In this video, I discuss foreign derived intangible income deduction as covered on the tax compliance and planning TCP CPA exam.
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The Tax Cuts and Jobs Act introduced a deduction aimed at promoting U.S. corporations' export activities. This deduction, applicable to a portion of what's termed as Foreign-Derived Intangible Income (FDII), encourages businesses to engage in and expand their international trade. FDII essentially represents earnings from selling goods or services to non-U.S. entities for use outside of the United States. Here's a breakdown of what qualifies for FDII:

Sales of Goods: When a U.S. company sells products to buyers who are not U.S. residents, and these products are intended for use abroad.
Provision of Services: When a U.S. company provides services to non-U.S. persons or in relation to property situated outside the U.S. This category also includes certain types of digital services.
Transactions with Related Foreign Parties: When a U.S. company sells products to a related entity that is not based in the U.S., and this entity in turn sells the products to an unrelated non-U.S. entity for use outside the U.S.
For tax years starting before 2026, corporations can deduct 37.5% of their FDII. This percentage is slated to decrease to 21.875% for tax years beginning after 2026. It's important to note that this deduction is exclusively available to C corporations, excluding Real Estate Investment Trusts (REITs) and Regulated Investment Companies (RICs).

Example:
Imagine a U.S.-based C corporation, TechInnovate Inc., which manufactures advanced computer components. In the 2023 tax year, TechInnovate sells components worth $2 million to various non-U.S. entities for use in their operations outside the U.S. Assuming this $2 million is considered FDII, TechInnovate could potentially deduct 37.5% of this amount from its taxable income, which equates to a $750,000 deduction ($2 million * 37.5%).

This deduction effectively lowers TechInnovate's taxable income, thus reducing the amount of tax the corporation owes and incentivizing further international business development.




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