As part of tax reform legislation, Congress added a section 250 deduction for its foreign-derived intangible income (FDII) and its global intangible low-taxed income (GILTI) and the amount treated as a dividend under section 78, which is attributable to its GILTI. The Act provides that section 250 apply to taxable years beginning after December 31, 2017.
Section 250 can reduce the effective tax rate for FDII and GILTI for certain taxpayers. The deduction, however, is subject to a taxable income limitations.
The Treasury Department and IRS have proposed regulations providing guidance on both the computation of the deductions available under section 250 and determination of FDII. Under the proposed regs, taxable income for purposes of section 250 is determined after factoring in all of the corporation’s other deductions, including the carryforward deductions of sections 163(j) and 172.
The regs propose five steps for ordering how taxable income limitations are calculated, in sequence:
- Compute the tentative amount of the FDII and the section 250 deduction taking into account all deductions, except any carryforwards or disallowances (section 163 (j)), net operating loss deductions (section 172(a)) or taxable income limitations.
- Compute amount of business interest allowed after applying section 153(j) interest deduction, taking into account the amount of the section 250 deduction but without regard to NOL deductions.
- Compute NOL deduction, taking into account the business interest deduction allowed and taxable limitations, but without regard to section 250 deductions.
- Compute the FDII, taking into account business interest allowed and net operating loss (NOL) deductions.
- Compute the section 250 deduction, taking into account business interest allowed and the amount of NOLs deductions.
These proposed regulations apply to taxable years ending on or after March 4, 2019. For previous taxable years, taxpayers may use reasonable documentation
to establish relevant facts.
This guidance may generate more questions than answers due to the complexities involved in calculating GILTI, FDII, section 163(j) limitations and section 250 deductions. Contact TaxOps' federal tax partner Allen Gregory or your TaxOps advisor for more guidance.
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