Section 250 Sale Exclusion Proposed Rules

On Aug. 20, 2026, the U.S. Department of the Treasury and the IRS published proposed regulations under Section 250 that define when income from certain property dispositions is excluded from DEI and therefore cannot generate foreign-derived deduction eligible income (FDDEI). The proposed regulations generally adopt the framework outlined in Notice 2025-78 while providing additional clarity in several areas. Comments are due Oct. 5, 2026, and Treasury and the IRS expect to finalize the regulations by Jan. 4, 2027. Taxpayers can rely on the proposed regulations before finalization, but only if they and their related parties apply the rules in their entirety and in a consistent manner.

Background

Before the OBBBA, Section 250 generally allowed a domestic corporation a deduction equal to 37.5% of its foreign-derived intangible income (FDII). FDII was computed as deemed intangible income (DII), generally equal to DEI less the deemed tangible income return (DTIR), multiplied by the foreign-derived ratio.

The OBBBA made two separate changes to Section 250 that take effect on two separate timetables. For tax years beginning after Dec. 31, 2025, Section 250 eliminates the FDII, DII, and DTIR concepts and instead allows a 33.34% deduction for FDDEI. FDDEI generally is DEI derived from qualifying foreign sales and certain services provided outside the U.S. DEI is the excess (if any) of a domestic corporation’s gross income determined without regard to certain categories of gross income over the expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income.

The OBBBA also added an additional exclusion from DEI. For sales or other dispositions occurring after June 16, 2025, DEI excludes income and gain from the sale or other disposition of intangible property and other property of a type subject to depreciation, amortization, or depletion by the seller, including deemed sales and Section 367(d) transactions. Before the OBBBA, these gains generally were not excluded. Although Section 250(b)(2)(E) defines the term “sale” broadly to include leases and licenses, the OBBBA changes to Section 250 provide that this definition does not apply for purposes of the new exclusion.

Highlights of the proposed regulations

The proposed regulations clarify what is characterized as a lease or license for purposes of determining whether income or gain is from a sale for purposes of the DEI exclusion. For instance, a transfer labeled as a license could be a sale if it conveys the relevant rights under general federal income tax principles. Even if income is from a transaction respected as a lease or license, it is not included in DEI unless the other Section 250 requirements to be included in DEI or FDDEI are satisfied. For intangible rights, neither the form of consideration nor the transferee’s use would determine the sale-versus-license result.

The proposed regulations add software examples, clarifying a distinction between transfers of underlying intangible rights and sales of copyrighted articles. Treasury Regulation 1.250(b)-3(b)(11) excludes a copyrighted article, such as software copies or digital-content copies, from the definition of intangible property. In one example, sales of software copies delivered electronically or on physical media are not excluded property sales because those copies are not intangible property, among other reasons. A two-year right to use a software copy that is classified as a lease likewise would not be excluded from DEI under this rule. By contrast, transferring the copyright itself could produce excluded property sales income.

Crowe observation

To support the DEI exclusion, software companies should consider tightening contract language and other documentation to clarify underlying intellectual property (IP) rights and substantiate the rights being transferred.

The proposed regulations also add a broad category of “other excluded property” that includes certain tangible property. Property is treated as other excluded property if, in the hands of a person treated as an “excluded seller,” it is or has been treated as a type of property subject to depreciation, amortization, or depletion. An excluded seller is a domestic corporation or partnership (whether domestic or foreign) that sells or otherwise disposes of intangible property or other excluded property. This definition of an excluded seller is broader than the definition in Notice 2025-78, which was limited to domestic corporations only.

Once treated as excluded property, fully depreciated assets, including zero-basis property acquired in a nonrecognition transaction and used in the seller’s business, would remain covered. Previously depreciated property would remain covered even if the property is later refurbished, remanufactured, or reclassified as inventory. According to the preamble of the proposed regulations, comments requesting a remanufacturing exception and a rule limiting the other property exclusion to depreciation recapture were not adopted. The proposed regulations also clarify that property always held as inventory by the seller would not be other excluded property. The proposed regulations include an anti-abuse rule to prevent cleansing a property’s prior use through a basis-carryover transfer with a related party if the transfer has a principal purpose of avoiding the exclusion. A consolidated group example illustrates that both the deferred intercompany gain and the corresponding gain on the latter external sale are excluded property sales income in the year of the external sale.

Crowe observation

Taxpayers seeking Section 250 benefits on sales of business assets might need asset histories across affiliates that track changes in use, fixed-asset records, and nonrecognition transfers to comply with the excluded property rules.

Additionally, the proposed regulations clarify that FDDEI remains a subset of DEI and cannot exceed DEI.

Looking ahead

Taxpayers claiming Section 250 benefits should identify sales and other dispositions occurring after June 16, 2025, involving IP transfers, software transactions, used business assets, assets reclassified as inventory, and basis-carryover related-party transfers. They should consult their tax advisers to determine how the proposed regulations apply to their specific facts and circumstances and whether to rely on the proposed rules. Separate guidance is expected on other changes made by the OBBBA, including deductions properly allocable to DEI and the removal of the DTIR and DII concepts.