By Anthony Diosdi
Public Law 115-97 (Tax Cuts and Jobs Act of 2017) enacted Internal Revenue Code Section 250 for the allowance of a deduction for the eligible percentage of Foreign-Derived Intangible (“FDII”) and Global Low-Taxed Income (“GILTI”). Form 8993 is utilized to determine the amount eligible for a deduction against FDII and GILTI under Section 250.
All domestic corporations (and U.S. individual shareholders of controlled foreign corporations (“CFCs”)) making a Section 962 election must use Form 8993 to determine the allowable deduction under Section 250. This article will go line by line through the Form 8993 to determine how a Section 250 deduction is determined. This article is based on the Internal Revenue Service (“IRS”) instructions to Form 8993.
Internal Revenue Code Section 250 Deduction
Effective for taxable years of foreign corporations (and individuals making a Section 962 election) after 2017, Internal Revenue Code Section 250 allows a domestic C corporation a deduction for the portion of the domestic corporation’s FDII and GILTI income. Specifically, domestic corporations are allowed to deduct 37.5 of the corporation’s FDII And 50 percent of the domestic corporation’s GILTI after a gross-up under Section 78 of the Internal Revenue Code. Form 8993 consists of four parts. We will discuss each part of the Form 8993 below.
Part I. Determining Deduction Eligible Income
Part I of the Form 8993 is used to determine the Deduction Eligible Income (“DEI”) of the domestic corporation. DEI means, with respect to any domestic corporation, the excess (if any) of the gross income of the corporation less exclusions, over deductions (including taxes) properly allocable to such gross income.
Line 1. Gross Income
The preparer must include all the gross income of the foreign corporation on line 1.
Line 2. Exclusions
For lines 2a through 2f, the preparer must exclude the following items of income from the amount enter on line 1 (gross income):
1. Any amount included in the gross income of such corporation under Section 951(a) (the pro rata share of the foreign corporation’s subpart f income or Section 956 income);
2. Any amount included in the gross income of such corporation under Section 951A (GILTI inclusions);
3. Any financial services income (as defined under Section 904(d)(2)(D)) of such corporation;
4. Any dividend received from a CFC with respect to which the corporation is a U.S. shareholder as defined under Section 951(a);
5. Any domestic oil and gas extraction income. The term “domestic oil and gas extraction income” means income described in Section 907(c)(1) determined by substituting “within the United States” for “without the United States;”
6. Any foreign branch income (as defined in Section 904(d)(2)(j).
Line 3. Total Exclusions
For line 3, the preparer must add lines 2a through 2f to obtain the total exclusions.
Line 4. Gross Income Less Total Exclusions
For line 4, the preparer must subtract line 3 from line 1.
Line 5. Deductions Properly Allocable
For line 4, the preparer must report the deductions properly allocable to line 4. This is determined by taking the domestic corporation’s gross income entered on line 1 and then reducing by certain items of income, including amounts included in income under subpart F, dividends, received from CFCs and income earned in foreign branches (these amounts are entered on lines 2a through 2f. This amount is further reduced by deductions (including taxes) properly allocated to the income of the foreign corporation.
Line 6. Deduction Eligible Income
For line 5, the preparer must report the “deduction eligible income.” The deduction eligible income of DEI is determined by subtracting limes 5 from line 4.
Part II Determining Deemed Intangible Income (“DII”).
Part II of Form 8993 requires the preparer to determine the domestic corporation’s DII. This is the excess (if any) of the corporation’s deduction eligible income over 10 percent of its qualified business asset investment (“QBAI”). A domestic corporation’s QBAI is the average of its adjusted bases (using a quarterly measuring convention) in depreciable tangible property used in the corporation’s trade or business to generate the deduction eligible income. The adjusted bases are determined using straight line depreciation. A domestic corporation’s QBAI does not include land, intangible property or any assets that do not produce the deductible eligible income.
Line 1. DEI
For line 1, the preparer should enter the DEI from line 6.
Line 2. Deemed Tangible Income Return
For line 2, the preparer must first compute the QBAI (discussed above). Second, the preparer should multiply the QBAI by 10 percent. This amount should be entered on line 2.
Line 3. Deemed Intangible Income
For line 3, the preparer must subtract line 2 from line 1.
Part III. Determining Foreign Derived Ratio
According to the instructions for Form 8993, the Foreign-Derived Ration (“FDR”) is determined by computing the ratio of FDDEI over DEI. This calculation can be expressed by the following formula:
Deemed Intangible Income x Foreign-Derived Deduction Eligible Income
Deduction Eligible Income
This computation is a single calculation performed on a consolidated group basis.
Line 1a. DEI Derived from Sales, Leases, Exchanges, or Other Dispositions of Property of a Foreign Person
For line 1a, the preparer must include DEI derived from the sales, lease, exchange, or other disposition (other than license) of property to any person who is a foreign person which is established to the satisfaction of the IRS it is for foreign use.
Line 2a. DEI Derived from a License of Property to Foreign Person of a Foreign Use
For line 2b, the preparer from the license of property to any person who is a foreign person and which is established to the satisfaction of the IRS is for foreign use.
Line 2c. DEI Derived from Services Provided to a Person or with Respect to Property Located Outside of the United States
For line 2c, the preparer must include DEI derived from services that are established to the satisfaction of the IRS are provided to any person or with respect to property, located outside the United States.
Line 3. DEI
For line 3, the preparer must state the DEI from Part 1, line 6.
Line 4. FDDEI/DEI
For line 4, the preparer should divide line 2 by line 3.
Part IV. Determining FDII and/or GILTI Deduction
For line 1, the preparer should enter the DII from Part 11, line 3.
For line 2, the preparer should enter the product of Part III, line 4.
For line 3a, the preparer should multiply line 1 by line 2.
For line 3b, the amount of GILTI reported on Form 8992, Part II, line 5 should be disclosed.
For line 3c, the preparer should add lines 3a and 3b.
For line 4, the preparer should enter the taxable income of the domestic corporation (determined without regard to the Section 250 deduction).
For line 5, the preparer should subtract the taxable income amount reported on line 4 from the total FDII And GILTI reported on line 3c. If the result on line 5 is zero or negative, the domestic corporation’s taxable income is greater than the sum of its FDII and GILTI, and the deduction under Section 250 is not limited. If however, the amount reported on line 5 is a positive number, the domestic corporation’s taxable income is greater than the sum of its FDII and GILTI, and the domestic corporation’s deduction under Section 250 is limited to taxable income.
For line 6, the preparer should divide line 3a by line 3 and multiply the product by line 5.
For line 7, the preparer must subtract line 6 from line 5.
To determine the product of line 8 or FDII deduction, the preparer must subtract the amount from Part IV, line 6 (FDII reduction), from the amount on Part IV, line 3a (FDII). Then the preparer must multiply the resulting amount by 37.5 percent to obtain the FDII deduction and enter it on line 8.
To determine the product of line 9 or GILTI deduction, the preparer must subtract the amount from Part IV, line 7 (GILTI reduction from the amount on Part IV, line 3b GILTI inclusion). Then, add any amount received by the corporation (or 962 electing individual) that is treated as a dividend under Section 78 attributable to GILTI from Form 1118, Schedule A, column 3(b). Finally, the preparer must multiply this amount by 50 percent.
Claiming a Section 250 deduction is extraordinarily complex. If your domestic corporation is attempting to claim a Section 250 deduction or if you made a 962 election (or you are contemplating making a 962 election) and you would like to claim a Section 250 deduction, you should consult with an attorney well versed in international tax planning and compliance. We provide international compliance assistance and international tax planning services to domestic corporations. We also assist other tax professionals who need guidance regarding international tax compliance matters.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.