limited by the company's taxable income. If your 2026 return shows a very large domestic R&E deduction, for example from catching up on previously amortized research costs under the restored Section 174 expensing rules, that big deduction can shrink or even wipe out your FDDEI benefit. The two provisions interact, and the interaction can run against you. Model them together, not separately. In some cases it may even help to keep some R&E costs on amortization in 2026 rather than deducting everything at once. Raise this with your tax team early in the year, because once the R&E costs are deducted there is no way to get the lost FDDEI benefit back for that year.
Can you use IC-DISC and FDDEI together?
Often yes, and this is where exporter planning gets interesting. You cannot claim both incentives on the same dollar of income, but a C corporation can split its export income: IC-DISC treatment for tangible goods and high-margin product lines, FDDEI for services, royalties, or other qualifying income. Each incentive has its own rules and limits, so the right split depends on your product mix and margins. Our IC-DISC vs. FDII guide compares the two regimes head to head, and our IC-DISC hub covers the commission mechanics. If you already run an IC-DISC, ExPortal is our platform for managing the commission calculations. New to the concept? Start with what an IC-DISC is.
Your 2026 exporter checklist
First, recompute your deduction-eligible income under the new rules: no QBAI subtraction, no interest or R&E allocation against the base. Second, test the taxable income limitation, especially if you are recovering old R&E costs in 2026. Third, review any planned IP or asset sales against the proposed exclusion before you count on the FDDEI benefit. Fourth, if you run an IC-DISC, model the hybrid split between IC-DISC and FDDEI income rather than defaulting to one or the other. Fifth, track the proposed allocation regulations toward finalization, since you are allowed to rely on them now but the final version controls later years. Exporters that redo this math before year-end will know whether 2026 is a bigger benefit, a smaller one, or just a different one. For the companion change on the foreign-subsidiary side, see our GILTI tax strategy guide.
Frequently asked questions
Does FDDEI apply to my 2025 tax return?
No. FDDEI applies to tax years beginning after December 31, 2025. A calendar-year company files 2025 under the old FDII rules and 2026 under FDDEI.
I am an S corporation. Can I claim the FDDEI deduction?
No. Like FDII before it, the Section 250 deduction for FDDEI is available to domestic C corporations. S corporations, partnerships, and sole proprietorships generally cannot claim it directly. Exporters organized as pass-throughs often look at the IC-DISC instead, which is built for them.
We manufacture in the US with a big factory. Are we better off under FDDEI?
Very likely yes. The old 10% tangible-asset haircut hit manufacturers hardest, and it is gone. Combined with the removal of interest and R&E allocation against the base, most capital-intensive exporters see a larger benefit even at the lower 33.34% rate. Run your own numbers to confirm.
Can the FDDEI deduction exceed my taxable income?
No. The Section 250 deduction is limited by taxable income, and it cannot create or increase a net operating loss for this purpose. This is the limitation to model carefully if you also have large R&E deductions in 2026.
Are the September 2026 proposed regulations final?
No. They are proposed, but taxpayers may rely on them in their entirety before final regulations are published. Keep watching for the final version, since it will control later tax years.
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