Taking advantage of the 13% effective rate in 2025 before it increases
The foreign-derived intangible income (FDII) provision allows domestic corporations to claim a deduction on income earned from selling, leasing, or licensing products to non-U.S. persons for use outside the U.S., as well as from providing services to individuals or concerning property located outside the U.S. Enacted as part of the rehaul of international taxation contained in 2017’s Tax Cuts and Job Act, this 37.5% deduction effectively reduces the corporate tax rate from 21% to approximately 13% for qualifying income. However, this reduced rate is subject to change at the end of 2025 pending federal action.
Which types of income qualify for the FDII deduction?
- Selling property to foreign third parties for use outside the U.S.
- Selling property to related parties that resell it to unrelated foreign buyers for use abroad
- Licensing intangible property to a foreign subsidiary for marketing and selling products to unrelated foreign customers
- Providing services to persons located outside the U.S.
Why prioritize FDII in 2025?
FDII offers an annual, permanent benefit that may provide cash tax savings and positively impact your financial statement by lowering the effective tax rate.
Currently, the FDII deduction is 37.5%, resulting in an effective tax rate of 13.125% on eligible income. However, starting after Dec. 31, 2025, the deduction will decrease to 21.875%, raising the effective tax rate to 16.406%.
The increase in the effective rate would be a significant shift, raising the tax burden on FDII income streams by more than three percentage points and making it costly to delay FDII-eligible transactions. Taxpayers have a limited window to move income into 2025 and achieve a permanent benefit using the current deduction.
With Republicans controlling both chambers of Congress and the presidency, there is potential for the lower rate to be extended. But there are hurdles. Republicans are faced with competing priorities and are not currently focused on relief for the international changes. In addition, the implementation of the 15% global minimum tax under the OECD’s Pillar 2 in other countries will undermine any benefit from keeping the FDII rate at 13.125%. Taxpayers should consider the present opportunity to maximize FDII under the favorable 2025 rate and avoid potential rate hikes that could erode future benefits.
Accelerating income into 2025 to benefit from FDII can position your business for proactive, ”no-regrets” planning, ensuring you are well-prepared for future developments. Even if the rate remains the same, accelerating FDII-eligible sales or services may increase the FDII deduction because accelerating income often does not accelerate the offsetting expenses — allowing for a benefit even when rates don’t change.
Furthermore, companies considering offshoring intellectual property should plan to complete the transfer in 2025 to include any income prior to expected rate increases, providing the best opportunity for a lower effective tax rate and reduced tax cash cost.
How to optimize your deduction for 2025
Reverse tax planning, such as accelerating eligible income and deferring relevant deductions to pay tax on the eligible income at current effective rate of 13.125%, can offer a permanent benefit before the reduction of FDII deductions.
Tax accounting methods, elections, accelerated transactions and other strategies can provide significant planning flexibility to maximize FDII deductions under the favorable 2025 rate. To fully leverage these opportunities, it is crucial to work with qualified, multidisciplinary professionals who can model potential outcomes, weigh associated risks and provide comprehensive, tailored advice.
Revenue recognition
ASC 606 and Section 451 regulations offer options to accelerate eligible income, enhancing FDII optimization with procedural flexibility. For instance, the full-inclusion method for advance payments lets businesses bring forward income into 2025.
Expense recognition
The tax code offers various options to control the timing of deductions. Identifying the right strategies to shift offsetting deductions to future years, allows you to take full advantage of the higher FDII deduction rate in 2025. For example, businesses may consider deferring compensation-related payments or renegotiating contracts to delay payments or events, effectively shifting expenses from 2025 to future years.
Fixed assets
Fixed assets are a major cost for many businesses, and tax rules offer flexibility to adjust taxable income. Organizations can optimize FDII deductions by implementing the following:
- Identification of improper methods used in prior years
- Accurate identification and treatment of repair and maintenance costs
- Identification and calculation of partial disposal costs
- Real-time cost segregation studies
Certain planning strategies offer cash tax benefits that increase significantly when FDII impact is considered, potentially generating long-term tax savings.
What now?
Consider the following to optimize your potential benefit.
- Increase the amount of eligible income by reviewing sales contracts and transfer pricing to identify eligible foreign income.
- Implement and manage tax strategies to accelerate eligible income for 2025 to increase the potential benefit under the existing higher FDII deduction rate.
- Analyze fixed assets to reduce your net tangible asset base for more favorable treatment
- Manage the complex expense allocation and apportionment rules to optimize amount of FDII computed by finding opportunities to allocate deductions.
Contacts:
David E. Sites
National Managing Principal, International Tax
Washington National Tax Office
Grant Thornton Advisors LLC
David leads the firm's International Tax practice, which focuses on global tax planning, cross border merger and acquisition structuring, and working with global organizations in a variety of other international tax areas.
Washington DC, Washington DC
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Retail & consumer brands
Service Experience
- Tax
- International Tax
Cory Perry
Washington National Tax Office
Principal, Tax Services
Grant Thornton Advisors LLC
Washington DC, Washington DC
Industries
- Technology, media & telecommunications
- Manufacturing, Transportation & Distribution
- Private equity
Service Experience
- Tax
Content disclaimer
This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
For additional information on topics covered in this content, contact a Grant Thornton professional.
Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Trending topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share