On July 15, the U.S. Department of the Treasury and the IRS published final regulations addressing the computation of the deduction for foreign-derived intangible income (FDII) under IRC Section 250. Enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) and effective for taxable years beginning on or after Jan. 1, 2018, Section 250 allows corporate taxpayers a deduction equal to 37.5% of their FDII and 50% of their global intangible low-taxed income inclusion under Section 951A. While the regulations do not provide the relief many taxpayers wanted, they mostly improve on the proposed regulations issued in March 2019. What follows focuses on the easing of the documentation rules. A subsequent article will focus on aspects of the final regulations relating to computation of the deduction.
In order to claim an FDII deduction under Section 250, a corporate taxpayer must substantiate with specific documentation that qualifying sales or services are 1) provided to foreign persons (if a sale of property) and 2) for foreign use or benefit. Under the proposed regulations, in many cases taxpayers were required to obtain information not ordinarily collected as part of a normal business transaction. The proposed regulations also provided a transition rule that allowed taxpayers to use any reasonable method for documentation for tax years beginning before March 4, 2019.
Substantiation that recipient is a foreign person
The final regulations ease the substantiation documentation rules by allowing taxpayers in certain circumstances to rely on information already required to be maintained by the corporation as substantiation rather than requiring specific documentation. For instance, the final regulations allow taxpayers to presume the recipient is a foreign person if the sale is a retail sale and the product is delivered to a foreign address or, for intangible property, if the purchaser’s billing address is outside of the U.S.
The final regulations also expand the documentation exception for small businesses. Under the proposed regulations, a small business included taxpayers with gross receipts up to $10 million. The final regulations increased the threshold to $25 million.