IRS Form 8993: FDII and GILTI Deductions

Form 8993 helps U.S. expats with foreign business interests manage their tax on foreign income. The form allows U.S. corporations and expats (via a Section 962 election) to claim deductions on Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) under Section 250. These deductions reduce tax rates on certain foreign income. This guide explains how U.S. expats can use Form 8993 to lower their tax liability and stay compliant with U.S. tax rules for international earnings.

What is Form 8993?

Form 8993, titled “Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI),” is used by corporations to calculate and claim a deduction under Section 250 of the Internal Revenue Code (IRC). This deduction applies to certain foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). It’s part of the tax reforms introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, aimed at encouraging U.S. corporations to keep intangible income and profits within the U.S. rather than shifting them abroad.

Key Points on Form 8993:

• Purpose: The form helps calculate and report the deduction allowable for FDII and GILTI, as described in IRC Section 250.
• Who Files: Generally, this form is filed by U.S. corporations (both C corporations and, in some cases, corporations electing Section 962) that have FDII or GILTI and wish to claim the Section 250 deduction. U.S. expats can make a Section 962 election, which allows them to compute their tax liability on certain foreign income (such as GILTI and Subpart F income) as if they were domestic corporations.
• When Filed: Form 8993 is filed along with the corporation’s income tax return for the tax year when they are reporting and claiming FDII or GILTI deductions.

Form 8993 is not just for U.S. corporations; it can also benefit U.S. expats who own Controlled Foreign Corporations (CFCs). By making an election under Section 962, expats can choose to be taxed as if they were a corporation for certain types of foreign income, like GILTI (Global Intangible Low-Taxed Income). This election allows expats to take advantage of the Section 250 deductions, which means they can reduce their taxable GILTI by 50% and FDII by 37.5% (for tax years before 2026).

This deduction effectively lowers the U.S. tax rate on qualifying foreign income, similar to how corporations benefit. So, for U.S. expats with foreign businesses, the Section 962 election and Form 8993 offer a way to make international tax obligations more manageable.

Components of Form 8993

Form 8993 consists of several parts that guide users through the calculation process:

1. Part I – Deduction Eligible Income (DEI): This section determines the gross income eligible for deduction after accounting for exclusions and deductions. The term taxable income influences the deductions allowed under Section 250.
2. Part II – Deemed Intangible Income (DII): This part calculates the DII based on DEI and qualified business asset investment (QBAI).
3. Part III – Foreign-Derived Deduction Eligible Income (FDDEI): This section computes the ratio of FDDEI to DEI, which is essential for determining the final deduction.
4. Part IV – Final Deduction Calculation: This part summarizes the deductions allowed under Section 250. The term domestic corporation is crucial for understanding the eligibility for deductions.

Understanding Section 250

Section 250 of the Internal Revenue Code provides U.S. corporations with a deduction on two specific types of income:

1. Foreign-Derived Intangible Income (FDII): Income derived from selling goods or providing services to foreign customers.
2. Global Intangible Low-Taxed Income (GILTI): Certain income earned by a U.S. corporation’s Controlled Foreign Corporation (CFC) that is subject to low foreign tax.

These deductions help lower the effective tax rate on FDII and GILTI for U.S. corporations, encouraging them to keep intangible assets, like intellectual property, within the U.S. while still generating foreign revenue.

For GILTI, Section 250 helps ensure that low-taxed foreign income is included in the U.S. tax base but not taxed at the full U.S. corporate tax rate.

Calculating the Section 250 Deduction on Form 8993

Form 8993 is used to calculate the Section 250 deduction for both FDII and GILTI. Here’s how it works:

1. **Determine GILTI and Foreign Derived Intangible Income (FDII)**:

• GILTI (Global Intangible Low-Taxed Income): GILTI is calculated first on Form 8992, where a U.S. shareholder’s net CFC tested income is adjusted for taxes and then included in the shareholder’s U.S. income.
• FDII (Foreign-Derived Intangible Income): FDII is calculated based on the corporation’s total deduction-eligible income (DEI), which is income earned from foreign sources after subtracting expenses related to generating that income.

2. Apply Section 250 Deduction Rates:

For tax years before 2026:

• FDII Deduction: 37.5% of FDII is deductible.
• GILTI Deduction: 50% of GILTI is deductible.

These deductions reduce the amount of FDII and GILTI subject to tax. For example, a corporation with $100,000 in GILTI would deduct $50,000 (50%), leaving $50,000 subject to U.S. tax.

For FDII, the deduction reduces the effective tax rate on foreign income. If a corporation has $100,000 in FDII, it would deduct $37,500 (37.5%), leaving $62,500 subject to U.S. tax.

3. Form 8993 Calculation Steps:

Form 8993 provides a structure for these calculations:

• Line 1: Total GILTI and FDII amounts are reported.
• Line 2 – Line 5: The FDII and GILTI deduction rates (37.5% for FDII, 50% for GILTI) are applied, allowing the corporation to determine the deductible portion.
• Line 6: The total Section 250 deduction is then calculated by adding the deductible amounts of FDII and GILTI together.

The result on Form 8993 is the total Section 250 deduction, which is subtracted from the corporation’s gross income on its U.S. tax return, reducing the overall taxable income.

Section 250’s Relationship to GILTI

GILTI is intended to prevent corporations from avoiding U.S. taxes by shifting profits to low-tax foreign subsidiaries (CFCs). It’s an anti-abuse provision that requires U.S. shareholders to include certain foreign income in their U.S. taxable income. Subpart F income is also included in the U.S. taxable income and can benefit from the Section 962 election.

Section 250 plays a key role by making GILTI more manageable: instead of being taxed at the full U.S. corporate rate, GILTI is eligible for the 50% deduction, effectively cutting the tax rate on this income in half.

Form 8993 is crucial for applying Section 250’s deduction for GILTI. Without this form, corporations wouldn’t be able to calculate the exact deduction and thus wouldn’t be able to reduce their taxable GILTI income as allowed by Section 250.

Example: GILTI and Section 250 Deduction Calculation on Form 8993

1. Determine GILTI Amount: Let’s say a corporation calculates $200,000 in GILTI on Form 8992.
2. Apply Section 250 Deduction: Using Form 8993, the corporation applies the 50% GILTI deduction rate.
   • Deduction Amount: $200,000 * 50% = $100,000.
   • Taxable GILTI after Deduction: $200,000 – $100,000 = $100,000.
3. Tax Rate Application: The corporation would apply the U.S. corporate tax rate (currently 21%) on the remaining $100,000 of GILTI, reducing the overall tax burden on this income.

What is Section 962?

Section 962 allows individual U.S. shareholders of controlled foreign corporations (CFCs) to make an election to be taxed similarly to a corporation on GILTI and certain Subpart F income, potentially lowering their tax rate on these types of income. Here’s how it works:

1. Election to Use Corporate Tax Rates: When an individual makes a Section 962 election, they are taxed at corporate tax rates (instead of individual tax rates) on GILTI and certain Subpart F income.
2. Eligibility for Section 250 Deduction: With the 962 election, individuals may also claim the Section 250 deduction, effectively reducing the GILTI inclusion, similar to the deductions available to U.S. corporations.
3. Foreign Tax Credit Eligibility: Electing individuals can also claim a foreign tax credit for foreign taxes paid on the GILTI income, though this is limited to 80% of the taxes paid.

The Section 962 election can be particularly beneficial for U.S. shareholders of CFCs, as it effectively allows them to utilize certain tax benefits available to corporations, such as the Section 250 deduction reported on Form 8993.

Section 250 and Form 8993: Key Points for GILTI, FDII, and Domestic Corporations

• Section 250 provides a deduction for U.S. corporations on FDII and GILTI, reducing the effective tax rate on these types of income.
• Form 8993 is filed by corporations to calculate this Section 250 deduction, enabling them to report reduced taxable income for FDII and GILTI. The allowable deductions are adjusted based on the corporation’s taxable income and a specific section amount, illustrating the impact of the taxable income limitation.
• GILTI is taxable income from CFCs, and Section 250 mitigates the impact of U.S. tax on this foreign income, aligning it more with global rates.

By filing Form 8993, corporations can lower their taxable income from GILTI and FDII, making international business activities more tax-efficient and aligning with U.S. tax policies designed to retain intangible income within the U.S.