FDII / FDDEI Deduction Under OBBBA: Who Qualifies and How Much You Save
Under the One Big Beautiful Bill Act (OBBBA), the Foreign-Derived Intangible Income (FDII) deduction has been renamed and rebuilt as the Foreign-Derived Deduction Eligible Income (FDDEI) deduction. The deduction rate drops from 37.5% to 33.34%, which fixes a permanent effective federal tax rate of 14% on qualifying foreign income. The rate is slightly higher than before, but the income base that qualifies is now much wider, so many exporters end up saving more.
This guide covers what changed, who qualifies, what income counts, what is now excluded, and what the deduction is worth in real numbers.
What is the FDDEI deduction?
FDDEI is a tax break for US C corporations that earn income from foreign markets. It lets a qualifying corporation deduct 33.34% of its eligible foreign-derived income, which lowers the effective federal tax rate on that income from 21% to 14%.
It is the same incentive that used to be called FDII. The Tax Cuts and Jobs Act of 2017 created FDII under Section 250 to reward US companies for serving foreign customers from a US base. OBBBA kept that goal, renamed the deduction, and changed how it is calculated.
What changed under OBBBA?
Five changes matter most:
- New name. Foreign-Derived Intangible Income (FDII) is now Foreign-Derived Deduction Eligible Income (FDDEI).
- Lower, permanent rate. The Section 250 deduction falls from 37.5% to 33.34%, fixing the effective rate at 14%. Before OBBBA, the deduction was scheduled to shrink to 21.875% in 2026, which would have pushed the effective rate to about 16.4%. That increase no longer happens.
- No more QBAI haircut. The old rules subtracted a deemed 10% return on your tangible assets before calculating the benefit. That subtraction is gone.
- Friendlier expense rules. Interest and research and experimental (R&E) expenses no longer reduce your eligible income base.
- Two new income exclusions. Gains from selling intellectual property and gains from selling depreciable property no longer qualify.
Most of these changes apply to tax years beginning after December 31, 2025. The new exclusions on IP and depreciable property apply to dispositions after June 16, 2025.
Who qualifies for the FDDEI deduction?
The FDDEI deduction is available only to companies taxed as US C corporations. S corporations, partnerships, and sole proprietors do not qualify directly. An LLC qualifies only if it has elected C corporation tax treatment.
Beyond entity type, the income has to be foreign-derived. A qualifying corporation earns it by serving markets outside the US, through:
- Selling, leasing, or licensing property to a foreign person for foreign use.
- Providing services to people or businesses located outside the US, or services tied to property abroad.
If you run a US C corporation and a meaningful share of your revenue comes from customers outside the US, you are in the zone where FDDEI is worth modeling.
What income qualifies as foreign-derived?
The test has two parts. First, the income has to be deduction-eligible, meaning it is not in one of the excluded categories. Second, it has to be foreign-derived, meaning the customer, user, or benefit sits outside the US.
That second part is a documentation question. To support the foreign nature of a transaction, keep records such as contracts, shipping documents, user location data, and evidence of where a service was delivered or consumed. The deduction depends on being able to show foreign use, so the paperwork is not optional.
What income is now excluded under OBBBA?
OBBBA narrowed the eligible base by adding two exclusions to the deduction-eligible income categories:
- IP sales. Income or gain from selling or transferring intellectual property, including transfers covered by Section 367(d), no longer qualifies.
- Depreciable property sales. Income or gain from selling property subject to depreciation, amortization, or depletion is excluded.
Both exclusions apply to dispositions after June 16, 2025. The practical effect is that ongoing export and service income still qualifies, but one-time gains from selling IP or equipment do not.
How much can you save?
The headline number is simple: $7,000 of federal tax saved for every $100,000 of qualifying foreign income. That is the gap between the 21% corporate rate and the 14% effective FDDEI rate.
Here is how it works on $1 million of qualifying foreign income:
- Deduction: 33.34% of $1,000,000 = $333,400
- Taxable income after the deduction: $666,600
- Federal tax at 21%: about $140,000
- Federal tax with no deduction: $210,000
- Savings: about $70,000
The actual result depends on your entity type, how income is sourced, how expenses are allocated, and whether any income falls into an excluded category.
FDII vs FDDEI: what actually changed
Why some companies save more under FDDEI even with a lower rate
The deduction rate dropped, but two of the old penalties disappeared.
The first was the QBAI haircut. Under FDII, you had to subtract a deemed 10% return on your US equipment and buildings before claiming the benefit. Capital-heavy businesses lost a large chunk of the deduction this way. OBBBA removed it, so manufacturers and asset-intensive companies can now claim a much larger base.
The second was expense allocation. Interest and R&E costs used to be allocated against your foreign income, which shrank or even wiped out the deduction for leveraged or research-heavy companies. Those costs no longer reduce the FDDEI base.
For many exporters, a wider base on a slightly lower rate produces a bigger absolute deduction than the old rules ever did.
What this means for cross-border founders
If you incorporated a US C corporation and sell to customers outside the US, FDDEI is the incentive built for you. A Delaware C-corp serving users in India, Europe, or anywhere outside the US can treat that revenue as foreign-derived, as long as the records back it up. The deduction does not require US manufacturing, so software and service businesses can qualify too.
Three questions decide whether it is worth pursuing:
- Are you taxed as a US C corporation?
- Is a real share of your revenue from foreign customers or foreign use?
- Can your books prove the foreign nature of that income?
If the answer to all three is yes, the deduction is on the table and worth modeling before you file.
Frequently asked questions
Is FDDEI the same as FDII?
Yes. FDDEI is the renamed and restructured version of the FDII deduction under OBBBA. It is the same Section 250 incentive with new mechanics.
What is the FDDEI effective tax rate?
14% on qualifying foreign-derived income, set permanently by OBBBA. The old FDII rate was 13.125%.
Can an LLC or S corporation claim FDDEI?
Only if taxed as a C corporation. The deduction is limited to US C corporations, so S corporations, partnerships, and sole proprietors do not qualify directly. An LLC qualifies only if it has elected C corporation tax treatment.
When do the new rules take effect?
Most changes apply to tax years beginning after December 31, 2025. The exclusions for IP and depreciable property sales apply to dispositions after June 16, 2025.
Does FDDEI require US manufacturing?
No. Unlike some export incentives, FDDEI does not require domestic production. Service businesses and software companies can qualify if the benefit is foreign.
How much is FDDEI worth?
About $7,000 in federal tax savings for every $100,000 of qualifying foreign income.
OBBBA did not remove the export incentive, it reshaped it. FDDEI is still a meaningful tax break for US corporations selling into foreign markets, but the winners under the new system are not always the same as under the old one. A small change in sourcing facts or expense allocation can move the outcome a lot, so this is a good time to model the deduction rather than assume the old FDII playbook still applies.
If you run a US C corporation with foreign revenue and want to know whether FDDEI applies to your numbers, we can help you map your eligible income and model the deduction before filing. We are the US finance and compliance layer for cross-border founders, and this is exactly the kind of question we handle every day.
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